A hotel management agreement records the relationship between the owner and the operator of a hotel. The nature of the relationship is that the operator is made responsible for the day-to-day running of the hotel, including hiring and firing employees. As well as providing accommodation, and additional functions such as conference facilities, the operator will take reservations and conduct the marketing and promotion of the business. The operator will be responsible for routine maintenance and will procure other capital projects needed for the hotel, although these will typically be authorized and paid for by the owner.
The owner will want to negotiate the terms of the agreement and introduce some balance, giving the owner rights and remedies if the hotel business experiences financial concerns. The scope to add balance to a hotel management agreement may depend on the allure of the hotel to the operator if it is a prestigious hotel, in a good location, the operator will be more likely to negotiate. . It will usually be heavily weighted in favour of the operator, such that the owner has little or no input in the business operation but is expected to finance the whole operation. The first draft of the agreement will usually be offered by a prospective operator. The operator will usually seek a long-term right to operate the hotel under the operator's brand to standards commonly used across that operator's group of hotels.
Features of Hotel Management Agreements:
1.Non-Disturbance Agreements : Both Owner and the operator of a hotel have different interests and aspirations in a hotel. The owner aspires that the money which is invested by him through debt or by equity should have an ROI (return on investment) and his Hotel remains a profitable entity, whereas the owner/manager of a hotel wants that he/she should have authority and freedom while deciding the affairs of the hotel and the owners as well as the lenders and financiers of the Hotel should have a little or no say in that. The Non-disturbance agreement is a tripartite agreement among the Owner, Operator, and Financer of the hotel which mandates the transfer of ownership to the lender of the owner in case the hotel is not able to generate any profit and is unable to pay its due to the lender. The change in ownership will not lead to any change in the position of the owner and the owner will be liable to receive the payment of its operation fees from the financer. Thus, as an advisor, balancing the interests of all the parties is essential, and requires to be addressed effectively as part of the overall relationship between the owner and manager under the Hotel manager agreement. The transfer of ownership should be according to the terms and conditions of the agreement.
2.Brand standard : The owner of the assets of the hotel will always be expected to maintain the goodwill and services of the brand if the owner of a hotel has taken a franchise of a Hotel chain. The best example is that of the Oyo hotel. When a hotel gets registered as an OYO hotel it has to maintain certain operational and service standards that should align with the goodwill of the brand OYO. The owner in a franchisee model of the hotel has more authority over the operation of the hotel. This clause should clearly describe the standard obligation of the owner to maintain the brand value of the hotel chain and to provide a customer experience that will not dilute the goodwill of the brand which the owner is representing.
3.Termination clause :In a Hotel management agreement, an Owner generally has a very few points or opportunities when he can exit the agreement. If an operator does not perform up to the expectation of the owner for consecutive years then the operator can buy out the chances of termination by paying the owner for the loss suffered by him during those years. Thus, it becomes necessary that the Hotel Management Agreement should contain certain events of default which can lead to the termination of this agreement and give an exit option to the owner of the Hotel.