Very few in the hotel industry will be unaware of the recent problems affecting the Banyan Tree Al Areen resort in Bahrain (which we understand may be rebranded as "Al Areen Palace and Spa" subject to receipt of necessary approvals).

As experienced industry professionals know, one of the toughest decisions to make in relation to development of a new hotel is finding the right partner – whether you are an owner or an operator. This is usually the single most important consideration and much time and effort will be spent on selecting the right brand which fits the hotel project.

However, finding the right brand to achieve the best returns for an owner and enhance an asset's value, financing and operational success is not the only consideration. Of equal value is the relationship, particularly given the long-term nature of a hotel management agreement (30-50 years is not uncommon, and some run to longer than this).

We have seen the recent boom of the Gulf hotel industry and this is a wonderful wave to ride. However, a long-term view must be taken to ensure that you have the most appropriate tools (and partner) to ride out the tough times when (not if) they happen.

Unfortunately for Banyan Tree and Al Areen, the relationship appears to have disintegrated, with accusations and counterclaims being issued on both sides. Ultimately, it is not just the asset that will suffer, but also the brand value of the operator and, of equal importance, the employees are become caught in the middle. There is very rarely a win-win solution in these cases.

How to find that perfect partner?
It is never going to be perfect, however a robust and carefully managed Request for Proposal (RFP) process will go a long way towards ensuring that both parties interests are aligned through the life of the management agreement. It will help to show whether the parties share the same vision of what the hotel should be and how it should operate, and should enable the parties' interests to be balanced, so far as possible. Consideration of the owner's ambitions, the specifics of the project and the underlying market conditions and competition against a list of potential operators and brands, with open and transparent negotiation of commercial terms, should give both parties comfort that the partnership ultimately entered into is the right one.

When the relationship crumbles...?
Termination of a hotel management agreement is not something to be undertaken lightly. In my experience, both parties will exhaust every opportunity to resolve a problematic situation before the button is pressed to terminate.

In the current economic climate, where hotels may be struggling to service debt or where Revpar and/or occupancy levels are down but operating expenses are not, it may be tempting to look at termination as the right move. Many owners will be frustrated if they feel that their operator is not responding to a critical situation and will be looking to them for proactivity in driving business, reducing costs and managing capex spend. Many operators, on the other hand, will be looking to an owner for continued financial support and commitment.

Most hotel management agreements cannot be terminated at will and will have complex procedures regarding notices of breach and remedy requirements. An unjustified termination of a management agreement will usually result in a hefty damages award against the terminator. There is very rarely a black and white example of breach of contract in these situations – there may be many reasons behind a failure to perform, and some of these could actually be caused by the other party's action or inaction.

Therefore, before the finger moves to the 'terminate' button, it is essential that a proper investigation is undertaken as to why things are going wrong. The discovery may not be pleasant but hopefully, it will allow the cause of the problem to be dealt with head on, and a resolution strategy agreed. Operational analysis should be carried out, both parties' performance should be considered, and a plan of how to improve the situation (whether this relates to results, capex spend, FF&E contributions etc), agreed.

Additional considerations should also be examined - Has an express or implied covenant been breached? What is the true legal position of the aggrieved party? What are the risks of failing to remedy the situation? What will be the true damage to the asset/brand/reputation? How will this impact on other business operations or assets held?

If at the end of the day all is lost, there is no way back, and the only option is to terminate – ensure that professional advice is taken and that damage limitation is a prime consideration of the strategy. This will serve you well in the long term.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.