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.