Hotel Management Agreements – Key Components

Hotel Management Agreements (HMAs) are pivotal in defining the relationship between hotel owners and management companies. HMAs outline the roles, responsibilities and expectations of both parties, ensuring the hotel operations run smoothly and profitably.

Key Components of Hotel Management Agreements

1. Term and Renewal – HMAs may specify an initial term (duration of the agreement) usually ranging from 5 to 20 years, with options for renewal, including any renegotiation of terms.
2. Management Fees and Financing – management fees can consist of a base fee (a fixed percentage of the hotel's total revenue) and/or an incentive fee (a variable fee based on the hotel's profitability, encouraging the management company to maximise operational efficiency and profitability).
3. Performance Standards – detailed performance metrics and benchmarks that the management company must achieve, such as financial targets and guest satisfaction scores.
4. Owner's Rights and Obligations– owners typically retain certain rights, such as approval of the annual budget, major capability expenditures and significant operation changes, and are usually responsible for funding major renovations/improvements. Careful consideration should be given to budgets, forecasting, expenditure limits and bank accounts to determine how much the management company is entitled to spend and how is this managed. Further, how often and to what standard or format will the management company need to account to the owner.
5. Operator's Responsibilities – typically includes day-to-day management such as staffing, marketing, reservations, maintenance and compliance with local regulations. Sometimes, if the hotel is part of a larger franchise chain, they must implement the brand standards.
6. Termination Clauses – conditions under which either party can terminate the agreement to protect both parties by providing clear exit strategies.
7. Dispute Resolution – mechanisms for resolving conflicts which should be clear to help maintain a cooperative relationship between the owner and operator.
8. Insurance – provisions setting out what insurance each of the owner and management company are required to hold. It is also important to ensure that the liability provisions of the HMA align with each party's insurance coverage.
9. Employees – consideration should be given to whether there will be a TUPE transfer on entry to or exit from the HMA and appropriate clauses should be included as a result to allocate the risk of this either to the owner, management company or the outgoing or incoming management company.
10. Intellectual Property – the HMA should set out provisions which deal with the intellectual property of each party and if applicable the franchise brand. This includes the grant of a licence to use the name, logo and any other intellectual property of the brand that is necessary for the management of the hotel.

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.