Hotel management agreements: Balancing the interests of owners and operators

Headnote

Abstract

This paper discusses the inherent conflict of interest between owners and operators under hotel management agreements and describes the most important business and legal issues that have to be observed from an owner's and an operator's perspective, respectively, when negotiating a hotel management agreement. At the same time, the paper gives an overview of the most significant contractual issues that should be covered in all hotel management agreements. The author concludes that only a balanced contract will allow both parties to achieve their business goals over time, and that the best approach to a balanced contractual basis is a mutual understanding by the parties of each other's main concerns.

Keywords:

approval rights, balance of economic risk, brand protection, cost control, group charges, guest data, hotel management agreements, management fees, operator, owner, termination clause

INTRODUCTION

Today it is an established principle of the international hospitality industry that ownership and operation of a hotel are more often than not separated. Only a small fraction of hotels that bear the name of recognised national or international brands are owned by the respective operators. In addition to properties that are owner operated, the following three concepts of operation have evolved over time: leases (either fixed or contingent), franchising and management agreements. Of these forms, management agreements are probably the most widespread in the quality hotel sector. A hotel management agreement can be defined as a written agreement between the owner of a hotel and an operator, by which the operator is appointed to operate and manage the hotel in the name, on behalf of and for the account of the owner and the operator is to receive a management fee in return.1

Inherent conflict of interest

Compared to all other forms of operation where the party operating the hotel is also bearing the risk of such operation, the management agreement is clearly distinct: under a management agreement the full economic risk remains with the owner, while the operator is responsible for the operation of the hotel. In addition to this imbalance of risk, the management agreement is characterised by an inherent conflict of interest between the owner and the operator. The goal of the owner is the long-term economic success of the hotel and the appreciation...