How Does A Hotel Management Agreement Work

Author: Georald Camposano | December 1st, 2020

A hotel is an object of unique value, but often operates in a binary relationship between the owner of the property and its administrator. The hotel administration contract (HMA) is legally binding, which imposes the terms of their partnership and defines the obligations of agent and other provisions. As a general rule, this operation is financed by the hotel operation and represents 4 to 5% of the total turnover expected for the replacement of FF-E (soft goods, carpets, etc.). The trend is to first define the fundamentals of business in a letter of intent (LOI) before moving on to the “final document” phase. Here are the key words for which there should be a “meeting of minds” before the parties can conclude that they have agreed on the terms of a HMA: given the increase in hotel management agreements and their importance to owners and operators, we were surprised not to find an investigation into the actual direction of owners and operators after the signing of the agreement. This does not mean that it benefits from the plethora of fees that come with representation. When an owner negotiates with a brand franchise and an external manager, it is plausible that he or she will pay at least 15 per cent of the gross revenue of the asset, in addition to the incentive fee the owner pays to the manager. Researchers and practitioners often recommend that owners and operators be required to consider and agree on a wide range of issues when negotiating management contracts in order to create a win-win situation. While we unequivocally support this view, it may be even more advantageous for hotel owners to first devote as much time and resources to choosing the “right” hotel company and maintaining the relationship after the contract is signed.

It is typical of the management company to expect the owner to compensate the management company for all claims, losses and debts, except those resulting from the actions of the management company that constitute intentional misconduct or gross negligence. In order for the management company`s compensation to be important to the owner, the actions of a large staff must be included in the management company. Ultimately, the management company`s and the owner`s liability insurance is, under the same policy, the means by which both parties are protected from claims from third-party hotels such as Slips and Falls. Licensing fees determine the extent to which the owner`s agreement is required to make decisions affecting the operation of the hotel. This allows the owner to remain involved in important cash flow decisions. In addition, an owner may impose spending restrictions (i.e. purchase systems, concessions or leases) when it is mandatory. These property rights generally include that not all performance tests are equal. In a sample of South American hotels in the HVS study, most hotels conducted performance tests related to the budget/profit and performance of RevPAR, known as the “collective test.” A smaller percentage is related to GOP/AGOP/NOI performance relative to RevPAR`s budget performance or performance relative to the competitive rate. In the meantime, brand executives have successfully launched a petition to reinstate the HMA on their behalf. Think of Marriott International when, in 2005, Maryland`s legislature passed a law that was part of the Trade Act of the Maryland Code. The law provides that in the event of a conflict between the agent and the client, “the explicit terms of the enterprise contract apply.” Any result that makes the hotel manager and owner more consistent is a positive trend that can find its basis at the beginning of the relationship, thanks to the terms of the management agreement.

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