Hotel management agreements are very high-level agreements. You won’t find much detail on day-to-day operations or recharges such as loyalty program costs, and for this reason they can form the basis of either a wonderful, collaborative relationship between owner and brand, or they can be the cause of endless friction. A well-negotiated HMA and a transparent relationship between stakeholders are key to the long-term success of a hotel.
HMAs are also evolving along with the sector. Owners are more savvy than they have ever been and know what to look out for during an HMA negotiation. It will come as no shock to anyone reading this that performance clauses and termination rights are among the most hotly contested areas of discussion, with the delicate balance of power between owner and brand easily swayed if one party feels that their interests are not properly represented.
Under a performance clause, the hotel has to perform up to a certain percentage of gross operating profit or revenue, and then if it doesn't perform to that level based on the annual budget for typically two consecutive years, then the owner can exercise a termination right.
These clauses have become very complex over the years, with all manner of exceptions. This means that they tend to be hotly debated and negotiated. What has often happened in the past is that the owner will ask for a termination clause, but the brand will offer a performance clause, designed in such a way that they cannot fail.
Where I have seen clauses that have been successful for the owner was where the owner has asked for a termination right on renewal with a performance clause that does not have an exclusion for force majeure. Then COVID came around — the force majeure — and they were able to terminate.
This was a good example of why these clauses need to be negotiated very carefully, because whether you're on one side or the other, this may or may not put you in a situation which is completely out of your control and the owners, but you end up being kicked out anyway as a brand, or being able to change brands if you're the owner.
Another area where termination rights are increasingly desired by the owner is in the case of a merger, acquisition or amalgamation of brands. We often see this with owners who are with the smaller brands, where they enjoy a more personal service than they might get with a brand supermarket.
While it is simple to understand the owners’ perspective — they have become one of many hotels — these are difficult to achieve because brand's core business is expansion. They are valued by the number of hotels they have and it is not in their interest to allow hotels to exit just because they are joining a much larger group and fear they will be overlooked or forced to compete with others who are meant to be on the same team.
Related to this we have concerns around restricted areas; the areas in which other hotels under the same flags may not trade. As the brands have proliferated, this has become an area of focus for owners and there are brands who employ cartographers to allow themselves to delineate very precisely what the restricted area will be.
If you're entering a new jurisdiction, for example, a country without much tourism, with no internationally-branded hotels, and you really want to put that hotel and the destination on the map, it makes more sense to negotiate a restriction. This can be the area itself, but can also be refined to include the period during which the hotel is ramping up.
In a sector where long-term agreements are standard, it is important to take into consideration the changes that the parties to a HMA might undergo during a period of ownership. As hotels move into the mainstream as an asset class, there is an ever-broader pool of investors, with a wide cross section of hold times depending on their investment strategies.
For some, being able to sell a property unencumbered by a brand is the best route to a higher value. For others, a solid and long-term HMA is vital. In the current climate of asset-light growth by hotel brands, owners are likely to find themselves disappointed as, with brands valued on the number and terms of HMAs they hold, they are unlikely to favor a termination right, which chips away at this value.
When you are negotiating it is worth noting that all hotels are not created equal. If you hold a trophy asset operated by a small luxury brand, then you will have more leverage in negotiations than if you own a hotel under a brand which is one of hundreds.
Ownership of data is also an area which has risen in prominence in recent years, particularly with the implementation of data privacy regulations such as the General Data Protection Regulation in the EU. Ownership of the guests’ profiles is core to the success of every hotel and the hotel owner should retain ownership of their guest data, even in the event of a change from one brand to another.
Transitions can take many forms, and we have seen some brands switch all their systems off and walk away from a hotel, leaving the owner in the dark, while some take a more gentlemanly route, assisting the hotel with a smooth transition of operations back to the owner or to the new operator. This is one of the many areas where older agreements might not be specific.
While owners may have different strategies relating to hold times, they also have different opinions about how involved they want to be in the hotel’s operations. The brand rightly believes that they have been given the mandate to operate the hotel and should be allowed to do so without interference from the owner or its representatives. However, some owners interfere in the day-to-day operations of the hotel, which can lead to disruption, and a rapid deterioration of relations between brand and owner.
There needs to be a healthy relationship between the brand and the owner, with regular meetings. It’s a meaningful contract and, as we have heard hundreds of times, an HMA should be treated like a marriage, and communication and trust are key to success.
Increasingly we are seeing owners — and sometimes brands — asking for the support and guidance of a specialist asset manager to advise on how to optimize operations, and help manage the relationship. A good asset manager will ensure all parties are represented and that the property is prioritized, leading to a long and happy union and better performance.
Hadrian Beltrametti Walker is a senior legal professional in the hospitality industry. He has held past positions with Kempinski Hotels and Hilton over his nearly 20-year career.
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