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After over a year of uncertainty and economic upheaval, the hospitality industry is quickly starting to recover from the effects of the coronavirus. As hotels continue to welcome more visitors, many property owners are considering ways to improve their property management. One of the best ways to do this is with a good management agreement. In the following article, my colleague Bob Braun suggests some important things to consider when drafting a new agreement.

Hotel attorney: 5 tips for your next hotel management contract (HMA)

by Bob Braun, hotel attorney

Is it time to reconsider your management agreement?

As the hospitality industry moves towards recreation, many hotel owners are rethinking how their hotels are managed. A good manager can add great value to a property; a bad manager can diminish his worth. Some studies conclude that a good management agreement – one that includes meaningful accountability, transparency, and performance – can add or decrease the value of a hotel by 50%. The next normal is likely to require rethinking how to maximize operational efficiency and effectiveness rather than just surviving the post-recession boom and planning for the future rather than just looking back at the past.

The Global Hospitality Group® at Jeffer Mangels Butler & Mitchell LLP has been negotiating, renegotiating, litigation, arbitration and advising clients on more than 2,500 hotel management and franchise agreements for more than 30 years. Our experience extends to virtually every brand and significant independent manager, as well as many lesser-known players. Based on this experience, we thought it would be helpful to provide some tips for owners to consider when reviewing the hotel management contract.

1. Owners and managers are not partners. Owners and managers often view the management contract as a means of balancing the interests of the owner and manager, and managers often characterize themselves as “just like a partner” in the hotel. The interests of the owner and manager must be reconciled, but they do not match – even if the operator provides key money, sets incentives to make the hotel profitable or even makes an equity stake in the hotel. Managers are tasked with generating profits for their shareholders and are focused on adding value to their entire property portfolio, while hotel owners worry about the value and income of an individual property (or their hotel portfolio). Managers can “sacrifice” the profitability of a single property as long as the value of their portfolio is increased; In addition, managers get their money “from above” from the gross income, regardless of whether the hotel is profitable or not. Owners must benefit from any property in order for the investment in building and maintaining a hotel to be justifiable.

2. Managers do NOT take ownership risk. While it’s true that hotel managers take on some of the costs and risks involved in managing a property, the fact is that in almost all cases their risk is dwarfed by the owner’s risk. Regardless of the profitability, the owners are liable for all costs and liabilities of the operation (except if the operator is guilty of gross negligence or breach of contract); Managers are not. Those who fundraise for charities often refer to the difference between “engagement” and “engagement”. And they like to make an analogy to a ham and egg breakfast that was about the chicken but the pork. In the world of hotels, managers are “involved” but owners are “committed”.

3. The hotel management contract or HMA is important. Many commentators, including those with industry experience, argue that the manager’s track record is more important than the management contract. We agree that an owner should review the manager’s track record before making a commitment, and that a manager with a poor track record cannot be reformed with a well-worded agreement. However, track record alone is not enough. First, every management company has a list of highly acclaimed achievements, but every management company also has a lesser-published list of disappointments – the track record goes both ways. In addition, a hotel management contract is a complex document that sets out the parties’ expectations for a period of five, ten, twenty, fifty years or more. During this period, a good track record can turn into disappointment, and relying on decades-old assumptions can be disastrous. The history of mergers and consolidations among hotel managers is littered with changes in key positions, revised corporate goals and forgotten promises.

4. Owners need meaningful permission rights. All of these factors lead to an important conclusion: Owners must have a meaningful say in hotel operations. While owners hire managers to operate properties based on their expertise, resources, personnel and reputation, the relationship between owners and operators is “asymmetrical” and the goals of the two are different. While managers want a hotel management contract in which the owner simply hands over the keys to the manager and hopes for the best, today’s owners are and should have a vital interest in the operation. This means that owners should have clear oversight and approval rights over budgeting, spending and important operational decisions. You should not be deterred from exercising these rights due to an operator’s track record.

5. The gap can be bridged. Despite the differences between owners and managers, the gap can be bridged, but this requires expertise and experience with the options and alternatives available to the parties. From an owner’s perspective, it is essential to have a lawyer who understands what managers need and how their requirements can be met. It is equally important to bring consultants to the table who can recommend meaningful and practical compromises and who are known to be credible players in the industry.

The content of this article is intended to provide general guidance on the subject. You should seek expert advice regarding your specific circumstances.

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