What Are the Main Hot Button Issues for Hotel Management Agreement Negotiations In 2018
We seek to identify the contemporary issues which we consider will be the most contentious and hence the ones which will take the most time to resolve. In our experience, negotiations are taking longer than was previously the case and in some instances significantly longer. These issues and the different perspectives and views that apply to them are significant contributors to the extension of time that negotiations are taking.
Hotel management agreement negotiations are dynamic and fluid. Over time the main contentious issues change or at least their emphasis changes.
Owners, operators and their respective advisers approach the negotiation table with different goals and expectations in relation to many issues. The negotiation process gives the parties the opportunity to discuss their different views generally with the aim of reaching a common landing point by the use of intellectual persuasion, compromise and/or sheer determination.
We seek below to identify the contemporary issues which we consider will be the most contentious and hence the ones which will take the most time to resolve. In our experience, negotiations are taking longer than was previously the case and in some instances significantly longer. These issues and the different perspectives and views that apply to them are significant contributors to the extension of time that negotiations are taking.
In the considerations which follow there are no absolute answers. Different approaches will be taken by owners and operators both with respect to individual issues and the importance of each issue with respect to the others.
To ensure that this newsletter is not overly wordy we assume a certain minimal understanding by the reader of the issues covered. All of these issues have been discussed in detail in one or more previous newsletters and we would be happy to forward other issues of the newsletter to anyone who would like to receive more information than is contained below.
Issue
Considerations
Operator selection
What are the comparative benefits of an operator selection process as opposed to a single operator negotiation?
Is operator selection the preferred course for the novice owner?
What is the best approach to ensure that all relevant operators are included in the process?
Who should advise the owner?
What is the right balance between prospective operational performance and contract provisions in selecting the preferred operator?
Operator financial contributions
In what circumstances are operator financial contributions appropriate?
What is the best means of assessing the true benefit and the opportunity cost of such contributions?
What form of contribution is the best in any specific circumstance?
How important is it whether a contribution is refundable or not?
Performance termination provisions
Which performance termination approach is the most fair and reasonable?
Should a performance provision be sacrificed for some other premature termination provision (not based on performance) if serious concerns exist in relation to its effectiveness?
What should be the form of a cure payment regime and how many times should it be capable of being applied?
Should an operator be permitted to claw back any cure payment made?
Operator relationship with owner's financiers
To what extent should an operator intercede in the relationship between the owner and its financiers?
What is a fair and reasonable approach to non disturbance agreements?
To what extent should there be concessions made to the initial owner which do not apply to subsequent owners?
Operator restraint provisions
How beneficial is it to an owner to prevent the operator from competing nearby particularly in mature markets?
What concessions can an operator provide an owner to relax a restraint?
How relevant are restraints in a world of increasing brand fluidity?
Do restraints need to extend beyond the hotel brand name to be effective?
Should a restraint cease to apply prior to the expiration of the management agreement?
Hotel employees
Is the owner concerned that it will be required to employ hotel employees who must act on the direction of the operator?
What safeguards and compensation should an operator receive if it agrees to employ all the employees ?
Guest data
How to strike a balance between the competing desires of the relevant parties to have meaningful access to guest data?
How important is it for an owner to be able to access hotel guest data when an operator has departed?
Are owners and operators interested in the same types of guest data or do they have different needs and concerns ?
Brand standard compliance
Is absolute Brand Standard compliance critical to an operator?
What concessions should be made to an owner when Brand Standards change?
Should an operator be able to change the Brand of a hotel during the term of a management agreement ?
Term
What are the relevant considerations in determining how long a management contract should be?
Should there be renewal options and who should have the right to exercise these ?
New builds - owner flexibility not to proceed
Under what circumstances should an owner be entitled not to proceed with a new build hotel after the operator has been engaged ?
If the owner elects not to proceed, what compensation should an operator be entitled to and how should it be calculated ?
About Baker & McKenzie
Founded in 1949, Baker & McKenzie advises many of the world’s most dynamic and successful business organizations through more than 11,000 people in 77 offices in 47 countries. The Firm is known for its global perspective, deep understanding of the local language and culture of business, uncompromising commitment to excellence, and world-class fluency in its client service. Global revenues for the fiscal year ended 30 June 2014, were US$2.54 billion. Eduardo Leite is Chairman of the Executive Committee. (www.bakermckenzie.com)
