Partner Insights spoke with Michael Kosmas, a partner at Stroock & Stroock & Lavan LLP and head of its global hospitality and leisure practice, for insight on where the sector stands today, and how the pandemic has affected hotel management agreements.
After over a year of uncertainty and economic upheaval, the hospitality industry is quickly beginning to recover from the effects of the coronavirus. As hotels welcome an increased number of visitors, many owners are considering how to improve the management of their properties. One of the best ways to do this is to have a good management agreement in place. In this article, my colleague Bob Braun suggests some key things to keep in mind when drafting a new agreement.
While the future cannot be perfectly predicted, protectants can be put into place that provides the option of a favorable choice of action. The COVID-19 pandemic has put additional pressure on hotel owners and operators, which in turn has resulted in disunity during a critical period. It is times like these, that owners and operators find the terms of their Hotel Management Agreement (HMA), which they had made clear sense at the time, did not stand the test of time.
The negotiation of a hotel management agreement is a complex process, typically preceded by the negotiation of a memorandum of understanding (MOU) or a letter of intent. The MOU sets out the prime commercial terms presented by the operator on which the hotel management agreement package will later be drafted. Missing out on resolving issues at this preparatory phase may lead to either party finding itself in an unfavorable position when the management agreement package arrives.
In collaboration with JLL, Baker & McKenzie presents Hotel Management Contracts 2018, a unique analysis of recent trends in hotel management contract negotiations in Asia Pacific. This provides an update to our previous study undertaken in 2014.
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.
At the Hotel Investment Conference held in Hong Kong in October we convened a session together with a panel of industry experts to discuss this topic. The audience consisted of over 230 conference participants. Judging by the number of attending participants, there was clearly significant interest in the topic.
Thoughts for owners and operators to achieve a winning strategy
Owners negotiating their first HMA struggle to understand why operators can adopt such an intrusive attitude to the owner's financing. This is particularly the case if the negotiations with the operator precede negotiations with the owner's prospective financier. In many instances the HMA negotiations precede the point in time where the owner knows the identity of its financier let alone the terms upon which the financier is prepared to lend.
Traditionally the guest data is available to both the hotel's owner and operator during the term of the management agreement and, perhaps more importantly, following the termination of the management agreement. In more recent times there has been a tendency on the part of some operators to stipulate that the guest data is effectively the 'property' of the operator.