The implications of the owner employing the hotel employees whilst being under the direction of the operator
Long time readers will be aware that we tend to pick a topic and then discuss ten issues relevant to it. Why ten issues? No particular reason. It has just evolved that way. In this article we are going to use the concept of 'ten' in a somewhat different way.
For a brand to have meaning in any useful sense there must be a collection of clear and concise standards which ensure that each user of the brand has the responsibility to deliver a consistent and uniform guest experience.
The manager wishes to have the right to review the owner's financing to ensure that the owner's financing is prudent and the owner is not over-leveraged. Otherwise, the owner's financing default could result in the hotel being placed under the financier's control.
Most hotel owners, particularly first time owners, often question any right on the manager's part to potentially block their sale of the hotel to a competitor of the manager. However, the answer to this question is really quite simple.
Despite the addition of many supporting agreements, today's international hotel management contract bears striking resemblance to the first such contract, signed in 1963 for the Hong Kong Hilton. What has changed over the years, however, is the relative balance and bargaining power of managers and owners.
It is relatively standard for an Owner to request a Manager to agree not to manage another hotel within a specified radius of the subject hotel. In former times, this restriction usually took the form of an absolute prohibition on the Manager. In more recent times, in an environment where many of the hotel management companies both international and domestic have multiple brands, the tendency is for the restriction to be solely in relation to the same brand as the brand ascribed to the subject hotel.
Generally speaking, managers insist that an owner obtain an NDA in a form, which is either attached to the hotel management agreement (HMA) or acceptable to the manager. Often however, the owner, the manager and the financier will have differing views as to the terms of an NDA.
In the experience of the authors of this article, the amount of time spent arguing about manager indemnities in hotel management agreement negotiations is inversely proportional to the practical significance of such indemnities.
The starting point for this discussion is the hotel owner. The operation of a hotel is usually the hotel owner's business. The hotel owner is entitled to all the profits of the business and is liable to pay all the losses. Profit is what is left after all the hotel's expenses have been deducted from hotel revenue (and losses arise if the expenses exceed the revenues).