Under a hotel management agreement (HMA), a hotel chain or independent management company operates a hotel business on behalf of the business owner for a fee. It is typically heavily negotiated, to establish the respective rights and responsibilities of the hotel owner and the operator.
The hotel business owner is generally responsible for the hotel’s assets, including maintaining the property, furnishings, fittings and equipment (FF&E), and inventory as well as funding the hotel’s bank accounts. The hotel owner is usually also the employer of the hotel’s staff and, therefore, liable for all employee claims.
Operator fees are paid by the business owner to the operating company for managing the hotel, typically consisting of the base management fee and other fees and/or reimbursements. The hotel owner generally requires the agreement to contain a performance test, where the failure of the operator to meet GOP and/or RevPAR metrics gives the owner the right to terminate.
An operator may accept a lower base management fee in return for a higher incentive fee, to reward the operator for outperforming agreed targets. As an alternative to a set profit-related incentive fee, scaled incentive fees reward effective operators while increasing the free cash flow to equity in the event of poor operator performance.
Control over operations refers to the right of the business owner to approve budgets, key personnel, contracts, etc. The operators' ability to manage hotels must be balanced with the business owner's ability to approve significant or material matters.
An assignment right in an HMA is the operator's right to assign the operating agreement to a third-party successor operator. The open-ended right to assign the HMA to a successor that has not been vetted and approved is rare.
Termination rights are contract provisions that allow the contractual parties to terminate the agreement. They include termination without cause, for breach, and on sale of the property.
