Hotel management agreements (HMAs) represent the unique business relationship between hotel owners and the management companies or operators that run them. An HMA must clearly define each party’s expectations, rights, and obligations. Each party has specific interests that the contract needs to protect.
Success for both parties largely depend on the financial performance of the property. It’s usually when the operator is not meeting the agreed performance levels that the provisions of an HMA become extremely important and disputes can arise.
The Texas retail and hospitality lawyers at MehaffyWeber have decades of experience working with hotel owners and operators, and they know what hotel management agreements must entail for successful business relationships. The following is a discussion of the key provisions in HMAs and why the topics can become the source of disputes between the parties.
Key Clauses in Hotel Management Agreements and Why They’re Important
HMAs are about selling hotel rooms and making a profit. The most important clauses in HMAs have to do with performance expectations, profit-sharing, and duration or termination. The topics below can be of particular significance in HMAs, and the specifics may be points for negotiation between the parties.
Duration
HMAs tend to have longer terms (20 years is not uncommon) and may include renewal options. Longer duration contracts generally favor the operator, and owners should make sure they don’t get locked into a lengthy contract without a means to terminate the relationship for good cause.
Definitions
Even though many terms used in an HMA may have a generally understood definition within the hospitality industry, including appropriate definitions in the contract can be very useful for clarifying the intentions and understanding for all parties.
Operations
This clause describes the expectations and duties for the day-to-day operations of the hotel. It will describe the operator’s responsibilities and define the scope of authority given to the operator to act on behalf of the owner without approval. Owners don’t want to allow too much freedom, and operators want enough freedom to run the business efficiently.
Brand Standards
Operators of branded hotels are required to conform to the design, operations, and service standards of the hotel brand. Operators want to retain as much flexibility as possible within given constraints to accommodate particular demographics. Who bears the cost of improvements to comply with brand requirements can be a point of negotiation between owner and operator.
Performance Standards
Operators are required to meet performance standards for quality of service and financial productivity in hotel operations. What these standards are and how performance will be measured are extremely important to both parties and need to be supported with objective criteria to minimize the opportunity for disagreements.
Management Fee
This provision is of obvious importance to the operator. It will specify a base amount, usually a percentage of gross revenue, and may also include an incentive fee based on various levels of financial performance. These terms must be very clear about how performance will be measured and incentive compensation paid.
Expenses
The payment of operational expenses is often the responsibility of the operator, subject to reimbursement by the owner. The timing and the process for reimbursement are important considerations for the operator who doesn’t want to incur liability for these expenses.
Repairs and Maintenance
The provisions need to be clear regarding authorization and responsibility for cost. The cost of repairs and maintenance is usually borne by the owner, but the operator must get approval to incur the expenses. Owners sometimes require operators to invest in improvements. The provisions should clearly state which party owns any repairs or improvements.
Liability, Insurance, and Indemnity
How the risk of loss will be shared between a hotel owner and operator is of concern to both parties. They must identify risks and reach an agreement about who will be responsible and how to manage the risk. These provisions may require one or more of the parties to obtain insurance and may require that one party indemnify another from liability.
Dispute Resolution
Having a clear method for resolving disputes within a well-drafted contract can save time, money, and business relationships. Requiring good faith negotiations may be able to resolve differences with a minimum of disruption. The next step is some type of alternative dispute resolution, like mediation or arbitration, that involves a third party. The goal is to resolve disputes efficiently and keep the business relationship workable when possible.
Termination
Termination provisions specify how the agreement can be terminated by either party, what happens if the contract is terminated, and the consequences for improperly terminating the contract. Owners are particularly interested in these provisions because they can provide flexibility to end the business relationship under specified conditions.
Force Majeure
These clauses are recognized in Texas and serve to relieve a party from performance under the contract when circumstances beyond the reasonable control of the party make performance impossible or impractical. The types of occurrences or events that will trigger the clause should be specified. Increased performance expenses will not be considered force majeure in Texas.
Circumstances Leading to Disputes in HMAs
Most HMA disputes arise when the operator fails to meet financial performance standards. Lack of performance may trigger the right of the owner to terminate the contract. The owner may accuse the operator of substandard marketing or customer service. In turn, the operator may blame the financial shortfall on the hotel’s lack of maintenance and upkeep.
Disputes can also arise from how the operator is using hotel funds and whether the operator is acting within the scope of authority granted. When an HMA is drafted properly, there is less chance for dispute because all parties understand the expectations and how to resolve disputes quickly, because the contract provides clear guidance in these matters.
Well-Drafted Contracts Avoid Lengthy Legal Disputes
Well-drafted HMA contracts minimize the opportunities for disputes when they clearly express the intent and expectations of the parties, address relevant contingencies, and provide sufficient detail so issues can be resolved without resorting to litigation.
At MehaffyWeber, we understand how a well-drafted contract can impact a business’s bottom line. Our retail and hospitality attorneys help clients run their businesses better by ensuring each hotel management agreement is thorough and fits a client’s specific needs. Businesses in Houston, Beaumont, San Antonio, and Austin have entrusted their legal needs to MehaffyWeber since 1946.