Global Hospitality Advisor: Hotel Management Agreements

Starting from scratch — negotiating brand management agreements

Anytime a hotel owner begins serious negotiations with a hotel manager, he or she is likely to be presented with the manager’s standard form of management agreement.

The Manager’s Standard Form

Not surprisingly, the standard agreement will be the best case scenario for the manager. It will provide the optimum term, best termination rights, and most effective limitations on liability — at least from the manager’s perspective. It will also likely include “fixes” to address concerns that have arisen in other management situations, and will sometimes reflect fundamental changes in the owner-management relationship. For example, a few years ago Starwood began to introduce a new provision allowing it to use hotel property to promote other Starwood businesses.

Hotel managers want to use their standard agreements for a number of reasons. One of them is contract management; the more each of their agreements look alike, the easier it is for them to administer them. So, if all of their agreements require proposed annual budgets to be submitted on November 1, planners are able to streamline their planning processes. The form of the management agreement can also have an impact on the value of the management company. If all of the agreements are, essentially, “no-cut” agreements — terminable only for cause — then the market value of the management company will be increased because the stream of income expected from the operation of the hotel can be better predicted. Finally, standardizing the management agreement is consistent with one of the key goals of virtually all management companies — standardization of the brand. Managers want the same standards applied to all hotels in the brand to emphasize not the individual hotels in the chain, but the importance of the brand and brand identification.

Not All Hotel Properties are “Standard”

Although hotel managers benefit from a standard form of agreement, it doesn’t necessarily benefit the owner. First and foremost, while an owner presumably perceives a value in its association with a brand, the owner isn’t as concerned with the success of the brand as it is with the owner’s hotel, and if the hotel underperforms, the fact that the brand may be successful is of scant comfort.

Moreover, a standard agreement, particularly for a first-class or luxury hotel, a resort or a mixed-use development, simply will not take into account the unique characteristics of each project. The variations are endless — the hotel might be a single part of a planned use development, requiring consistency among the elements of the development, shared parking or other facilities, and financial relationships which turn the standard form of agreement on its head. The hotel might be located within an historic building, which will limit the ability of the manager to demand changes to the structure and format of the hotel, something which management companies often seek to control. On a more basic level, the financial terms of the typical agreement might not mesh with the practical reality of a hotel in a specific market, and it is obviously inappropriate to expect either a manager or an owner to enter into an agreement that ignores financial reality.

Negotiating from Scratch

Because of this, negotiating an agreement “from scratch,” using the manager’s form, is a frustrating and expensive process. It requires that experienced hotel counsel, who has successfully negotiated scores — if not hundreds — of agreements, analyze the needs of the owner, prepare a meaningful counterproposal and to negotiate the agreement to conclusion.

Some owners have countered by asking their potential managers to start the negotiations not from the manager’s standard form, but from the most owner-friendly agreement entered into by then-manager, in the hopes that someone else will have done the heavy lifting. That approach has allure, but suffers from some potential pitfalls:

First, the owner will rarely know if the agreement presented actually represents the best deal agreed to by the manager. Managers insist on confidentiality provisions for this very reason — they want to make sure that they have the ability to withhold unique terms from owners. This is an area where a highly experienced hotel attorney can help. We have, for example, been able to identify specific agreements where a manager has made very valuable concessions because we have negotiated those agreements. We have often been able to identify where a manager actually provided its “best effort,” and where it hasn’t.

Just as importantly though, even a previously negotiated management agreement must be viewed as a starting point, not an end product. As noted above, one of the shortcomings of a manager’s form agreement is that it does not take into account the unique issues and concerns facing a particular owner and project. Consequently, the owner needs to look at a negotiated agreement with the same eyes that it would look at a standard form, and decide what needs to be done to make this agreement work.

Forming Productive Relationships

The hospitality industry has experienced an unprecedented era of prosperity that has benefitted both hotel owners and hotel managers. The explosion of hotel-enhanced mixed-use development has aligned the interests of owners and managers more closely than in the past, and we are seeing many more owners and managers experiencing “win-win” situations with their management agreements. Owners will find it pays to obtain the advice of an expert who understands the industry and its norms, and can negotiate terms that take into account all the realities of a specific property. Managers will find that negotiating from scratch will reveal issues that will help them develop productive and long-lasting relationships with owners. A good management agreement is one that is negotiated with integrity on both sides and provides for profitable growth for both the owner and the manager.

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Robert Braun is a senior member of the Global Hospitality Group® and partner in the Firm’s Corporate Group, Mr. Braun has represented clients in successfully negotiating hundreds of hotel management agreements. He advises hospitality clients with respect to business formation, financing, mergers and acquisitions, venture capital financing and joint ventures. He also represents clients in the negotiation of hotel and spa management and franchise agreements, as well as telecommunications, software, Internet, e-commerce, data processing and outsourcing agreements for the hospitality industry. Contact him at 310.785.5331 or rbraun@jmbm.com.