5 Tips for Your Next Hotel Management Agreement (HMA) — Hotel Law Blog — June 14, 2021

June 14, 2021

Find out how JMBM’s Global Hospitality Group® can help you.
Click here for the latest articles on hotel management agreements.

After more than a year of uncertainty and economic upheaval, the hospitality industry is rapidly beginning to recover from the effects of the coronavirus. As hotels welcome increasing numbers of visitors, many owners are thinking about 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 the article below, my colleague Bob Braun suggests some key things to keep in mind when drafting a new agreement.

Hotel lawyer: 5 tips for your next hotel management contract (HMA)

by Bob Braun, Hotel Lawyer

Is it time to rethink your management agreement?

As the hospitality industry heads towards recovery, many hotel owners are reassessing the management of their properties. A good manager can bring great value to a property; a bad manager can reduce its value. Some studies have concluded that a good management agreement – ​​one that provides for meaningful accountability, transparency and performance – can add or subtract 50% from a hotel’s value. The next normal will likely require rethinking how to maximize efficiency and effectiveness of operations, rather than just riding the post-recession boom, and planning for the future, not just looking back on the past.

The Global Hospitality Group® of Jeffer Mangels Butler & Mitchell LLP has been negotiating, renegotiating, litigating, arbitrating and advising clients for more than 30 years on more than 2,500 hotel management and franchise agreements. Our experience extends to virtually every major independent brand and manager, as well as many lesser-known players. Based on this experience, we thought it would be helpful to provide some tips that owners should keep in mind when reviewing the hotel management contract.

1. Owners and managers are not partners. Owners and managers often see the management contract as a way to “align the interests” of the owner and manager, and managers often define themselves as “like a partner” in the hotel. Although the interests of owner and manager may be reconciled, they are not aligned – even when the operator provides the doorstep, has incentives to make the hotel profitable, or even takes an equity stake in the hotel. Managers are tasked with making profits for their shareholders and focus on increasing the value of their entire portfolio of properties, while hotel owners are concerned with the value and revenue of a single property (or their portfolio of hotels). Managers can “sacrifice” the profitability of a single asset as long as the value of their portfolio is enhanced; moreover, the managers draw their money “from the top” of the gross income, whether the hotel is profitable or not. Owners must take advantage of each property to justify the investment in building and maintaining a hotel.

2. Managers do NOT take the risk of ownership. While it’s true that hotel managers bear some cost and risk in running a property, the fact is that in almost all cases their risk is dwarfed by that of the owner. Regardless of profitability, owners are responsible for all operating costs and liabilities (except where the operator is guilty of gross negligence or breach of contract); managers are not. Those who fundraise for charity often refer to the difference between “involvement” and “engagement”. And they like to draw a ham and egg breakfast analogy, where they say the chicken was involved, but the pig was engaged. In the world of hospitality, managers are “involved”, but owners are “engaged”.

3. The hotel management contract or HMA is important. Many commentators, including those with industry experience, argue that the manager’s background is more important than the management agreement. We agree that an owner should check the manager’s background before committing, and that a manager with a poor track record cannot be discharged with a well-drafted agreement. However, the balance sheet alone is not enough. First of all, while every management company has a list of highly touted successes, every management company also has a list of less publicized disappointments – the track record goes both ways. Beyond that, a hotel management contract is a complex document that identifies the expectations of the parties for a period of five, ten, twenty, fifty years or more. During this period, a good track record can turn into disappointment, and relying on decades-old assumptions can be disastrous. The history of mergers and consolidations between hotel managers is littered with changes in key personnel, revised corporate objectives and forgotten promises.

4. Owners Need Meaningful Approval Rights. All of these factors lead to one key conclusion: owners must have a say in hotel operations. While owners hire managers to operate properties because of their expertise, resources, staff, and reputation, the relationship between owners and operators is “asymmetrical” and the goals of the two differ. While managers would love a hotel management deal where the owner simply hands over the keys to the manager and hopes for the best, today’s owners are, and should be, extremely interested in operations. This means that owners should have clear oversight and approval rights over budgeting, spending and key operating decisions. They should not be deterred from exercising these rights because of an operator’s track record.

5. The gap can be bridged. Despite the differences between owners and managers, the gap can be bridged, but it requires expertise and experience with the options and alternatives available to the parties. From the owner’s perspective, a lawyer who understands what managers need and how their requirements can be met is essential. Equally important is bringing to the table advisors who can recommend meaningful and practical trade-offs, and who are known to be credible players in the industry.

For more information on hotel management contracts

You will find much more information related to this subject on the Blog on hotel law under Hotel Management Agreements and many will also want to look at Hotel Franchise and License Agreements.

Here are some of the resources you will find there:

Bob Brown is a senior member of JMBM’s Global Hospitality Group® and Co-Chair of the firm’s Cybersecurity and Privacy Group. Bob has over 20 years of experience representing hotel owners and developers in their contracts, relationships and disputes with hotel managers, licensors, franchisors and brands, and has negotiated hundreds of contracts hotel management and franchising. His practice includes experience with virtually every major hotel brand and manager. Bob also advises clients on timeshare hotel title issues and numerous transactional matters including entity formation, financing and joint ventures, and works with companies on their data technology, privacy and privacy issues. and security. These include software licensing, cloud computing, e-commerce, data processing and outsourcing arrangements for the hospitality industry.

Additionally, Bob is a frequent speaker as an expert in technology, privacy and data security, and is one of only two attorneys on the 2015 SuperLawyers list to be recognized for his expertise in technology. information. Bob is a member of the advisory board of the Information Systems Security Association, Los Angeles Chapter, and a member of the International Association of Privacy Professionals. Contact Bob Braun at 310.785.5331 or [email protected]

Photo by Jim ButlerIt is Jim Butlerauthor of www.HotelLawBlog.com and founding partner of JMBM and JMBM’s Global Hospitality Group®. We provide business and legal advice to hotel owners, developers, independent operators and investors. These tips cover critical hotel issues such as buying, selling, development, financing, franchising, management, ADA, and intellectual property issues. We also have a compelling track record in hotel litigation, union avoidance and labor negotiations, as well as cybersecurity and data privacy.

JMBM’s Global Hospitality Group® has been involved in over $87 billion in hotel transactions and over 3,900 hotel properties located worldwide. contact me at +1-310-201-3526 or [email protected] to discuss how we can help you.

How can we help? Brochure Credits Photo gallery

Nicholas E. Crittendon