5 tips for your next hotel management agreement (HMA) – Blog Law Hotel – June 14, 2021


June 14, 2021

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After more than a year of uncertainty and economic upheaval, the hospitality industry is quickly starting to recover from the effects of the coronavirus. As hotels receive an increasing number of visitors, many owners are considering 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 a few key things to keep in mind when drafting a new agreement.

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

by Bob Braun, hospitality lawyer

Is it time to rethink your management contract?

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

Jeffer Mangels Butler & Mitchell LLP’s Global Hospitality Group® has negotiated, renegotiated, litigated, arbitrated and advised clients for over 30 years on more than 2,500 hotel management and franchise agreements. Our experience spans virtually every major brand and independent executive, 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 agreement.

1. Owners and managers are not partners. Owners and managers often see the management contract as a way to “align the interests” of owner and manager, and managers often define themselves as “just like a partner” in the hotel. While the interests of owner and manager can be reconciled, they are not aligned – even when the operator provides funds, has incentives to make the hotel profitable, or even makes a capital investment in the hotel. Managers are tasked with realizing 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 income of a single property (or their hotel portfolio). Managers can “sacrifice” the profitability of a single asset as long as the value of their portfolio is valued; in addition, managers make their money “from the top” of gross income, whether the hotel is profitable or not. Homeowners must capitalize on each property to justify investing in building and maintaining a hotel.

2. Managers do NOT take ownership risk. While it is true that hotel managers bear certain costs and risks in running a property, the fact is that in almost all cases their risk is eclipsed by the risk of the owner. Regardless of profitability, owners are responsible for all costs and responsibilities of the operation (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 “commitment”. And they like to make a ham and egg breakfast analogy, where they say the chicken was involved, but the pork was engaged. In the hotel industry, managers are “involved”, but owners are “engaged”.

3. The hotel management contract or HMA is important. Many commentators, including those with experience in the industry, 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 hiring, and a manager with a bad track record cannot be reformed with a well-drafted agreement. However, the record alone is not enough. First, while every management company has a list of highly touted successes, every management company also has a less publicized list of disappointments – the picture goes both ways. Beyond that, a hotel management contract is a complex document that lists the expectations of the parties for a period of five, ten, twenty, fifty years or more. During this time, a good track record can turn into disappointment, and relying on decades-old assumptions can be disastrous. The history of mergers and consolidations among hotel managers is littered with changes in key personnel, revised corporate goals 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 want a hotel management agreement in which the owner simply hands the keys to the manager and hopes for the best, today’s owners are and should be extremely interested in the operations. This means that owners should have clear oversight and approval rights over budgeting, spending, and key operating decisions. They should not be dissuaded from exercising these rights because of an operator’s track record.

5. The gap can be closed. Despite the differences between owners and managers, the gap can be bridged, but doing so requires expertise and experience with the options and alternatives available to the parties. From an owner’s perspective, an attorney who understands what managers need and how their requirements can be met is essential. Equally important is bringing to the table advisers who can recommend meaningful and practical compromises, and who are known to be credible players in the industry.

For more information on hotel management agreements

You can find much more information on this topic on the Hotel Law Blog under the topic Hotel Management Agreements and many will also want to check out hotel franchise and licensing agreements.

Here are some of the resources you will find there:

Bob braun is a senior member of JMBM’s Global Hospitality Group® and co-chair of the company’s Cybersecurity & Privacy group. Bob has over 20 years of experience representing hotel owners and developers in their contracts, relationships and litigation with hotel managers, licensors, franchisors and brands, and has negotiated hundreds hotel management and franchise agreements. His practice includes experience with virtually all major hotel brands and managers. Bob also advises clients on hotel condominium title issues and many transactional matters including entity formation, financing and joint ventures, and works with companies on their data technology, privacy issues. and security. These include licensing agreements for software, cloud computing, e-commerce, data processing and outsourcing for the hospitality industry.

In addition, 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 security technologies. 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 butler, author 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. This advice covers critical hotel issues such as buying, selling, development, financing, franchising, management, ADA, and intellectual property issues. We also have compelling experience in hotel litigation, union avoidance and union negotiations, as well as cybersecurity and data privacy.

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

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