In the Middle East, the hotel industry has seen a huge rise in activity in the last decade. A huge number of international operators have entered into hotel management that is running successfully and having profitable operations. However, in this sector, most regional jurisdictions have restrictive laws about international investors. Hence, the local companies of the Middle East majorly own and develop hotel management agreements with operators.
Hotel Management Agreement
It is a contract between the owner of the hotel and the operator to work for the hotel exclusively. The agreements share common anatomy, but their structure and content varies widely among Operators. These agreements do not have any standard forms, and they are tailored individually reflecting the commercial bargain between the parties. Fees and termination clauses in the agreement are negotiated up to an extent that the agreement reaches to a complex stage in certain projects.
Mostly these agreements are similar but differ based on a different commercial arrangements between the parties to the agreement. The relationship between the parties cannot be predicted. The life of the agreement is generally 20 years or it may be more and in that duration the market structure varies, and this concerns the Owner whether the Operator is overseeing and promoting the hotel appropriately or not. There stands a mutual responsibility between the parties wherein the Operator needs to guarantee the Owner to maintain resources into the upkeep of the hotel genuinely.
Different Agreements for different purposes
The Hotel Management Agreement is the one that defines an understanding between an operator and an owner of the hotel. If a hotel is under developed then the parties may enter into a Technical Services Agreement, this requires the operator to give certain consultancy administrations to the owner to guarantee that the lodging’s development meets the operator’s necessities. If the operator offers extra accommodation administrations then a different agreement may be signed between the parties i.e. the Central Services Agreement. This oversees issues that are not very complicated and can be managed by extra administrations in the body of the main agreement.
A different IP License Agreement is required by many significant operators identifying with the utilization of the operator’s image by the owner. If the owner of the hotel is looking for financing or may offer it for acquisition, then it is advisable to enter into a Non-Distribution Or Disturbance Agreement to assure its activities according to the main contract that is independent of the owner changing the title deed or selling the hotel to a third party. It is the one where the owner of the hotel achieves profits as a result of the Operator’s experience and expertise in running hotels. For this success, the operator receives a fee that can be structured to include one or more of a basic management fee including an incentive fee based on profit, a license fee, and fees for other mandatory billable services. In the Agreement the owner needs to be guarded against risk allocation provisions that could erode rapidly their margins for such profit.
Management of Accounts
During the term of the agreement (almost every year), the Owner and Operator mutually agree on an operating budget that covers the expenses and revenue for the forthcoming year. There are two major accounts: Operating Account and the Furniture, Fixtures, and Equipment Account (FF&E Account). To cover the operating expenses the hotel revenue goes into the Operating Account if there is a deficit then a top-up may be required from the Owner. The said account will be used by the Operator for the payment of expenses agreed between the parties under the operating budget or as per the agreement. A certain amount will be paid by the operator from the Operating Account into the FF&E Account for covering the expenditure on replacement or substitution of the FF&E during the term.
The Owner must assure that there lies a sufficient amount in the FF&E Account for coving the related requirements under the operating budget. The owner holds the responsibility to undertake repairs to the hotel be it structural or capital in nature. In case of failure, the Operator may be able to do so from the FF&E Account.
Once the payment of all operating expenses, the contribution to the FF&E Account, and the payment of the management fees are cleared, the Operator holds an obligation of remitting the remaining funds in the operating account to the owner of the hotel. The provisions concerning the operating budget and ensuring that the Owner has sufficient control over the Operator is essential.
As we have discussed above, the Hotel Management Agreements vary based on the purpose and requirements, the needs change based on changing scenarios. Hence, there is always a likelihood of a dispute between the parties. Most of these issues are managed amicably by the gatherings, as given the lodging is sensibly beneficial both will remain to lose more if the relationship closes. If the parties are not able to maintain the relationship and are willing to terminate the agreement then it is inevitable to seek legal advice for ensuring proper termination and entitlement of rights about the said agreement.