assignment of hotel management agreement

Hotel Management Agreement

Jump to section, what is a hotel management agreement.

A hotel management agreement is a legal agreement between the owner of a hotel property and the management company. The management company will be overseeing the daily operations of the hotel and the property. This agreement allows the management company to assume responsibility for everything from property maintenance to hiring and training staff.

These agreements are legal contracts and require management companies to provide reports and to bookkeep a certain way. They also require how the company will handle insurance and determine what maintenance and repairs are necessary for upkeep, among other essential provisions.

Common Sections in Hotel Management Agreements

Below is a list of common sections included in Hotel Management Agreements. These sections are linked to the below sample agreement for you to explore.

Hotel Management Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.3 6 dex103.htm FORM OF HOTEL MANAGEMENT AGREEMENT. , Viewed October 19, 2021, View Source on SEC .

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I am a solo practitioner with offices in Denver, Colorado and Austin, Texas with a focus on general business and real estate contracts.

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Benjamin is an attorney specializing in Business, Intellectual Property, Employment and Real Estate.

Travis counsels individuals and businesses on a broad range of complex topics. His practice centers on producing efficient, client-driven results. He concentrates his practice on real estate, construction, and general business matters with an emphasis on assisting clients both before and after problems occur by drafting contracts designed to best position clients to avoid disputes and litigating matters to a final resolution if problems emerge. Born and raised in Oklahoma, Travis is a triple graduate of the University of Oklahoma, having obtained his Bachelor of Arts, Master of Business Administration, and Juris Doctor degrees from OU. Prior to practicing law, Travis managed the finances and business operations of a successful construction supply company for several years. This insight into sophisticated business dealings, contractual issues, and strategic planning makes him uniquely qualified to handle a wide range of legal matters. Travis lives in Norman with his wife, Haley, dogs, Walter and Poppy, and cat, Ernest. Outside of the office, Travis enjoys playing golf and reading.

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I love to learn, and I love solving problems. That's why I became a lawyer, and learned to solve legal problems for individuals and businesses and help them fix things when there's a snag. Touch base if you think I could have something to offer for you or your company. Experienced, results-oriented legal professional whose background and education have established him as a valuable resource in areas of corporate law, franchising, litigation, compliance, mortgages and banking, and more. Practice Areas Include: Corporate law, Franchising, Litigation, real estate, corporate law, civil disputes, insurance representation, corporate counseling, dispute resolution, risk management, regulatory counsel, compliance. Experience involves sophisticated as well as routine corporate structuring and transactions, simple and complex litigation, and written and oral advocacy such as depositions, mediated settlement conferences, trials, appeals, written pleadings and discovery, and case strategy and analysis. Experience managing and litigating disputes between parties and negotiating settlements across the spectrum of civil litigation, including probative discovery, successful motions practice, legal research and writing, appellate practice, and legal consultation to individuals and business entities. Further experience includes digesting and monitoring updates to the legal landscape to advise clients or departments and successfully adapt policies and procedures to assure compliance with applicable laws and regulations as well as to manage risk effectively. For those needing a skilled commercial or corporate lawyer, or for individuals whose rights need persuasive advocacy, I am a valuable resource. Representative work also has involved success on the appellate level, as in Baker Construction Company, Inc. v. City of Burlington and Hawthorne, LLC, North Carolina COA09-13.

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Out-Law Guide 1 min. read

Hotel management agreements

16 Jun 2021, 11:36 am

Most branded hotels are operated under either a lease, management contract or franchise, or a combination of these options.  Each of these models creates a separation of some sort between the investment in the real estate element of the hotel and the operation and/or branding of the business element. Over the past few decades hotel brands and operators have increasingly pursued more capital light growth and used these models to drive expansion in partnership with real estate investors.

In this article we focus on hotel management contracts and, as an introduction, discuss some of the main terms that they cover. Large parts of these agreements cover issues over which the owner and management company are not aligned, and a balanced contract usually requires robust negotiation.

What is a hotel management contract?

Under a hotel management contract, the owner of the hotel real estate and business appoints a management company to operate the hotel business on the owner's behalf. Some management companies are also brand owners, in which case the hotel will be operated under the management company's brand. The owner remains the owner of the real estate and the business and retains the majority of the risk and reward from operation, but pays a fee to the management company, which is responsible for the day-to-day management of the hotel.

Term and renewal

Management contracts can be very long term contracts. Larger, branded management companies are particularly concerned to secure flags for their brands that will be there for decades. To some extent the value of their businesses relies on holding long term contracts. With those types of management company a typical term may be around 20 years, but in some cases substantially longer once renewal rights are taken into account. The management contract is likely to be structured so that the management company stays in place on a sale of the hotel, which can be particularly relevant for investors that have a specific intention to dispose of an asset within a certain period of their investment.

A balanced hotel management contract usually requires robust negotiation.

Smaller management companies will offer more flexibility and shorter terms to owners, and some will work on a very short term basis in turnaround type scenarios. They will often allow 'break rights' of some kind in the event of a sale of the hotel, most likely for a fee. The level of that fee will vary and often be dependent on remaining term of the management contract.

Performance-based termination

Most management contracts will contain some kind of right for the owner to terminate based on poor financial performance by the hotel. The most common forms of performance test look at either how the hotel’s revenue generation is performing against a peer group or how the hotel is performing against budget, or a combination of these.

However, overall these are normally fairly weak tests, based over several years, and with various carve outs and cure rights for the management company that can make them essentially toothless.

Management company fees

Management companies will typically be paid a 'base fee' which is a percentage of revenue, and an 'incentive fee' that is a percentage of operating profit. Clearly, from an owner's point of view, a greater emphasis on the incentive fee will align the management company more with the owner's commercial position.

There are many ways to structure the fees to alter the balance between the parties. For example, in some cases a management company might go further and guarantee minimum levels of profit, usually subject to some sort of cap on exposure; or alternatively agree not to take or defer its fees until minimum levels of profit are being earned for the owner.

In addition to the headline fees, management companies will often charge a large number of additional fees for centralised system services covering areas such as marketing, reservations, HR and accounting. Some of these can be in place of a service that the hotel would otherwise have to undertake, and staff, in-house which may result in a cost saving for the owner. However, in general, owners should try to obtain as much clarity on these charges as possible and they should not represent another way for management companies to make profits from the arrangement.

Working capital and bank accounts

As the hotel business remains the owner's under the management contract, and the owner retains most of the risk from the operation of the business, the owner provides the working capital required for continued operation of the hotel as and when it is needed.  The management company then operates the bank accounts of the hotel on behalf of the owner, collecting revenues and paying operating costs.

At the end of each month the owner is then transferred from the bank accounts any cash in excess of that needed for working capital and payment of operating costs.

Asset management

Day-to-day control of the hotel is undertaken by the management company, but there should always be certain important matters that require the consent of the owner. The management contract should also include detailed reporting and regular asset management meetings between the management company and representatives of the owner.

Matters over which the owner would typically have approval rights include:

• the appointment of key staff;
• the annual budget;
• high value and or long term contracts;
• high value litigation.

Capital expenditure

The furniture, fittings and equipment (FF&E) in a hotel are often exposed to heavy use and must be replaced or renewed on a regular cycle to avoid a deterioration in the hotel product/brand and its ability to generate income. The owner will be responsible for funding this expenditure. Often the management contract will require a percentage of revenue (typically 3-5%) to be put into a separate reserve each month to ensure that funding for such expenditures is available when needed. If the amount required at any time exceeds that available in the reserve, then the owner will typically be required to fund the shortfall.

In addition, particularly in management contracts for branded hotels that are required to meet evolving brand standards, owners are required to provide capital to invest in improvements to the hotel from time to time. This can be a particularly problematic area in the management contract and owners will often wish to obtain concessions to protect against unreasonable calls for further investment.

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What does your hotel management agreement say?

The hotel industry is a mature industry, and hotel management agreements have been evolving for a long time. In the United States, hotel management agreements have a more or less standard set of provisions, and their content is more or less consistent with reflecting what at any particular point is “market.” This is not exclusive to the hotel industry or management agreements; many agreements share this same particularity. For example, most nondisclosure agreements have a common set of provisions that are considered “standard” or “market.” However, what constitutes “market” can change rapidly; not long ago, third-party management contracts were long-term and not easily terminable by the owner, but alas, those days are gone. 

Although everything is always negotiable, the job of a hotel attorney is to understand why the provisions in the form of agreement say what they say, so it can explain if an issue on the table conforms to market and is reasonable or not. Clients can then decide if they should accept a proposed provision or spend time and money asking for something that may be hard, if not impossible, to get.  

Rights and Obligations

Hotel management agreements, like most agreements, are designed to provide for the rights and obligations of the parties in respect of a transaction, and to allocate the risk of the many things that can happen along the way. One of the standard provisions in management agreements states that the operator is not responsible for the acts or omissions of the hotel staff and is only responsible for the acts or omissions of its corporate personnel. Sometimes a different dividing line is negotiated, from the operator being responsible for the acts of the executive team at the hotel to only being responsible for the acts of its corporate personnel at the VP level and above. Does that mean that the operator will never be liable for any action taken by a member of, for example, the housekeeping staff? 

Imagine that a member of the housekeeping staff failed to clean a guest’s room; the guest is now bothered, and the only way to appease him or her is to extend a discount on the rate charged for the room. If the operator is liable for the failure of the housekeeper to clean the room, it would have to reimburse the hotel owner for that discount; if not liable, the cost of the discount will be borne by the owner. 

Leaving aside other intervening legal issues (such as standard of liability, the fact that the housekeeping staff is employed by operator and the exclusion of consequential damages), in oversimplified terms, if the housekeeper failed to clean the room because, for example, he or she received an instruction from a corporate employee of operator not to do so, then the operator would be liable because the failure to clean the room can be attributed to an action or omission of the operator (i.e. the instruction). But in the absence of that (or other action attributable to the operator), the failure by the housekeeper in cleaning the room will be assumed by the owner. So why are the actions of the housekeeper (and the risk associated with them) not attributable to the operator? Isn’t the operator supposed to operate the hotel?

Different Businesses, Different Services

To understand the rationale, we need to take a step back and look at what the business of each of the parties is. The owner is in the business of providing overnight accommodations and related services to guests, and the operator is in the business of providing certain services to the owner. Cleaning the rooms is a service provided by the hotel to the guest, by the operator to the owner, of both? It’s a fine line, but one of the guiding factors has to do with costs. A rule of thumb could be that the operator is providing to the owner those services for which it assumes the cost. If the cost of cleaning the rooms is not assumed by operator, that means operator is not providing to owner cleaning services, and therefore is not assuming the risk of the rooms not being cleaned due to an action of the housekeeper. So then what services are being provided by operator? With respect to the cleaning of the rooms, the operator provides manuals, procedures, supervision and other services designed to cause the housekeeper to properly clean the room, and which cost the operator is assuming. So if the failure to clean the room is the result of one such services not being correctly provided (for example, the operating procedure for cleaning the room is inappropriate, and even though the housekeeper followed it, the room was not properly cleaned), then operator should be liable for the action (or omission) of the housekeeper—again leaving aside the standard for liability and the exclusion of consequential damages. 

This dividing line is not exclusive of hotel agreements. For example, if a customer hires a purchasing agent to buy certain products on its behalf, the agent may be required to select a reputable supplier, place a purchase order and inspect a sample the products. If the purchasing agent does all activities correctly, but then some of the products are defective (because the sample did not cover defective products or the inspection did not reveal the defect), the agent would not assume the consequences because it did not assume the cost of the products (as would have happened if the agent would have purchased and resold the products to the customer). If the purchasing agent failed to correctly do some of the activities for which it is assuming the cost (say, selecting a reputable manufacturer or sampling the products), then it would be liable. 

Unfortunately, the analysis of a simple event such as a housekeeper failing to properly clean a room is not as straightforward as described above—there are many intervening issues and other provisions in the agreement that would come into play, but dividing an event into different pieces an analyzing each separately and try to determine how it would affect the outcome could be useful. 

David Camhi is a partner in the Miami and Fort Lauderdale offices of Berger Singerman.

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How to negotiate a hotel management agreement. 10 tips for a smoother process

Most of these suggestions are focused on expediting the negotiating process, because time is not your friend if you are an Owner or Developer. You need to complete the entire process, and you can't afford to cave on critical points too quickly just to rush things along. But generally speaking, the faster you can complete a well-orchestrated negotiation, the less the process will cost, and the better your terms will be. Deadlines and delays can put too much leverage in the hands of the operators, and all operators know that. If you want some information about the substance of the deal points you should be negotiating, see the references at the end of this article.

So how do you expedite a Hotel Management Agreement negotiation, while maintaining stamina to win important economic and business points?

Here are our 10 Tips for negotiating hotel management agreements:

• Select your team and get access to a virtual data base of "market" terms. You should identify the members of your group who will have the authority to make decisions and will be dedicated to the process. Just as importantly, you need to seek the outside advisors - lawyers and consultants - that can bring you the expertise and sense of "market" terms that you don't have in your organization. Our business and legal experience from more than 1,000 hotel management agreements provides the largest virtual database of hotel management and franchise agreement deal terms in the world.
• Identify and prioritize the issues . There are at least 20 or 30 business issues that are "tier 1" or "tier 2" issues that need to be raised and negotiated in a term sheet or LOI. (See " The HMA PRO™ Checklist. ") While such term sheets and LOIs are usually "nonbinding," the failure to raise these major issues at this stage will subject you to angry claims that you are retrading if you want to raise them later. It will certainly be harder to accomplish them later - if you can at all - and will delay your process.
• Control your own draft of the Hotel Management Agreement . Get the Operator to provide you with a Microsoft Word copy of the form of HMA they propose to use. The Operator may want to "control" the document revisions, but that's not realistic in an age of universal word processing, and we can often conform their HMA to the agreed-upon terms faster and better than they can. In any event, we need it for the process as described below.
• Shaping the form HMA to meet your needs . We don't mind starting with the Operator's form HMA. That is generally the accepted custom of the industry. However, after working with you to identify the most important business and legal points, we revise the Operator's form agreement to meet your needs, using specialized redlining software that tracks all changes in the document. Usually, we will suggest the exact language to be used. Sometimes, we will just highlight issues or options for discussion.
• Making sure we are all on the same page . Based on our earlier discussions about your priorities and goal, we then circulate a marked up draft of the Operator's form HMA showing all of our proposed changes. This draft only goes to you for your review, followed by a conference call to discuss the agreement and any necessary revisions. We review the document with you, page by page, to get your input and approval for what we have suggested. Most of the changes will be obvious as to their purpose and effect. Some will not be, and we will discuss these so we are all agreed to all proposed changes.
• Revise and confirm . After our joint review of the document, we make any necessary revisions to reflect your decisions. If changes are minor, we may not recirculate to our team prior to sending to the Operator. If there are major changes or there is a desire to see the revised language, we may recirculate to gain final approval before sending the document to the Operator.
• Send the revised draft to the Operator . The next step is to send the proposed changes to the Operator in the form of the marked up draft we have already cleared with our client. We jointly want to press the Operator for a fast turnaround with its own indication of what changes the Operator can accept or proposed changes to our changes. If at all possible, it is very much to your advantage to keep control of the drafts. If not, we can make it work, but the process is more laborious and time consuming.
• Set the all hands meeting . The goal is to get the Operator's markup or written response to our proposals, and then to arrange a "meet until the deal is done" meeting. This usually takes at least one, and perhaps two, working days. The biggest problem for you will be convincing the Operator to make someone available for the entire time necessary. Otherwise, there can be a delay of days or weeks until the follow up meeting is scheduled and the negotiations can be completed.
• Location of the all hands meeting . It is not important where we meet. There is a benefit to meeting in our offices in terms of our ability to generate documents quickly, but we can meet at the Operator's corporate offices, their attorney's offices, the Hotel or your offices. The availability of representatives with decision-making ability will probably drive this location, and you should be prepared to travel to meet the Operator on their "turf," if it means they will have the necessary people available.
• Exchange and finalize . After the all hands meeting, we will circulate revised drafts of the HMA reflecting the decisions. There may be a very small handful of "final issues" to be resolved that we hold to the very end before we give them up or trade them off. But there will be an exchange of documents reflecting the final decisions that should lead to an expedited signing of the HMA. If something goes awry, we will do another meet-until-we-sign meeting.

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Assignment and Assumption of Hotel Management Agreement, dated April 29, 2019, by and between RI II MC-HOU, LLC and Moody National Kirby-Houston MT, LLC

MOODY NATIONAL REIT II, INC. 8-K

EXHIBIT 10.5

ASSIGNMENT AND ASSUMPTION OF HOTEL MANAGEMENT AGREEMENT

THIS ASSIGNMENT AND ASSUMPTION OF HOTEL MANAGEMENT AGREEMENT (this “Assignment”), is made and entered into as of the 29 th day of April, 2019, by and between RI II MC-HOU, LLC, a Delaware limited liability company (“Assignor”) and MOODY NATIONAL KIRBY-HOUSTON MT, LLC, a Delaware limited liability company (“Assignee”).

W I T N E S S E T H :

WHEREAS, Assignor, as Owner, and Moody National Hospitality Management, LLC, a Texas limited liability company, as Manager, entered into that certain Hotel Management Agreement dated February 20, 2019, related to the operation of that certain hotel known as Residence Inn- Houston/ Southwest Medical Center — Houston, Texas (“Hotel”), located at 7807 Kirby Street, Houston, Texas 77030 (“Property”).

WHERES, on the date of this Agreement, Assignor has conveyed the Property to MOODY NATIONAL KIRBY-HOUSTON HOLDING, LLC, a Delaware limited liability company, an affiliate of Assignee, who leases the Hotel to Assignee.

WHEREAS, in connection with the sale of the Property, Assignor now wishes to assign all of its right, title and interest as Purchaser under the Agreement to Assignor and Assignee desires to assume and perform the obligations of the Assignor as Purchaser under the Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Assignor and Assignee hereby agree as follows:

1.        Assignment. Assignor does hereby SELL, GRANT, ASSIGN, TRANSFER, CONVEY, RELINQUISH AND SET OVER unto Assignee all of Assignor’s right, title and interest in and to the Agreement.

2.         Assumption by Assignee. Assignee, hereby accepts the foregoing assignment, agrees to assume and perform all the duties and obligations to be performed by the Purchaser under the Agreement therein mentioned to the same extent as if Assignee had originally been named as the Purchaser in that Agreement, and to indemnify and hold Assignor harmless for any liability for performance or nonperformance of the duties and obligations assumed by Assignee.

3.         Governing Law. This Assigrunent shall be governed by, and be construed in accordance with, the laws of the State of Texas.

4.         Counterparts. To facilitate execution, this Assignment may be executed in as many counterparts as may be required. It shall not be necessary that the signature on behalf of both parties hereto appear on each counterpart hereof. All counterparts hereof shall collectively constitute a single Agreement.

5.         Entire Contract. This Assignment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

[Signature page follows.]

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Assignment as of the date and year first above written.

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Top ten things to consider when negotiating a hotel management agreement

Owner considerations.

1. Testing the market

• Consider operator selection programme rather than exclusive negotiation
• Seek to compare operational and commercial differences between operators
• Facilitate competitive bids to get world’s best practice
• Seek to accumulate market information for future projects

2. The consequences of when to go exclusive

• How should the operator selection programme proceed?
• When should exclusivity take place – when commercial terms agreed or later stage?
• Consider the operator’s legal agreements for ancillary / non-core commercial issues (e.g. rights of first refusal, financing limitations and purchasing)
• How to proceed should negotiations with the preferred operator falter

3. Determine which matters have significant commercial value

• Be strategic – what are you seeking to achieve from the negotiation
• Pick your battles – pursue the commercially significant issues and accept the peripheral issues
• Be prepared to be bold (e.g. consider other commercial alternatives other than just relying on Performance Test and/or AOP)

4. Are significant commercial issues being conceded without a value-driven negotiation?

• Don’t settle for second best (e.g. press for a Performance Test that actually works)
• The most significant issues are best resolved with properly structured competitive process for operator selection programme
• Be determined and prepared for an investing time and efforts for a thorough negotiation – the best deals are generally not done quickly

5. Which consultants should be engaged and when

• Identify the skill sets you lack and engage appropriate consultants to provide the relevant skills
• Consider engaging the consultants at the outset – it may cost more but it may just be worth it
• Ensure that all your consultants are marching to the same tune as you are
• If you are paying for advice, consider it carefully – even if you initially disagree with it

Operator considerations

1. Don’t assume that the owner and its consultants know what is distinctive about you

• Does the market understand your unique/distinctive service offering
• To what extent do you provide an information kit to prospective owners to highlight what is “special” about your offering and how you are different from your competitors?
• Repeat your major selling points over and over again
• Take every opportunity to inform owner consultants – it’s better that they sing your praises rather than you

2. Be flexible and reasonable

• Amplify your niche and value proposition in today’s competitive world – be prepared to be sufficiently flexible or reasonable to get the right the deal
• Separate the wood from the trees – shame to lose a deal over a word in an indemnity clause
• Approach to negotiation may indicate how parties will deal with disputes during contractual term
• Thinking and approach of commercial and legal teams should be constantly aligned

3. Don’t allow negotiations to blow out

• Ensure that the negotiation team is focused and pro-active
• At the outset determine a timetable and seek to follow it religiously
• Ensure that all relevant tasks are identified and responsibility attributed to each
• Particularly important in complex hotel/branded residence and condo hotel developments

4. Be aware of the local market nuances

• Before pitching, study the local market for specific practices and approaches to commercial terms
• For international operators, consider the value proposition of local operators
• If unsuccessful, seek appropriate feed back as to competitive qualifiers (e.g. fees, term and/or premature termination)

4. Don’t make promises that are unrealistic

• Don’t oversell (it’s a long term relationship and it will come back to haunt you)
• Don’t place too much importance on information which you are not prepared to stand behind (e.g. forecasts)
• Be honest about your strengths and weaknesses with respect to your competitive set

I appreciate that that this is by no means an exhaustive list that can be improved in the next negotiation. I trust, however that at least some of the considerations set out above resonate with you – and if at least one of the considerations helps you with your approach in a beneficial way then all the better.

About the author

Graeme acts primarily for clients in the hotels, resorts, tourism and wider property industries. He has worked extensively on structured purchases and sales of hotel and resort properties, and on managed investment fundraisings which include all forms of public trusts, timeshare schemes, tax driven investment schemes and other similar investments. He has advised on hotel and resort management contracts — including non-disturbance agreements between owners, operators and lenders — and integrated resort developments in Australia, New Zealand, Fiji, Tahiti, Maldives, the Caribbean, Singapore, the United States, People’s Republic of China (including Hong Kong), Japan, Vietnam, Malaysia, India, Thailand, Cambodia, Indonesia, Korea, the Philippines and Eastern Europe.

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