Why these seven
Most of a hotel management agreement is standard drafting that rarely matters in practice. A small number of clauses, however, decide how much the operator earns, how much control you keep, and how hard it is to change course if things go wrong. These are the clauses Amit Parmar spends most time on when he negotiates for owners.
1. The base fee
Charged on total revenue and paid every month, profitable or not. Ask how it compares with recent deals for similar hotels, whether it steps up over time, and exactly which revenues it applies to.
2. The incentive fee
Charged on gross operating profit, it should reward good management. Ask for it to start only after you have received a minimum return on your investment, often called an owner’s priority. Without that, the operator earns an incentive even when you earn very little.
3. Centralised charges
Sales, marketing, reservations, loyalty, technology and training charges can add substantially to the headline fee. Ask for every charge to be listed, defined and capped.
4. The performance test
The single most important protection for an owner. A clear test, usually based on two consecutive years of results compared with budget and with competitors, gives you the right to terminate if the hotel is poorly run. Make sure the test is measurable and that the operator’s right to “cure” a failure by paying the shortfall is limited.
5. Budget approval and key staff
You carry the financial risk, so you should approve the annual operating and capital budgets, and be consulted on the general manager and financial controller. Agree what happens if you and the operator cannot agree a budget.
6. Term, renewal and exit
Check the initial term, who controls renewal, and what it costs to leave early or on a sale of the hotel. An agreement that makes your hotel unsellable without the operator’s consent reduces its value.
7. Area of protection
The brand’s promise not to open a competing hotel within a certain distance. Agree the radius, the brands it covers and how long it lasts.
Getting help
These clauses are negotiable, but only before you sign. If you have a term sheet in front of you, Amit’s brand tie-up advisory can help you compare it with alternatives and negotiate what matters.
