Hotel management contracts: bargaining power is shifting - Insights

Hotel management contracts: bargaining power is shifting

Balance scalesDespite the addition of many supporting agreements, today’s international hotel management contract bears striking resemblance to the first such contract, signed in 1963 for the Hong Kong Hilton. What has changed over the years, however, is the relative balance and bargaining power of managers and owners.

These changes, along with typical current contract provisions, are examined in “The International Hotel Management Agreement: Origins, Evolution, and Status,” by Michael Evanoff, a well known practitioner who has negotiated scores of management contracts for Hyatt, other hotel management companies, and investors worldwide. The report is available at no charge from the Cornell Center for Hospitality Research and the Cornell Center for Real Estate and Finance, both of which are located at the School of Hotel Administration and are jointly releasing the report.

Developed over fifty years ago as a mechanism to allow hotel operators to expand globally without significant capital investment, management contracts were a more sophisticated tool than the lease agreements originally used by Hilton for its international expansion. Evanoff points out that these original management agreements were strongly weighted toward the operating companies’ interests, but today’s contracts have achieved a greater balance due to competition and increased owner knowledge.

“Early on in the days of international hotel management, we would joke that if an owner wanted a cup of coffee in the café, he had to pay for it,” said Evanoff. “Those days are long gone.”

Although most of the financial risk still rests with the owner, operators have considerable incentive to operate as effectively as possible. Not only are their management fees at stake, but being removed from a property is a black mark that most international chains wish to avoid. In consideration of the mutual interests of owners and operators, the specific contract provisions, such as base fee and incentive fee formulas and the length of the agreement, continue to evolve and change according to market forces and the relative bargaining power of the parties.

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