Top ten things to consider when negotiating a hotel management agreement

Negotiations signpostIn my experience, when both owners and operators reach the end of a hotel management agreement negotiation there are always things that potentially could have been done differently. In this article, I’ll identify a number of the more common issues and to keep it balanced, I have identified an equal number for both owners and operators.

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?

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  • 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 DicksonGraeme Dickson is a partner in the Structured Real Estate group in Sydney at Baker & McKenzie and is global coordinator of the Firm’s leading Hotels, Resorts & Tourism Practice Group. He is recommended by Best Lawyers, Chambers Asia Pacific and Doyle’s Guide for his work advising on hotels and tourism law.

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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