Most hotel owners, particularly first time owners, often question any right on the manager’s part to potentially block their sale of the hotel to a competitor of the manager. However, the answer to this question is really quite simple.
The relationship between an owner and a manager is an intimate one, where a significant quantity of confidential information passes between the parties on an ongoing basis. In the case of information passing from the manager, this includes:
- hotel sales targets;
- pricing and revenue strategies;
- proprietary marketing information;
- system wide and hotel specific customer data;
- sophisticated technical information about industry trends and competitor activities; and
- frank assessments of the performance of the hotel and key employees.
This information is extremely sensitive and it is completely understandable that the manager would not wish a sale of the hotel to result in this information being available to one of its competitors. Hence, the justification for a restriction on sale of the hotel to a competitor of the manager. However, this issue becomes more complicated when the affiliates of both the buyer/competitor and the manager are to be included in discussing the scope of any restriction.
Significant finesse is required to draft the definition of “competitor” to ensure that it captures all relevant circumstances without overstepping the mark. We have had extensive experience acting for both owners and managers in drafting such provisions and it often requires some thoughtful and patient discussions to reach an agreement.
Alternatively, but less frequently, some management agreements contain no restrictions on the owner selling to a manager competitor. But if the owner does so, the manager has the right to terminate the management agreement and receive certain pre-agreed or unascertained termination compensation.
Other management agreements may contain a hybrid of these two approaches. For example, for an initial period, the prohibition is in place and thereafter the prohibition is lifted and the manager has the election to terminate. This is usually accompanied by other changes, which are activated when the prohibition ceases to apply, such as the removal of any area of protection restrictions on the manager.
In practice, however, this issue is more apparent than real. Generally, hotel operating companies would be disinclined to expend funds to acquire a hotel, which is subject to a long-term management agreement to one of its competitors.
Source: Baker & McKenzie
The article is part of Baker & McKenzie’s Hotels, Resorts and Tourism series on provisions and concepts within hotel management agreements focusing on “What is the risk/reward relationship between an owner and a manager?”.
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