We are currently running a 10-part series discussing particular provisions and concepts within hotel management agreements.
The purpose of this series is to discuss common hotel management agreement provisions and concepts from the perspective of both hotel managers and hotel owners. Hopefully, we will touch upon one or more topics which spark an "I've always wondered why that is the way it is, but nobody has taken the time to explain it" reaction with you. We trust the discussion goes some way to demystify the topic.
Our 10-part series will cover the following topics:
- Why is the manager's fee based on hotel's revenue and profit and not some other basis?
- Why do some agreements provide that the manager is the owner's agent and some do not?
- Why does the owner employ most or all of the hotel employees (and not the manager)?
- What is the risk/reward relationship between an owner and manager?
- Why does the owner indemnify the manager?
- Why do we need a non-disturbance deed between the owner, manager and financier?
- Why do we need an area of protection?
- Why is the owner usually prevented from selling the hotel to one of the manager's competitors?
- Why does the manager impose restrictions on the owner's ability to finance the hotel?
- What is the importance of brand standards?
Why is the owner usually prevented from selling the hotel to one of the manager's competitors ?
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:
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.