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?
There are many other lawyers in our firm scattered across the globe that have experience and expertise in negotiating hotel management agreements. These lawyers may have views on all the topics discussed in this series which vary from the views of the authors. Today, we will continue this series with the final topic.
For those readers who may not have received all of the prior newsletters in this series, and who would like to read any of such newsletters, then please click on the heading of the relevant newsletter above and a link will take you to the relevant newsletter.
What is the importance of brand standards ?
It is fitting that we end this series with the topic of brand standards.
For a brand to have meaning in any useful sense there must be a collection of clear and concise standards which ensure that each user of the brand has the responsibility to deliver a consistent and uniform guest experience.
The great hotel operating companies of the world whether they are international or entirely local, or whether they have one brand or a suite of brands, fundamentally depend on their owners and franchisees to adhere to brand standards. Typically the brand standards are most comprehensively codified with respect to five (5) star brands as these generally are the most treasured gems in the operator's stable of brands.
For both managed and franchised hotels, operators take various approaches to brand standard compliance. Some operators mandate brand standard audits and if not complied with on one or more occasions then adverse consequences may be imposed upon the recalcitrant owner with the ultimate sanction being termination of the management or franchise arrangement, removal of the brand and the potential of a claim for significant damages against the owner for breach of contract.
For hotels under management agreements, compliance with brand standards at all times is achieved through the daily management leadership of the general manager and other senior personnel appointed to the hotel by the operator. In practice, however, operators adopt a common sense approach to compliance particularly with respect to matters such as upgrade requirements pertaining to technology in advance of the expiration of the life cycle / tax written down value of existing technology in the hotel. To take but one example in the technology landscape, mandated requirements to comply with state of the art plasma screen / LCD television receivers are tempered by a recognition that this should only be insisted upon when the life cycle / tax depreciation expiry date of existing television receivers is reached.
Brand standards are the essence of the symbiotic relationship between all owners and franchisees who are authorised to use the brand and the operating company who is the brand owner. Each owner/franchisee looks to the operating company to mandate brand standard compliance across the chain of hotels using the same brand and to take decisive action with respect to instances of non-compliance. The operating company relies on each owner/franchisee to comply with its contractual obligations to comply with brand standards and spend the necessary funds to ensure that this takes place.
As with all the previous articles in this series, we would be happy to elaborate to any interested reader any aspect of this topic and the key negotiation considerations relating thereto.
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