For more than 10 years, the Mexican hospitality market has been gaining a world-wide position. In 2017, Mexico experienced a record hotel sector revenue of net $21.3 billion, up 8.3% from 2016, and an increase in hospitality transactions over the past years.
Typically hotel brands have entered into management agreements with hotel owners, whereby the brands provide, among other services, a wide variety of management and operational services intended to keep the quality of the hotel property and services consistent with the brand’s hotels around the world.
In addition to the branded management agreement structure, the market has also seen an increase in branding hotels and resorts through franchise agreements. Potential franchisors and franchisees should note that franchise agreements have several specific requirements under Mexican law.
Franchises Under Mexican Law
Pursuant to the Mexican Industrial Property Law,1 in order for a franchise to exist, it is necessary for the franchisor to grant a license for the use of a mark as well as provide technical know-how or technical assistance. With these elements in place, the franchisee will be able to produce or sell goods, or provide services consistently, according to the operating, commercial and administrative methods established by the owner of the mark. With this approach, the quality, prestige and image of the products or services distinguished by the mark may be maintained.
Under the Mexican Intellectual Property Law,2 a franchise is considered to exist when the following elements are met:
a) When the license for the use of a mark is granted in writing;
b) the person receiving the mark is provided with technical knowledge or technical assistance;
c) in order for the person receiving the mark to produce or sell products or render services in a uniform manner;
d) with the operative, commercial and administrative methods established by the owner of the mark; and
e) tending to maintain the quality, prestige and image of the corresponding products or services.
To comply with Mexican law, the franchise agreement must include various elements, such as the geographical area in which the franchisee will carry out the activities; the inventory, marketing and advertising policies, and the provisions relating to the supply of goods and contracting of suppliers; the terms and conditions for subfranchising, if any; and the characteristics of the technical and operational training of the franchisee´s staff, as well as the method or form in which the franchisor is to provide technical assistance, among others.
Furthermore, the Industrial Property Law requires that the franchisor shall provide to the prospective franchisee, at least 30 business days prior to the execution of the franchise agreement, certain relevant information on the state of the franchisor’s firm, through a document identified as the Franchise Disclosure Document (Circular Oferta de Franquicia).
To comply with the provisions of Mexican law, the franchise agreement must specify certain minimum information, such as:
- The intellectual property right involved in the franchise;
- The amounts and the purposes of the payments to be made by the franchisee to the franchisor; and
- The types of technical assistance and services that the franchisor must provide to the franchisee.
In the event that any such information provided by the franchisor is false, the franchisee shall have the right, in addition to demanding that the contract be declared null and void, to demand compensation for damage suffered by it as a result of the non-compliance.
Finally, for the franchise agreement to be valid in front of third parties, it must be registered with the Mexican Institute of Industrial Property.
Management Agreements Under Mexican Law
Pursuant to a management agreement between a Mexican hotel owner and a hotel brand, a license for a trademark is commonly granted and is linked to the rendering of services. In addition, a management agreement commonly involves the transfer of technical knowledge necessary for the operation of the hospitality premises that is intended to maintain the quality and prestige of the trademark included within the management transaction.
Based on the elements of a franchise, there is a fine line between a hospitality transaction construed and structured as a franchise and a management transaction.
Any and all transactions involving the branding of a hotel property in Mexico need to be fully analyzed in order to confirm the appropriate structuring under Mexican laws from a corporate, real estate, intellectual property, franchise, labor and compliance standpoint.