If the hotel is a new building, the owner should have the right to terminate the management contract if, for any reason, the hotel is not completed without compensation to the operator. The tendency is to define the general conditions in a Memorandum of Understanding (Letter of Intent, LOI) before continuing with the “final document” phase. Here are the key words for which there should be a “meeting of heads” before the parties can conclude that they have agreed on the terms of an HMA: 14. Damage and destruction: non-life insurance is offered by the owner with coverage acceptable to the management company. The owner must find insurance income to repair the hotel, but he may have a right of termination if the damage is serious. In view of the increasing number of investment companies that own both hotels and hold shares in hotel operators` companies, hotel owners should also consider whether the definition of competition would exclude parties with a stake below a certain level, i.e. 50%, in a hotel company, or whether a party that has not participated in the performance of the hotel establishment`s main activity, using centralized booking and marketing systems. After the acquisition, Hilton, to stimulate growth, continued the agreements at a generalized rate and sometimes conceded to the negotiating table the terms of the management agreement. According to Braham, this has meant that other companies also need to be more flexible. “It turned the script around,” he said. Jones added: “When the financial crisis hit, some brands agreed to work on the numbers.” That was not the case 20 years ago, when the base fee was up to 3.5%. While management contracts are still unilateral in favor of the operator, Mobar says there is a wider acceptance of barriers to profits, as “owners try to get more for their money.” The parties should consider whether there are other options to limit the transfer to a competitor.
For example, an investment fund linked to flexibility to transfer as part of its investment strategy may instead offer a right of pre-emption on transfer that, if not exercised by the operator, allows the owner to sell the hotel without restriction (although the owner must ensure that this does not delay the sale process too much). Alternatively, an owner may require a right of termination from HMA upon sale for a higher fee to the operator….