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www.hospitalitybizindia.com | Hospitality Biz - April 2016
Critical Elements of a Hotel Management
Agreement – An Owner’s Guide
H
otel Management Agreement is a legal contract consisting
several terms, conditions, tenure, defaults, consequences
and all other commercial and non-commercial
arrangements under which hotel owner(s) hire a hotel management
company to manage their hotel professionally, efficiently and with
greater market reach. Hotel management company or hotel operator
may also be referred as ‘brand’ since in India most hotel brands are
hotel operators themselves.
Owners usually get introduced to a hotel management agreement
after finalising the brand during brand search process and therefore
most remain curious to get hold of a typical draft agreement well in
advance to understand the complexity. And since hotel consultants
or brands are bound by ethical code of conduct and confidentiality
conditions, they aren’t able to share the typical agreement sooner
than the right stage.
One intention of this article is to fulfill that requirement of hotel
owners.
1. Term Period – Hotel Management Agreements have tenures
varying from 10 to 15 years for most brands. Usual explanation
given by the brands for a minimum tenure of 10 years is the amount
of effort they have to put into a hotel during the first 2-3 years of
stabilisation for relatively lower management fee since the hotel
revenue is not at its peak while the effort definitely is. That being
said, new entrants, mostly domestic, may always take up hotels for
shorter tenure in order to quickly scale up.
2. Operator Fees – This may be divided into two sections: Section a)
Pre-Opening Fees, and Section b) Post-Opening Fees.
Pre-Opening Fees consists of: i) Signing Fee, and ii) Technical
Services Fee.
Signing Fee is a onetime non-refundable fee that a hotel owner
pays to the brand while signing the hotel management agreement and
is usually a multiple of total rooms. This may usually vary anywhere
between USD 250 to 500 per room. So for instance, signing fee for
a 150 room hotel may add up to anywhere between US$ 37k to 75k
(INR 24 to 50 Lacs).
Technical Services Fee is charged by the brand to assist the
owner in developing the hotel with right specifications, designs and
detailing. For a hotel still in its planning stage, Technical Services Fee
could be a percentage of overall above the ground project cost or a
monthly fee till project completion.
Post-Opening Fees come into effect after the hotel has opened and
started earning revenues and remain in effect throughout the tenure
of the contract. This consists of: i) Base Fee, ii) Incentive Fee, and
iii) Marketing Fee. Sum of Base Fee and Incentive Fee is termed as
‘Management Fee’. The overall Management Fee for a hotel may
vary from 6 to 8% of its gross revenue. Marketing Fee, also known as
Group Services Fee, is collected to offset the marketing, advertising
and related expenses that brand has to make at the central level.
Though not applicable to all brands, but apart from these, there may
be additional heads such as – Reservation Fee, Loyalty Card Fee,
Quality Audit Fee, etc.
3. Obligations of the owner – Owner commitments and liabilities
are detailed in this section that may lead to Owner Default if not
fulfilled as stipulated. Things that are at owner’s prerogative for
under development hotels typically are – Completion of hotel
as per the suggested facilities and minimum brand standards
(MBS), Procuring all permissions/ NOCs/ licenses initially,
Extending local support to the brand in various ways, etc.
Once the hotel begins its operations the owner is obligated to
Open hotel operating account, Providing necessary working capital,
Providing reserves for replacement, Honoring Brand’s liberty and
discretion in managing the hotel, and also ensuring that the brand’s
fee is paid in time with no unreasonable delay. Most brands conduct
quarterly review meetings (QRM) between the Owner, General
Beni Agrawal, Founder and Principal Consultant, GK Hospitality Services (GKHS)

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www.hospitalitybizindia.com | Hospitality Biz - April 2016
Manager and Brand’s representative to bring all concerned on the same
platform to make any suggestions, concerns or recommendations. One
of the critical responsibilities of the owner is to approve the Annual
Business Plan (ABP) prior to each new financial year.
4. Obligations and responsibilities of Brand – Brand’s obligations
are listed in this section covering the brand’s in managing the hotel.
This typically includes – managing the hotel as per minimum brand
standards (MBS), maintaining financial books of accounts, preparing
Annual Business Plan, sharing periodic hotel performance statements
with the owner, appointing right people on the right roles, establishing
appropriate policies/ procedures/ systems for hotel operations,
maintaining the hotel and its valuables, etc.
5. Approved Annual Business Plan – While the hotel management
agreement is negotiated only once, Annual Business Plan (ABP) needs
to be approved by the hotel owner each year prior to the beginning of
the respective financial year.
This includes the revenue
and expense budget of the
hotel detailing each head
appropriately. The owner
may share his suggestions,
recommendations or
concerns which may be
assessed by the brand for
appropriate inclusion. ABP
is typically shared with
the owner sometime prior
to beginning of the new
financial year.
6. Performance Clause –
In a business partnership
environment, no one partner wants to remain stuck with a non-
performing partner and suffer continued losses. Performance clause in
a hotel management agreement protects the owner against any such
situation wherein the brand is repeatedly not able to perform while the
other hotels in the competitive set of the subject hotel are performing
significantly better. Two keywords to be noted here are – ‘repeatedly’
and ‘significantly’.
Performance clause is either linked with RevPAR of competition set
of subject hotel, or with budgeted GOP as represented in the approved
ABP.
7. Bank Accounts – Usually two bank accounts are opened by the
owner: a) Operations Account, and b) Replacement Account.
Operations Account is the main current account where working
capital is deposited. Daily proceeds from hotel revenue are also
deposited in this operating account by the brand. This account is
jointly managed by the General Manager and Financial Controller
of the Hotel.
Replacement Account is only used to make good routine wear
and tear, and replacement of the interior, equipment, upkeep, etc. to
ensure that the property remains in good condition through its long
years of operations. This account is usually maintained by the owner
with brand’s advice or mutual consent.
8. Non-compete / Area of Protection (AOP) – In AOP clause, brands
commit that they wouldn’t take up any other hotel property of similar
positioning within a specified area of protection usually measured in
radial distance from the subject property. Some scenarios where AOP
may lose its importance is the inventory size of competing hotels of
same brand or demand market size being too huge and easily absorb
both the hotels.
Dual brand model has recently become popular and is a good
example of two non-competing attached hotels catering to two
different segments without breaching each other’s territory.
9. Employees – One of the very common queries of hotel owners
is – who is liable towards employees of the hotel? All employees are
recruited by the brand and their salary is paid from working capital.
Owner may participate in the
recruitment process of General
Manager (GM) and Financial
Controller (FC) by sharing his/
her consent before finalization
of respective candidate.
Handling people can be
a challenging affair and
mismanagement can lead to –
compromised service standards,
poor upkeep of hotel property,
and above all immoral or illegal
activities in some cases. Since
the hotel is managed by the
brand,ownerstypicallywantthe
brand to take full responsibility
of all acts of employees and consequences arising from it.
10. Premature Termination and Consequences –Early termination or
premature termination has its consequences on both parties. Brands
would argue that they wouldn’t have any reason to terminate the
contract unless the owner is at default. While if the owner prematurely
exits the contract, the financial consequence or penalty is usually a
multiple of expected loss of management fee that the brand had to
suffer because of the early termination.
In case of brand’s default including failure of performance test,
owners have the right to prematurely terminate the contract with no
consequence financial or otherwise.
The above 10 Critical Elements of a Hotel Management Agreement
may differ marginally or at large from brands of various origin,
positioning, age, scalability and establishment, etc.
As a final word, it must be noted that these critical elements are
mostly negotiable but to what extent would purely depend on the
appetite of the brand towards the subject hotel, which has a direct
co-relation with the – City, Location, Scalability, Design, Features,
Owner’s Profile, and several other factors that would have commercial
and perceptual impact. n