Hotel management contracts more complex as global operators grow

Hotel management contracts are becoming more complex as increasingly powerful global operators become more difficult to negotiate with.

That's according to a report by global hotel consultancy HVS, which highlighted that management contracts are taking longer to negotiate and contain a wider variety of terms and restrictions, often requiring the assistance of a specialist advisory firm.

The report suggested the added complexity comes despite owners becoming more knowledgeable in recent years because major global operators have also become larger and more powerful through recent consolidation, and mergers and acquisition of hotel operators in the industry.

HVS said that hotel lease contracts have traditionally been popular in Europe, and continue to be preferred by many institutional investors, but most major international hotel operators have become far less willing to offer leases.

And hotel management contracts are more prevalent as investors look to share more of their hotel's trading profit.

A number of alternative operating models have emerged as hotels have become more mainstream assets, including the growing use of third-party operators' agreements.

Hybrid lease/management contracts are also becoming more common, as are ‘manchise’ agreements, which see hotel owners engage a branded hotel company to manage the property for an initial time period, after which the agreement converts into a franchise contract.

The owner then assumes management responsibility but retains the operator’s brand, in exchange for an annual franchise fee. This type of agreement is particularly advantageous for hotel operators looking to launch a new brand, said HVS.

Chris Martin, senior director, HVS Hodges Ward Elliott, said: “As with any major commercial contract, negotiating the terms of a hotel management agreement should not be approached lightly.

“As well as characterising the property’s identity for many years to come, a hotel’s performance and therefore value are intricately linked to the selection of operator and the terms of the management agreement.”

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