Hotel management agreement

A hotel management agreement, contrat de management or contrat de gestion in French, is a contract under which the owner of a hotel, or the company holding its business, entrusts its operation to a hotel operator. The operator runs the hotel in the name and on behalf of the owner, usually under its own brand, in return for fees. The owner keeps the revenue, the costs and the result: it bears the operating risk.

In the hotel sector

The operator’s remuneration generally combines a base fee, calculated on revenue, and an incentive fee, calculated on GOP or a similar measure, plus brand, distribution or reservation charges. The owner funds capital expenditure and contributes to a reserve for replacing furniture, fixtures and equipment. These agreements are long, and the owner’s termination rights are limited, sometimes by performance tests.

In a transaction

A hotel “under contract” and a hotel “free of management” appeal to different buyers. An operator wishing to run the hotel itself will look for an unencumbered asset. An investor may prefer an agreement already in place with an established operator. The points reviewed:

• remaining term and exit conditions, including the termination fee
• change of control clause and any pre-emption or first refusal right in favour of the operator
• capital expenditure and brand standard commitments
• reporting format (often USALI) and access to operating data

These clauses sit in the data room and can affect both the timetable and the price.

Not to be confused with

A hotel franchise, where the operator runs the hotel itself under a brand, and a commercial lease, where the tenant pays rent and bears the operating risk.

For an off-market disposal: the Circle.