Signing on the dotted line

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Under the mountain of paperwork, both parties are working towards a common goal.

Trowers & Hamlins senior lawyer Russell Vickers takes a look into the complex world of hotel management agreements and reveals the key points for owners and developers to remember.

The significant number of leisure projects in the Middle East region is creating a boom in the number of hotels being developed. Nowhere is this more obvious than in Dubai, where the Dubailand project alone plans to add a further 80,000 hotel rooms to the emirate's inventory in the coming years.

The three Palm Island developments by Nakheel are also expected to host more than 200 hing and hoteotels.

Naturally, this has led to an ever increasing interest in the region for international hotel operators, particularly with high occupancy rates and high profits per available room. Competition between developers for the appointment of premium hotel operators is increasl operators can now be more choosy about which projects they pursue.

This has allowed premium hotel operators once again to become less flexible on the basis upon which they will undertake operation of a new development.

In addition, the type of hotel management agreement now being used in the region is more sophisticated than in previous years. International-style suites of management agreements are now commonplace.

As the business practices and legal systems in the region mature, so does the need to ensure that arrangements between owners and operators are adequately formalised.

Management agreements

In virtually all situations an operator will have a standard form of management agreement that they will propose to the hotel owner. This would ordinarily be accompanied by at least a pre-opening services agreement, technical services agreement and licence agreement.

It is of course important to ensure that these agreements are tailored for the Middle East market.

It is common for a standard form agreement to be based upon the situation in a western jurisdiction which is often dissimilar to that of the Middle East.

For example, agreements which include references to gambling facilities would be wholly inappropriate, similarly references to alcohol should not be included in agreements covering Saudi Arabia.

Furthermore, employment and immigration laws in the Middle East differ substantially from the position in jurisdictions where there is a more readily available local workforce.

When considering a form of agreement, owners should ensure that they do not focus purely upon negotiating management fees. Full consideration needs to be given to all terms of the agreement.

The more comprehensive a management agreement, the less room remains for a dispute. The issues need to be discussed in an open nature as these will form the basis of the long-term partnership going forward.

The parties should not regard their negotiations in an adversarial manner, but rather one of co-operation. Ultimately, both parties' aims are the same and each want to run the best and most profitable hotel possible.

Control

The fundamental issue, which any owner and operator will often spend more time negotiating than anything else, is their respective levels of control. Both of course have a vested interest in having a broader level of control over the hotel operations.

The key thing to remember here is that hotel management agreements are based on the concept of agency. The operator is appointed by the owner to exclusively manage the hotel on the owner's behalf and in the owner's name.

The owner must not interfere in the operation of the hotel, other than within the boundaries set out in the management agreement.

Nonetheless, rarely nowadays will an owner agree to cede absolute control of a hotel to a hotel operator. The control to be retained by the owner will generally be linked to the annual budgeting process and a right to approve and input into these budgets.

Similarly certain other areas, such as the appointment of key staff and the conduct of material litigation would be carried out with the approval of the owner.

One area where there are often discussions is in relation to the bank accounts of the hotel. Naturally the owner would seek some (and in some cases total) control over these, although generally it is something that should be resisted from the operator's perspective.

Clearly an operator's ability to operate a hotel will be severely undermined if it cannot also operate that hotel's bank accounts on a daily basis.

It is best if the management agreement specifies who has the right to be an authorised signatory and particularly whether the owner expects some co-signing rights. Such co-signing rights should ordinarily only be relevant for unbudgeted expenditure over a certain level.

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