The art of negotiation

Hotel-management contracts are aimed at achieving return on investment for owner and operator alike, however, we know that the asset value can be impacted by both the quality of the management company and the economic conditions at any particular time. This is particularly pertinent where contracts run for anything up to 20 years, during which time the operator’s focus and the economic climate can shift dramatically.

Following the credit crunch, a large number of hotels have struggled to meet the targets in their management contracts and some owners have not been able to meet their financial obligations to lenders. This means, therefore, that it can be necessary to re-negotiate contracts during an economic downturn and also, considering the current climate, to take a different approach to negotiating new contracts than you may have done two years ago.

It is important to be market specific in assessing who has the strength — the owner or the operator — when negotiating or re-negotiating contracts. In Europe, the balance of power moved to the owner a while back due to the competitive environment for the operators, whereas in the Middle East the power has been with the operator due to massive expansion of hotels and the presence of relatively few management companies. I believe this is now changing due to pressure on operators to produce results in a tough market.

Either way, it is extremely important that both operator and owner are able to sit down and analyse the management contract in a way that allows the owner to achieve the most cash-in-the-bank situation without negatively influencing the operator’s management fees.

From the owner’s perspective, below are some considerations that we believe need to be taken into account when negotiating or re-negotiating contracts:

The owner’s right to authorise budgets and expenditure — ultimately they have responsibility of paying the lender.

The owner’s right to appoint general managers and financial controllers; we all know that the right manager will make a property and an over-zealous “controller” can break it; also retain a clause whereby group operators moving managers at will is by owner’s consent only as this can negatively influence the continuity of sales and reputation.

Insertion of an “if everything else fails” clause in order to ensure that there is no negative influence on a property’s sale price due to an incumbent operator. On the other hand, in many cases a buyer will appreciate the continued services of a good operator and this clause would not have to be applied.

The owner’s revenue in future, due to the present situation, will need to include provisions whereby commitments to lenders have priority and operators have obligations to meet those priority levels. These can be done through what is considered nowadays to be an outdated practice of performance guarantees, not to be mistaken for owner’s priority, which is generally used as a hurdle in order to justify incentive fees.

The reason for this is that many owners in today’s market paid boom time rates for land, properties or construction and financial arrangements have been according to that. It is imperative for both owner and operator, therefore, that these commitments can be met to stave off litigation or bankruptcy.

Non-compete clauses are not that important in the Middle East due to the fact that a large percentage of business is locally negotiated. Properties located in one vicinity under the same management company is not necessarily a major factor in success or failure, however, the quality of manager, sales force and sales commitment from operator is.

Mike Scully has worked for some of the leading hotel management companies worldwide — Sun International, Holiday Inn, Accor and Starwood — as well as developing and managing properties for the Dubai Government. He is currently managing director of Seven Tides — Hospitality, which will be opening four luxury properties in Dubai within the next 12 months and which also owns Dukes Hotel in London.

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