A lawyer’s word of caution

Owners normally look at checking the main terms of the contract in respect of:

a. The duration.
b. The base management fee.
c. The incentive fee.
d. Marketing and advertising contribution.
e. FF&E contribution.
f. Licensing or royalty fee.
g. Loyalty programme fee or reservation fee.

As Mike Scully has correctly stated, the owners now should also review other aspects such as budgets expenditure, reservation of rights to appoint various management staff, the non-compete clause and review of termination clause to incorporate breach by the operator.

One of the aspects I normally have to negotiate with management companies would be the inclusion of the following matters in the definition of “expenses” — provision for bad debts, professional fees, if at all possible the base fee, the contributions and reservation fees and tax and other impositions.

Furthermore, we would encourage owners to include in the definition of “revenue” a limitation, so it excludes loans or proceeds of insurance and concessions receipts.

The scope of duty of the operator must be clearly laid out, not only with regard to pre-opening and opening services and technical services, but also the ongoing responsibility of preparing budgets and adhering to each budget.

The other area which owners try to minimise is in respect of capital expenditure and refurbishment. Most owners these days tend to get away with it because of the economic downturn. However, it is important that the management company has sway when it comes to determining the standards and adherence to such standards and as long as the budgets are correctly laid out there should be no dispute about the expenditure in question.

The trend shows in recent years a reduction of the incentive fee and a spread over a number of years and/or a decrease in the percentage of the GOP (gross operating profit). The life blood of a hotel depends on a good loyalty programme and the management company should not budge as regards to the per room revenue percentage which is charged for the contribution.

With regard to the termination clause, care should be taken as to how the owner can terminate and that any termination for breach should be properly justified and not merely in respect to under performing and non-achievement of targets. The non-achievement of targets should only run after the initial fiscal years. We have encountered termination clauses that require expert opinion from a recognised consulting firm as to whether or not there has been under performance, before termination can be effected.

The economic downturn has been severe over the last six months. Dubai has faced a large decrease in revPar compared to hotels in cities such as London and Paris. However, the desired ROI can vary from hotel to hotel, and region to region (to quote PKF’s newsletter of July 2009). While some owners blame operators for the figures, I’ve heard from an operator that they’re convinced it has to do with feng shui!

Finally I recommend the parties succumb to Dubai International Financial Centre (DIFC) and the London Court of International Arbitration (LCIA), even if they’re not domiciled in DIFC. LCIA arbitration awards can be enforced immediately through DIFC courts and thereafter immediately enforced through the Dubai courts (by virtue of a memorandum of understanding signed between Dubai courts and DIFC courts recently).

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