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Fri 6 May 2016 12:02 AM

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GCC hotel owners get tougher on operators over contracts

More than half of all hotel contracts now include performance test on which they can be terminated, says report

GCC hotel owners get tougher on operators over contracts

More than half of all hotel contracts awarded in the Gulf now include a performance test on which they can be terminated as the regional hospitality market faces tougher conditions, according to a new report.

Research by TRI Consulting forecast that termination clauses are poised to be one of the biggest issues for hotel owners and operators in the future.

Tougher economic conditions in recent months have seen hotel owners become increasingly more risk averse, said TRI Consulting, and many are now adding clauses which make it easier for them to terminate contracts with operators if the property does not hit performance targets.

"With many institutional investors and investment funds getting into the regional hotel development space, who typically have shorter holding periods, we believe that the termination clause is likely to become an important discussion point between owners and operators in the near future," TRI said.

The research, which was based on analysis of 85 hotel contracts it was involved in, found over 50 percent of all contracts included a strict performance test.

The TRI research found that owners could end the contract if the hotel failed to achieve at least 80-85 percent of the budgeted gross operating profit (GOP) or if its average revenue per available room (RevPAR) was 15-20 percent below the average for the area.

The report also found most contracts did not apply the targets during the first three to five years but most owners now insist on being able to end the contract if the operator fails the GOP and RevPAR targets over two or three consecutive years after the contract has matured.

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