In addition, the operator receives the following from the owner of the premises/investor:
- a pre-opening grant for the sales and marketing activities of the operator one to two years before the opening (Soft-opening);
- technical services fees: fee for the provision of services and contribution of know-how in the planning and construction process;
- marketing fees;
- reservation fees;
- internet/website fees;
- IT installation fees;
- bookkeeping, accounting and controlling fees;
- quality assurance fees (including quality control);
- charges for loyalty programs;
- human resources and training fees;
- working capital: basic financial equipment of a hotel to ensure liquidity; and
- IT services fees: provision of EDP software and hardware and for computer training.
Everything done by the operator is done in the name and on behalf of the owner. Consequently, all expenses, debts, liabilities and taxes (including the real property taxes) relating to the operation of the hotel are to be borne by the owner.
In addition to the base management fee and the incentive management fee mentioned above, most HMAs provide that the owner shall pay to the operator a marketing and advertising contribution which is usually calculated on the basis of a certain percentage of the gross room revenue as well as a reservation fee which is usually set at a certain amount per room and per reservation for reservations made through the central reservation platform of the operator plus any amounts charged by other reservation systems used by the operator.
Moreover, some branded operators may require payment of royalty fees depending on the hotel's gross sales.
Technical service fees, international chain services (marketing, reservation, etc.), software, and trademark royalties are typical in HMAs with international brands.
Usually, owners bear most costs and taxes. Fees paid by owners may include centralized systems fees, administrative and consulting fees, pre- and post-opening marketing fees, IP license fees, frequent guest fees, royalty fees, working capital, travel and accommodation fees, and training fees. Sometimes, operators pay key money to owners.
License fees (percentage of total revenue), centralized services fee (calculated against the services provided), and marketing service fees (percentage of gross room revenue).
Marketing fees and trademark fees.
Operators will require marketing contributions and other fees for various services which may or not be optional (eg accounting services, license fees, software licenses, room reservation networks, trademarks and IP). Depending on the case, such services can be subject to separate agreements entered into between the owner and the operator (such as services agreements or licensing agreements).
Besides the base management fee and the incentive fee, other agreed fees charged by branded operators often relate to contributions for the provision of technical services, accounting and reservation systems and marketing efforts.
License fees (percentage of total revenue), centralized services fee (calculated against the services provided), and technology service fees (percentage of gross room revenue).
Royalty fees and group services fees are usually charged for brand use, marketing, central booking, bookkeeping and other group services.
While fee structures vary between operators, the position in Ireland would follow the usual set of fees as described in question 9 and above. Other fees that can arise are reservation fees, centralised services and FF&E contributions. Technical services fees arise for newly developed hotels if input from the operator’s technical team is required on the design and fit-out of the hotel.
Sometimes fees can be prescribed as optional and owners would pay additional fees if they opt in to avail of those services or based on usage.
Usually the royalty fees, marketing contributions and other fees for certain centralized services are requested on the basis of specific agreements entered into simultaneously with the HMAs.
License fees (normally a percentage of total revenue), centralized services fee (based on the services provided), and marketing service fees (based on either gross room revenue or total revenue).
License fees (normally a percentage of total revenue), centralized services fee (based on the services provided), and marketing service fees (based on either gross room revenue or total revenue).
Operators normally have license agreements, trademark license agreements etc.
- License fees
- Group services and benefit fees
- Hotel specific services
- Marketing contributions
- Reservation contribution
- IT services fee
Besides the base management fee and the incentive fee, we have seen fees that relate to contributions to accounting and reservation systems and to marketing efforts.
Entry fees, reservation fees, trademark fees, loyalty package fees, adaptation (standardization) fees.
Branded operators may require royalty fees and most require marketing contributions and other fees for certain centralized services, which may or may not be optional (eg accounting services).
Sales and marketing costs, accounting charges, purchasing costs, and license/franchise fees. These are often set as a percentage of rooms' revenue, and typically range from 1-3% of gross room revenue.
There is usually a license fee (as a percentage of total revenue), a centralized services fee (usually based on the services used at the hotel) and a marketing fee (which is often a percentage of room revenue).
Royalties sometimes apply for branded operators. Having a marketing fee is usual.
License fees, centralized services fees, and marketing service fees are the most common, and additional fees will vary widely among operators and their a-la-carte services. Condotels and hotels with branded residence components are common in Thailand and there may be additional fees involved in these type of structures (eg fees for condominium association management, branded residence marketing fee).
There is usually a license fee (as a percentage of total revenue), a centralized services fee (usually based on the services used at the hotel) and a marketing fee (which is often a percentage of room revenue).
As above, branded operators may require royalty fees and most require marketing contributions and other fees for certain centralized services, which may or may not be optional (e.g. accounting services etc.). Where a project includes condominiums or branded residences there will likely be further fees applied.
Additional operator fees may include above-property centralized services and system fees such as reservation, marketing, accounting and loyalty program fees, as well as property-level technical services and pre-opening fees. Technical services and pre-opening services are typically handled under one or more separate agreements.
Australia
Are Hotel Management Agreements (HMAs) common in the jurisdiction?
Yes. HMAs are a common owner/operator structure used in Australia.
If not HMAs, what are the alternatives / what is commonly used?
Other alternative approaches are:
- Franchise agreements – operators enter into franchise agreements with well-known domestic or international hotel chains under which the chain provides a business system, services and licenses the use of the brand and other IP of the hotel chain. The property at which the hotel is operated may be owned by the operator or another party (which may be an entity related to the franchisor). The fee structures may vary and may be made up of a number of components, including royalties for the use of IP, other fixed charges, fees for services and/or fees based on revenue/performance of the hotel business.
- Leases – owners lease the underlying asset to an operator on a long-term basis (under which a fixed lease payment is payable), and the operator operates the hotel business autonomously, or occupies the hotel under the lease, with the HMA regulating the operation of the Hotel.
Is it common or usual for the HMA to be governed by (i) local laws; (ii) the laws of one of the parties' country of incorporation; or (iii) an alternative jurisdiction?
HMAs are typically governed by Australian law. Australia is regarded as a relatively stable legal jurisdiction, such that the sovereign risk and legal risks associated with use of Australia law are limited.
Are there any significant or unusual points to note in respect of tax on HMA payments in the jurisdiction?
HMA payments made to the operator by the owner, and/or any rental payments under a lease of the Hotel property are subject to the Australian Goods and Services Tax (GST).
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Australia
Is there a standard contract period of an HMA?
The duration of HMAs depends in part on the bargaining position of the operator – for major operators, terms of 20+ years are not uncommon. The duration also depends on the nature of the assets, with landmark assets often attracting longer terms.
Is the term usually fixed? Are early exit or similar options included (contractual or implied)?
The term is usually fixed.
It is increasingly common to integrate early exit mechanisms where operators underperform for a sustained period. This is in addition to standard early termination rights, such as for an insolvency event (eg liquidation, receivership, statutory winding up) or where a third party brings any claim or commences proceeding relating to the owner's title to the hotel or land.
Is it usual to include fees / liquidated damages for early termination?
Exit fees for early termination for convenience (ie without cause) or on sale of the property by the owner, and excluding termination in the case of manager default, are common. The level of termination fees/liquidated can vary depending on a number of commercial factors (eg location, type of hotel, market position of brand) and the reason for early termination (ie for convenience vs where the property is sold).
What is the usual position in respect of renewal?
It is common to have renewal periods that are subject to agreement between the parties; options that are exercisable unilaterally are less common. Renewal periods vary depending on the operator and are driven by their own operational needs. Renewal periods as part of an HMA are often negotiated as part of any agreed future capital improvement program for the hotel asset.
Australia
What is the usual standard imposed on an operator in respect of the operation of the hotel?
Commonly, the standard imposed on the operator is that the operator will use the skill, effort, care and expertise reasonably expected of a prudent operator of hotels with regard to the brand and brand standards of the hotel operator. KPIs and other prescriptive standards are less common, although the inclusion of such standards varies depending on the operator and the consequences flowing from failures to achieve such standards, the operator and the asset.
What performance measures are commonly used in the jurisdiction?
Common performance measures are generally related to performance against an agreed budget and/or Revenue Per Available Room (RevPAR) relative to a set of similar competitors.
These measures are often linked to termination rights for failures to meet these standards.
Is an operator or owner guarantee common in the jurisdiction?
The inclusion of guarantees depends on the identity and structure of operator and owner, including the financial position and assets held by them.
What is the usual position in respect of employees? With whom does the liability for the employees sit?
Commonly, the owner of the hotel employs the employees and the employees take directions under the supervision of the operator. In these circumstances, the hotel owner is liable with respect to:
- minimum wage obligations, work, health and safety (WHS) and discrimination law compliance;
- any penalties, damages, compensation or other order arising of unfair dismissal; and
- vicariously liability for the acts and omissions of employees.
For everyday management, owners usually give operators permission to direct and control its employees.
In some cases, the general manager, and possibly other key employees (eg executive chef), will be employed by the hotel operator.
Is it usual to have a non-compete clause, eg that no other property with that brand can open within a certain radius?
Yes, based on a geographic radius.
Who is responsible for insurance?
The owner is typically responsible for obtaining insurance for:
- the property;
- business interruption;
- workers compensation for employees employed by the owner; and
- items owned by the owner or people other than the operator.
The operator is typically responsible for the following insurances:
- public liability;
- workers compensation for employees employed by the operator;
- motor vehicle;
- employee fidelity; and
- other operating risks it is customary to insure against in the operation of hotels.
Does the HMA give rights in real estate in the jurisdiction?
No, provided that the HMA does not operate as a lease or give rise to a leasehold interest.
Does the HMA need to be recorded against the property, if this is possible in the jurisdiction?
No.
However, where an HMA is not recorded against the property (for example, via a caveatable interest and caveat registered against the title to the property), operators will need to ensure they properly secure their operating rights in the event the hotel property is sold.
Where financing is taken, is it standard to obtain a Non-Disturbance Agreement (NDA) as part of a management or lease agreement?
Yes. The terms of NDAs vary depending on the parties.
What other agreements usually sit alongside an HMA in the jurisdiction?
There may be other associated agreements depending on the operator, which can include:
- IP licensing agreements;
- services agreements for the provision of services (eg accounting, software licensing, access to reservation networks);
- individual employment contracts for the general manager of the operator;
- supply agreements; and
- mortgagee step-in right deeds (on behalf of the owner).
Australia
What are the standard rights / restrictions in respect of transfer / sale of the hotel?
The rights and restrictions applicable to the transfer/sale of the hotel depend on the operator and the asset. For major operators and/or landmark assets, the consent of the operator is commonly required for the hotel to be sold or transferred. Otherwise, the owner is usually permitted to transfer or sell the hotel without the consent of the operator.
When a managed hotel is sold (either asset or share deal), is it usual in the jurisdiction that either the Operator's consent is required for the sale, or that the hotel may only be sold if the HMA transfers with the hotel?
Both. In relation to the requirement for the consent of the operator, see above – it depends on the operator and the asset; however, commonly with marquee hotels operated by international hotel operators, their consent is usually required, and commonly provided if the purchaser agrees to be bound by the HMA following the sale of the hotel.
Whether this is the case with other operators, or if the owner can sell the hotel property with vacant possession will depend on the terms of the HMA.
For taxation reasons, hotels are commonly sold with the HMAs in place, even if these can be terminated after settlement. Taxation advice should be sought as part of any hotel acquisition or disposal.
Do HMAs commonly include a right of first refusal for the operator to purchase the hotel?
It depends on the operator and the asset. Some operators also own hotels and therefore like to have a first right of refusal, while other organizations that are simply operators do not seek such a right.
Is it usual to include provisions which enable the sale of the property with vacant possession ie without the brand?
As above, these depends on the terms of the HMA and the operator. There are different tax consequences arising if the hotel property is sold with vacant possession and taxation advice should be sought as part of any hotel disposal.