Yes, the operator guarantees a certain operating profit either in the form of a group surety, letter of commitment or bank guarantee. This is to ensure that the owner/investor receives a certain compensation even if the operation profit is not reached.
As mentioned above, in some cases, the operator may grant capped guaranteed results to the owner.
Not for the operator but depending on the project a key money is agreed. Guarantees are typically required for the owner, especially with regards to trademark marketing licenses and construction works.
Operator guarantees are unusual for major brands. Owner guarantees may be used depending on the circumstances.
No. However, relative to owners elsewhere in Asia Pacific, owners of Chinese hotels are more likely to get operators to guarantee a minimum gross operating profit and to top up any shortfall amount in any operating year.
No, a guarantee is not necessary; however, it is common that before granting a license or concluding a franchise agreement, factors such as solvency and asset value are evaluated.
Yes, an AGOP guarantee for the operator.
No.
This would depend on the scale and reputation of the operator and owner. A reputable owner or a well-performing operator would not usually provide such a guarantee.
For established brands, an operator guarantee would be very unusual, owner guarantee is also rare and usually limited to cases where there is a substantial financing on the property.
For branded operators, an operator guarantee would be unusual. Regarding owner guarantors, it will depend on the owner vehicle. If there is a PropCo/OpCo structure in place, a property owner’s agreement may be put in place or both PropCo and OpCo would be party to the HMA as covenants from the freehold owner of the property may be required.
Branded operators usually ask the owner to release a parent company guarantee, if it is a special purpose vehicle.
An operator guarantee is uncommon; these guarantees are sometimes seen for prime properties, but even then it is common for operators to have clawback rights (ie to be able to deduct payments made under the guarantee against future surplus profits). An owner performance guarantee is commonly sought when the owning entity under the HMA does not hold title to the real estate.
No.
Guarantees on both sides tend to be usual.
An operator or owner guarantee is not common. In the event of Opco-Propco structures, non-disturbance covenants are customary.
For some branded operators, an operator guarantee would be unusual.
For ordinary lease agreements, a guarantee is usually included as part of the main terms.
No.
For branded operators an operator guarantee would be unusual. Regarding owner guarantors, it will depend on the owner vehicle, if it owns the hotel (eg are there are Propco/Opco structures in place).
For branded operators, an operator guarantee would be unusual. However, this may vary on a case-by-case basis.
No, however international operators will likely require the title holding entity of the Hotel (PropCo) to enter into a non-disturbance agreement if the contracting party to the HMA is a different entity (OpCo).
Guarantees on both sides tend to be unusual.
Parent guarantees of the owner are common if the owner is an SPV granted land use rights by way of a lease. Operator guarantees are rare.
No; however, international operators will likely require the title holding entity of the hotel (PropCo) to enter into a non-disturbance agreement if the contracting party to the HMA is a different entity (OpCo).
For branded operators, an operator guarantee would be unusual. Regarding owner guarantors it will depend on the owner vehicle, if it owns the hotel (ie are there are Propco/Opco structures in place, etc.).
Guarantees are not a standard HMA requirement. The existence of guarantees depends on the bargaining strength of the parties and the particular hotel and market.
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
Is there a standard fee structure for HMAs (eg base + incentive)?
HMA fee structures typically comprise a percentage of gross annual revenue (base fees), and a sliding scale percentage of the adjusted gross operating profit, where the operator meets profitability thresholds (incentive fee). The fee structure will depend on various factors including the extent to which the operator or the hotel owner contribute to capital and operational costs of the hotel over the term of the HMA.
What other fees and charges are there (such as royalties, accounting, marketing, license fees, etc.)?
Depending on the parties and type of hotel, marketing contributions and/or fees for use of services such as accounting, software, reservation networks or intellectual property (including branding) may be payable.
Are owners typically required to set aside funds for fixtures and fittings?
Yes. Owners are typically required to make furniture, fitting and equipment (FF&E) contributions for general repairs and maintenance of the hotel, and any other budgeted capital expenditures.
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.