Yes, normally agreements are concluded for a definite period.
The term is usually fixed. No early exit or similar option is implied or imposed by law. Break options allowing early termination of the HMA after a certain period are allowed. It is customary to provide for a break-out option in favor of the owner if, during a certain period of time, the performance of the operator does not meet certain predefined criteria usually set by reference to the performance of other comparable hotels in the same geographic area.
The terms are usually fixed with specific early termination possibilities established in the contract (eg performance termination, breach of contract, condemnation, bankruptcy).
Yes, the term is usually fixed. Contractual exit options are common in the event of hotel or party insolvency, owner default on payments or funding obligations, hotel profits falling below a stipulated threshold, and unreasonable owner interference with hotel operations. Implied early termination rights for convenience are unusual and exit fees would likely apply.
Yes, the term is fixed. Parties negotiate termination for cause in the HMA. Termination at will/without cause is not common, except for rights of termination upon sale of the hotel.
The term is usually fixed. There are no implied exit options; however, these could be introduced into the contract by the parties at their discretion. It is common that the parties agree on early exit options for several specific reasons (eg violation of the terms of the agreement by one of the parties). It is also possible to include an extension option in the agreement.
The term is usually fixed (with renewal possibilities often provided) and early exit options are commonly provided (notably upon performance test failure or sale of the hotel). Operator or owner misconduct, condemnation, bankruptcy or default may also be taken into account. Termination rights for convenience will almost always be rejected, even if subject to an indemnity.
Yes, usually the term is fixed. Depending on the length of the term, this might sometimes conflict with case law. Terminations for convenience are often excluded, hence the HMA can only be terminated extraordinarily if the other party violates its obligations under the HMA.
HMAs often contain a performance clause according to which the operator is obligated to reach specific financial results with the hotel operation in each financial year. If the operator does not reach the agreed financial results in two or more consecutive years, the owner is usually entitled to terminate the HMA.
Yes, the term is usually fixed. Parties negotiate early exit options such as termination for cause rights in the HMA, which commonly includes the owner’s rights of termination upon the operator failing to meet performance standards as agreed under the HMA. Termination at will/without cause is not common.
Terms are usually fixed. In some cases an early exit option is included and always subject to an early termination fee.
The norm is for the HMA term to be fixed.
Early exits can always be commercially agreed and subject to exit fees.
Similar to English law, it is unlikely that Irish law would allow an HMA to include implied rights for early termination (for convenience). Only the termination rights explicitly stated within the HMA are likely to be enforceable. However, if explicitly agreed upon commercially, these rights can include termination for convenience.
The term is usually fixed. Specific termination rights could be agreed by the parties depending on the specific situation or event or breach of the obligations. Usually a termination right is granted if specific revenue targets are not met.
Yes, the term is usually fixed. Early exit options are normally limited to contract and specifically owners' breach of the HMA or operators' failure to achieve performance tests for several years. Implied termination rights (for convenience) are not common.
Yes, the term is fixed. Termination for cause rights, such as termination in the event of failure to maintain the rights to the underlying land lease, breach and underperformance, are negotiated in the HMA.
The term is generally a fixed term and extension options are established. HMAs may be terminated early in the case of breach by the parties, which may include low performance or other criteria negotiated by the parties.
The terms are usually fixed. Given the substantial investments in hotel operations, HMAs do not usually include early termination rights.
The norm is for an HMA term to be fixed. Early exit and similar options are often included in HMAs that we have reviewed. But with the limited number of HMAs in Norway, it is not possible to say what is "usually" the situation.
HMAs often contain a performance clause according to which the operator is obligated to reach specific (financial) results with the hotel operation in each financial year. If the operator does not reach the agreed (financial) results in a defined period of time, the owner is usually entitled to terminate the HMA. Also see Performance measures.
The term is usually fixed. There are no implied exit options, however, these could be introduced into the contract by the parties at their discretion, which is not the standard solution on the market.
The norm is for an HMA term to be fixed. Where early termination or, for example, flip to franchise is negotiated, it may be subject to exit fees.
Are early exit or similar options included (contractual or implied)?
Yes, usually the term of an HMA is fixed. However, the HMA may be terminated early by the owner/operator in case of breaches of the other party's material obligations – such breaches are usually expressly mentioned in the HMA.
The owner may also have the right to terminate the HMA early for material underperformance compared to a competitive set of hotels of the same size/type.
Fixed term.
The norm is for an HMA term to be fixed, with contractually fixed break options or early termination rights for either party, generally based on performance.
On the other hand, clauses that allow for the tacit extension of the HMA are becoming increasingly popular. In most cases, this extension is for a shorter period of time than the initial period, not reaching five years.
Yes, the term is fixed. Early exit options for breach or underperformance are normally negotiated in the HMA. Termination on sale provisions in favor of the owner may be agreed, although exit payments normally are required. Implied termination is unusual in the HMA context.
Fixed term.
The norm is for an HMA term to be fixed. Where early termination or, for example, flip to franchise is negotiated it is usually subject to exit fees. Under English law it is unlikely a HMA could have implied early termination (for convenience) rights. The issue appears to have stemmed from US law where an agency relationship may be considered to exist; agency is not viewed in the same way under English law. Only those termination rights contained within the HMA are likely to be enforceable under English law.
Terms are typically fixed, with extension options at the discretion of the operator. HMAs typically do not provide for early exit other than termination due to breach or failure of the performance test. Sometimes owners are able to negotiate the ability to terminate on sale after a specified holding period (eg ten years), upon payment of a negotiated termination penalty, which is typically calculated based on lost management fees for the remainder of the term. In such instances, the operator is often granted a right of first refusal to purchase on sale, allowing the operator to prevent termination of the HMA by purchasing the hotel. Outside of the contractual terms of the HMA, case law in select US jurisdictions has evolved in the past ten years to allow the owner to terminate the HMA in a non-default scenario in violation of the HMA terms, based on agency principles, although such termination will not insulate the owner from resulting damages. As noted above, Maryland, where many hotel companies are headquartered, by statute requires adherence to the terms of the HMA, disallowing termination based on agency principles. Hence, most hotel companies require Maryland law as choice of law in the HMA.
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 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 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.