Transfer rights under HMAs can vary widely. Commonly, operators will require consent to any change in ownership of the hotel or at least require restrictions on transfers to competitors.
HMAs often provide that the transfer thereof by either the owner or the operator is not allowed without the prior consent of the other party. However, it is not uncommon to see clauses whereby the owner has the right to transfer ownership in the hotel to a third-party buyer provided that the third-party buyer is of good reputation, has a strong financial standing evidenced by a strong balance sheet and takes over all obligations of the owner under the HMA.
It is common that the contract establishes that (i) transfers must be approved by the operator for asset deals (except in the case of condo-hotel sales) and limit certain share deals; and (ii) HMA transfers with the hotel.
The right of first refusal to the operator is granted in some cases. Considering that under Brazilian Law HMAs are not subject to registration at the Real Estate Registry Office and do not bind third parties, it is recommended to insert an obligation for the owner to assure the HMA assignment.
This varies as negotiated. Generally, owners need operator consent to transfer or sell to third parties. HMAs often provide that where the proposed purchaser is of good financial standing and reputation and is not a competitor or affiliated with a competitor, operators cannot unreasonably withhold consent. HMAs may permit owners to sell or transfer without operator consent to affiliates or due to mergers or corporate restructuring. Sometimes, owners must pay early termination fees for selling the hotel (which may be calculated on the previous year's management fees).
Operators will require consent to any change in the ownership structure, and consent can be withheld for a number of reasons, including if the owner fails the operator's compliance checks or is deemed a competitor to the operator.
Usually there is an option of an early termination of the agreement by the owner in case of a sale of the hotel with agreed an amount of severance pay for the operator (see the answer to the question no. 7).
Changes in ownership of the hotel will often be subject to the prior approval of the operator and/or will be restricted (eg only possible to sell to a member of the owner's group) or prohibited in the agreement.
If the owner disposes of the hotel, the HMA is usually transferred to the purchaser. The operator is typically entitled to terminate the HMA if the purchaser is a competitor or operator. It is rather uncommon that the operator has a right of first refusal.
An operator will require approval rights with respect to any assignment or transfer of assets or shares in relation to the hotel. Assignment or transfer of the hotel is usually acceptable in the event of the internal restructuring or rebranding of the owner.
Operators will require consent to any change in ownership of the hotel or the hotel owner vehicle.
Transfer rights under HMAs can vary widely. Commonly, operators will require consent to any change in ownership of the hotel. There may be restrictions on transfers to competitors, restrictions in relation to financial covenant strength and "reputation" tests.
Operators will require consent to any change in the ownership structure, and consent can be withheld for a number of reasons, including if the owner fails the operator's compliance checks or is deemed a competitor of the operator.
An operator will require approval rights with respect to any change in the ownership structure of the hotel. Approval can usually be withheld for a number of reasons, including if the owner fails the operator's compliance checks or is deemed to be a competitor.
Changes in ownership of hotel or change of control of the owner will often be subject to the operator's prior approval.
Transfer rights under HMAs can vary widely. Commonly, operators will require consent to any change in ownership of the hotel which is not unreasonably withheld. There may be restrictions on transfers to competitors, restrictions in relation to financial covenant strength and "reputation" tests.
Usually, there are no general limitations or restrictions for the sale of the hotel from the property owner. If the owner disposes of the hotel, the HMA is usually transferred to the purchaser. Please note that the operator is typically entitled to terminate the HMA if the purchaser is a competitor or operator. Is it uncommon that the operator has any other rights, such as a pre-emptive right, that can limit the possibility for a transaction related to the hotel property as such, since such clauses would limit the possibility for financing of the acquisition, construction or simply the ownership of the hotel.
None.
Transfer rights under HMAs can vary widely. Commonly, operators will require consent to any change in ownership of the hotel. There may be restrictions on transfers to competitors, restrictions in relation to financial covenant strength and "reputation" tests.
Transfer rights under HMAs can vary widely. Commonly, operators will require consent to change ownership of the hotel. There may be restrictions on transfers to competitors.
An owner typically cannot transfer without the consent of the operator. The operator will seek to prohibit transfer to a competitor (often broadly defined) or anyone subject to sanctions etc.
Given that HMAs are characterized by their long duration, operators seek to agree in the agreement that the same will survive regardless of any changes that may occur in the ownership of the company. It is now relatively common to introduce a non-disturbance clause in favor of the operator. This clause would allow the operator to have the right to continue to manage the hotel and to receive its agreed fees. On the other hand, exit fees are sometimes agreed in case the purchaser does not want to be subrogated to the owner's position.
Operators will require consent to any change in the ownership structure, and consent can be withheld for a number of reasons, including if the owner fails the operator's compliance checks or is deemed a competitor.
An owner typically cannot transfer without the consent of the operator. The operator will seek to prohibit transfer to a competitor (often broadly defined) or anyone subject to sanctions etc.
Transfer rights under HMAs can vary widely. Commonly, operators will require consent to any change in ownership of the hotel. There may be restrictions on transfers to competitors, restrictions in relation to financial covenant strength and "reputation" tests.
Changes in ownership of the hotel or change of control of the hotel owner are typically subject to prior approval of the operator, with certain carve-outs for affiliate transactions. However, with institutional or strong owners, transfer to third parties which meet certain criteria, such as (i) having adequate financial resources to perform under the HMA, (ii) not being a competitor, and (iii) not being a specially designated national or blocked person, is sometimes allowed.
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 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.
Australia
