Hotel Management Agreement

1. Introduction

In this section, with a case-by-case approach, the “hotel management” Agreement in commercial and entertainment projects is examined.

an owner(s) of a hotel usually provides the necessary capital to build and operate it. He outsources hotel management services to well-known brands in the field of hospitality or to independent operators who are responsible for the day-to-day management of the hotel.

2. Hotel manager services

The rights and obligations of the parties to the contract are also established by the “Hotel Management Agreement”.

Hotel manager services include managing various parts of the hotel, such as: maintenance, headquarters, catering, hiring and training the hotel staff, pricing, and other services, advertising and marketing, and planning the cost of capital expenditures such as equipment, supplies, and accessories for the hotel, preparing monthly and annual financial reports and submitting them to the hotel owners, purchasing raw materials and signing contracts with suppliers, operating the hotel based on the approved annual budget and contract terms, and complying with standards which are considered necessary by the brand owner under the license or franchise agreement.

In general, companies providing hotel management services are of two categories: first is a company with a brand and trademark in the field of hotel management. Second; a company that operates independently and without a brand in the field of hotel management services.

3. Brand Operators

If the management contract signed with the first category companies, the hotel owner or owners, under a single contract, hand over the management of the hotel and acquire the well-known brand and trademark of the contracting company in the field of hotel management. This method of hotel management is applicable to large and full service hotels.

For example, a contract signed in 2012 between the Iranian company “ACD” as the owner of the hotel on the one hand and Rotana Hotel Management Corporation Limited (LLC) as a brand owner and hotel manager on the other hand. The hotel manager, who owns the Centro Hotels by Rotana hotel chain, has agreed to provide management services for 15 years in exchange for certain fees. In the said contract, to protect the trademark and brand of the manager, the parties agreed as follow: Property Name and Protected Names.

4. Property Name and Protected Names

“Property Name and Protected Names:

The Manager agreed and approved that the Owner has the right to use the brand (s) alone or in conjunction with the Property Names or any other word or words of the Manager under the terms and conditions set forth in this Agreement. Owner acknowledges that each of the Protected Names, when used either alone or in conjunction with the Property Names or another word or words, is the exclusive Property of Manager.

Accordingly, Owner agrees that no right or remedy of Owner for any default of Manager hereunder, nor the delivery of possession of the Property to Owner upon the expiration or sooner termination of the Term of this Agreement, nor any provision of this Agreement, shall confer upon Owner, or any transferee, assignee or successor of Owner, or any person, firm, or corporation claiming by or through Owner, the ownership of the Manager’s brand (s), provided, however, upon the termination of this Agreement, Owner shall have the right to use, in the ordinary course of business only, any operating supplies bearing any Protected Name for a period of time ending upon the earlier of:

(i) 90 days after the termination of this Agreement or

(ii) when the operating supplies bearing the Protected Names have been consumed.

In the event of any breach of this covenant by Owner, Manager shall be entitled to damages, to relief by injunction, and to all other available legal rights or remedies, and this provision shall be deemed to survive the expiration or sooner termination of the Term.”

It should be noted that in the first type of contract, not all hotel property may be licensed under the brand of the operating company, and the hotel owner manages some of this property himself or through independent operators in form of a franchise.

5. Type of Contracts

Using the first type of contract has the competitive advantage for the hotel owner, which reduces the cost centers of the hotel, and the owner no longer has to incur the cost of the brand franchising fees in addition to the management fees.

On the other hand, outsourcing hotel management to Brand Operators facilitates the financing of the hotel’s operating costs. This is mainly because from the viewpoint of banks or financial and credit institutions, hotel management by such companies will have a higher and faster rate of return than independent operators.

Brand Operators, however, show less flexibility than independent operators in the negotiation phase of management fees due to their credit.

6. Independent Operators

According to the second form of a hotel management contract, the owner or owners of the hotel entrust management services to independent operators and receive a license to use the company’s brand under a separate license agreement with one of the well-known hotel companies.

This method of hotel management applies to medium and small size hotels. Independent operating companies do not own well-known hotel brands, but provide management services under these brands.

Using this method, despite reducing the competitive advantage for the hotel owners, has the advantage that they have more bargaining power in the negotiations and determination of management fees compared to the first type of agreement.