Main Clauses of Hotel Management Agreement

Hotel Management Agreement

Hotel Management Agreement


Main Clauses of Hotel Management Agreement

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1. Scope of Services

The scope of the services of a manager typically includes several sections, which include management services and services related to the Construction, Furnishing, and Equipping Services of the hotel.

Management services include selection, hiring and termination of employment, training and supervision of staff, the appointment of general manager and hotel staff, pricing, price list and monitoring of service receipts, monitoring of minor changes and routine repairs for maintenance and operation which are deemed necessary by the hotel manager, signing a contract for renting hotel business units such as shops, supervising the activities of hotel guests, hotel shops and their staff and, if necessary, terminating the service or terminating the lease contract with the above persons in case of non-payment of services or rents, maintaining hotel accounts under a uniform accounting system in the hotel industry, signing other contracts necessary for the optimal operation of the hotel, planning, preparing the necessary arrangements and signing a contract to advertise the hotel and increase the level of its services.

Depending on the type of hotel and its size, the scope of these services may change. In some contracts, obtaining the consent or approval of the hotel owner is required to enter into any contract.

For example, based on “ACD-Rotana” Agreement, signing any commercial contracts to use or develop the inside or outside territories of the hotel is subject to the approval of the hotel owner:

2.01 Management Services

The negotiation, execution and Conclusion of leases, licenses and concessions for store, office, lobby or other commercial space at the Property or any kind of contract which is reasonably necessary or required in connection with the operation of the Property by the Manager shall be subject to the prior written approval of the Owner which shall not be unreasonably withheld or delayed.”

In addition to management services, the hotel manager also provides services in the construction phase of the hotel or in association with decorating and equipping the hotel.

Accordingly, in the construction and completion of the hotel, owners must acquire approval of the Manager concerning technical standards and other features of the hotel. In addition to improving the quality of services, the utilisation of the manager brand in the hotel also affects the process of construction, decoration and equipment of the hotel while requires the use of standards and features which are acceptable to the manager.

For example, according to the above contract, these standards are described as follows:

“2.02. Owner shall in accordance with the Technical Standards, the plans and specifications approved by Manager, and with reasonable diligence, cause such Property to be completed upon the Site according to the Agreed Standards. The Property shall include 2 (two) buildings containing approximately 200 rooms each and appropriate recreational facilities. Owner shall engage and retain, at Owners expense, such architects, designers, specialists and contractors as shall be necessary to Owner in connection with the planning and completion of the building and in connection with the design, selection, purchase and installation of the furnishings and equipment. Owner shall, with reasonable diligence, cause to be prepared with respect to the Property, full and adequate plans and specifications in accordance with the Technical Standards meeting and shall furnish copies of each thereof to Manager for its advance approval. Manager shall consult with the Owner and its architect at such reasonable times and places as Owner shall specify in connection with the planning and completion of the building, furnishings and equipment.”

2. Fees of Manager

In hotel management contracts, the manager typically receives two types of fees:

1. Basic Management Fee;
2. Incentive Management Fee

In addition to the above, additional service fees may be awarded to the manager based on other services provided by him, such as marketing and advertising.

Hotel Management Agreement

2-1. Basic Management Fee

The basic management fee of the manager in management contracts, which covers most of the services provided by him, is somehow calculated and paid on the basis of a fixed percentage of the hotel gross income (normally between 2% to 4%).

The basic management fee of the brand operator who owns a brand is relatively higher than the independent operators. Because the owners in this type of hotel management, no longer pay a separate fee for the brand franchise.

Since the basic management fee is calculated based on the hotel’s gross income, managers focus primarily on increasing gross income rather than net income; This encourages managers to increase costs and even to create unrealistic costs to manipulate the hotel profits.

For example, according to the above contract, the basic fee is set at 2.25%:

3.01 (a) A basic Management Fee equal to 2.25% (two and a quarter percent) of the total Gross Revenue of the Property.”

Gross Revenue is defined in Section 3.03 of the contract as follows:

“Gross Revenue” shall mean all revenues resulting from the operation of the Property, including, but not limited to, rentals or other payments from lessees, licensees and concessionaires (but not including the gross receipts of such lessees, licensees or concessionaires), subsidy payments, business interruption insurance payments, governmental allowances or awards and any other form of incentive payments or awards from any source whatsoever which are attributable to the Property. Gross Revenue does not include sales tax collected from guests payable to the government”.

Hotel Management Agreement

2-2. Incentive Management Fee

Because, the basic management fee is based on the hotel’s gross income, managers focus on increasing that income instead of net income. In order to motivate managers to increase the hotel’s net income, another type of fee has become common in management contracts, called incentive fees. Unlike a basic management fee, this type of fee is based on performance metrics such as gross operating profit and net income, which are calculated after the deduction of legal charges such as taxes and other costs. Anticipating this type of fee increases the motivation of managers in hotel productivity and reduces costs, and puts the interests of the parties to the contract in one direction.

For example, according to the above contract, the incentive fee is set at 7% of annual Gross Operating Profit. G.O.P. is defined in section 3.02 of the contract as follows:

The Gross Operating Profit of the Property for the purposes of this Agreement shall be the excess of the Gross Revenue derived from Property operations over Deductions as both terms are hereinafter defined.”

 It should be noted that one of the important conditions of management contracts is to determine deductions that are reduced from the hotel’s gross income to determine net income. These deductions include all expenses that are necessary for the operation of the hotel. For example, the salaries and benefits of the hotel staff and general manager, general and administrative expenses of the hotel, training costs of the hotel workforce, the cost of providing the necessary insurance coverage for the hotel, the cost of using the services of financial and technical consultants, the cost of creating a contingency account for the hotel, etc. According to the recent contract, these costs are as follows:

“3.04. Deductions

“Deductions” shall include all expenses reasonably and necessarily incurred in connection with the business, operation and maintenance of the Property during the Term, but shall not be limited to, the following in so far as the same relate to the Property or its operation:

Hotel Management Agreement

a) The cost of sales, salaries, wages and other employee benefits and remuneration of employees of Owner in addition to the proportionate cost of salaries, wages and other employee benefits and remuneration of employees performing centralized services and functions for the Property under the supervision of Manager; compensation of the General Manager; departmental expenses, administrative and general expenses, payroll taxed; the cost of training employees and employee relations expenses; advertising and business promotion expenses; the cost of heat, air conditioning, light and power; and the cost of repairs and maintenance (all terms to be understood as defined and described in the Uniform System of Accounts for the Lodging Industry);

b) All other expenses necessary for the proper operation of the Property, including, without limitation, the cost of replacements of china, glassware, silverware, utensils, linen and all other Operating Equipment;

c) A reserve for bad debts as Manager shall reasonably determine on the basis of experience;

d) The costs and expenses of any technical consultants or other specialized experts who may be required to perform routine professional services for the Property;

e) Insurance expenses on all policies pursuant to section 8.02 of this Agreement.” 

3. Fee for other services

In addition to the above fees, the manager may provide other services such as marketing and advertising as agreed by the parties. In this case, based on a predetermined formula, a fee commensurate with these services will be paid to the manager. For example, according to the above contract, the fee for marketing services, including the formation of a marketing working group, is set at 1.5% of gross monthly revenue:

“3.06 Group Marketing Activities

The operation of the Property, as part of a group, shall require launching and maintaining some group activities such as; the production of a group advertising and promotional material, group participation in major trade shows, the maintenance of group reservation online system, carrying out joint promotional material and advertising campaign, the maintenance of a group loyalty card, changing and updating the Rotana website which includes all information on the Property. For all these activities, a monthly fee representing 1.5% (one and a half percent) of Gross Revenue is to be paid to Manager.”

In addition to the above, hotel management contracts contain other terms & conditions such as hotel accounts, hotel decoration and equipment, maintenance and possible repairs, insurance coverage such as property insurance and hotel operation insurance, demolition or damage to the hotel and its effects such as suspension of operation of the hotel, termination of the contract and general conditions.

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