In today\’s era, there is high competition in the field of the Hospitality Industry as new market players are entering on a day-to-day basis in this field. Generally, we all know hotels are being operated by their owners, but due to the high rise in demand and competition in the market, a new trend of Hotel Management has begun wherein the Owner (s) of hotel assign or appoint an operator to manage the hotel instead of either rent or profits arising out from the sales being conducted.
Geographical Market Trend
Dubai is one of the world\’s most visited tourist destinations and one of the fastest-growing economies. Therefore, considering the UAE\’s market trend in mind \”Hotel Management Agreement,\” also famously known as \”HMA\” is the most used term or instrument executed between the contracting parties wherein the hotel operator is responsible for the day-to-day affairs and operations of the hotel in lieu of management fee or some percentage from the profits which the hotel earns after securing the amount of threshold.
Through this article, we will inform the readers about the relevancy of the Hotel Management Agreement and important aspects which are to be kept in mind while entering into such agreements. Our commercial contract lawyer will provide more details about this topic in the article below. The article is written in question-and-answer form to understand the reader better.
What is the Hotel Management Agreement?
Our Commercial Contract Lawyer states that:
The Hotel Management Agreements are agreements executed by and between the hotel\’s Owner and the operator to operate the hotel business on the Owner\’s behalf. There is no such specific definition being mentioned about the HMA, but the basic idea for executing these agreements is to manage the hotel\’s operations by appointing someone.
What factors are to be kept in mind while drafting Hotel Management Agreement?
Our Contract lawyer states that:
There are various key factors which are to be kept in mind while drafting or entering HMA, and the said factors are based upon the issues which the owners in practicality are facing. The said factors are being hereinbelow:
- Target Achievement Test (TAT)
These agreements are long terms agreements in ordinary course pertaining to 10-15 years. However, these agreements should ensure the protection of the Owner if the performance of the operator falls short off as per expectations. This test will enable the Owner to terminate the agreement without compensation if the operator does not meet the specific number or needs required to complete. The said test shall be based upon the market target and keeping in view the geographic location and various other factors which are an essential element for the sales of a hotel.
- Discretionary Termination Clause
The \’HMA\’ shall possess the termination clause based upon the discretion of the Owner wherein the power to terminate the said agreement must be given to him at his convenience. As we have observed from various case studies and problems that our client faces, it becomes difficult for the Owner to remove the operator from the such work after a specific time. Therefore, in such termination which is based on convenience right to compensation to the operator is to be given as it causes losses to the operator. Thus, our contract lawyers always advise clients to raise or clear these terms mutually before entering into the final agreement.
- Exclusivity Clause
This clause will protect the Owner of the hotel in a situation wherein the HMA has been terminated, and the operator has started working with the different hotel which is in competition within the same area. This restriction is leveled but only with keeping in mind the specific time location, and the same brand chain of the hotel.
- Operator\’s Authority and Owner Controls
The Hotel Management Agreement generally provides obligations and authority to the operator to manage the hotel and its operations. This includes hiring or terminating the employees, entering lease or license for renting any commercial space, entering service contracts, maintenance, and supply contracts and authorizing capital improvements for the smooth functioning of the hotel.
Therefore, on the other hand, it is to be kept in mind that Owner(s) rights in relation to approval of annual budget, capital investment, access to the accounts, reserve maintenance, approval for major renovation in the hotel premises and otherwise. These rights shall exclusively be granted to the Owner so that their interest may be protected.
- Balancing the interest
It is essential to create balance in the agreement so that the furniture, maintenance, and other fitting or fixation charges cannot act as a hurdle for the operator in the smooth functioning of the hotel. Therefore, it becomes the Owner\’s responsibility to allocate such amount from the separate account opened for such work. We always advise our client to avoid such dispute they must open different accounts that are to be used for the functioning of the hotel in an effective and efficient manner so that interests of contracting parties may be safeguarded.
- Accounts Keeping and Review
We always advise our clients to keep accounting provisions in such a manner that no loophole or conflict shall arise at the later stage. This can be done by following a uniform procedure for accounting and reviewing the account books as and when required by the Owner. In addition to the same, it is also advisable to open and operate a separate bank account so that hotel affairs may easily be managed and records for such accounts may be kept at ease.
There are several other clauses which are mentioned under HMA as this agreement is very exhaustive in nature, and every aspect in relation to the law and proposed problem which may arise in the future are kept in mind while drafting this agreement. The reason is that these agreements are formulated for a more extended period, and each aspect must be covered at the initial stage of drafting.
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