Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
This is the first in a series of short briefing notes identifying key issues for discussion when agreeing the terms of a hotel management agreement (the HMA). We briefly identify the typical position adopted by each interested party and further issues for consideration when negotiating from such a position.
One of the key terms to be agreed between the parties will be the length of term that the operator will be engaged for under the HMA. When negotiating the term, the parties will also need to consider whether the operator or the owner will have any rights to extend/renew the HMA.
Operators, particularly branded operators, will typically prefer a long initial term under the HMA and unilateral rights to renew the HMA for additional periods, citing the investment made by the operator in establishing the reputation of the hotel and the need to ensure that their brand reputation and income flow is not compromised if replaced within a short period of time.
Owners typically prefer to avoid being bound by the HMA for the long term, particularly as it is unusual for owners to be entitled to terminate an HMA at its discretion without paying a significant compensation amount to operator. Owners will also not want the operator to have specific renewal rights, or for any rights of renewal being subject to certain performance conditions, on the basis that if the hotel is a success, renewal will be in both parties’ interests.
Lenders will be keen to understand whether income is protected during the term of the loan. As such, lenders will want to ensure that the HMA will not expire prior to the satisfaction of the loan and will need to take into account when negotiating the terms of any financing (including the relevant periods of repayment) any operating period in an HMA allowing the Operator to terminate.
Various additional commercial arrangements can be agreed to balance the interests of the parties. These include:
Though often included in HMAs, rights to renew based on ‘mutual agreement of the parties’ are of no legal effect under English law and will not require either party to renew an HMA. This does not prevent such language being prevalent in many HMAs and term sheets.
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Discussing restructuring topics in Australia, Canada, the UK, Germany, the Netherlands and the US.
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