Hotel Management Agreement Performance Test

Although common in HMA, performance tests are notoriously difficult to impose. As a result, owners should consider having more than one performance mechanism in an HMA. Incentive fees are one of the mechanisms that are increasingly important to owners and operators, which, in theory, means that the operator will receive higher financial rewards as revenues are generated at the hotel. However, in order to ensure a return on investment, homeowners may also demand payment of an owner`s return (also known as the owner`s priority), i.e. an agreed return due before any payment to the incentive charge operator. This urges operators to increase revenues so that they can collect their royalties. The typical performance test these days, which has become very standardized in large U.S. brand management companies (p. B.

Marriott, Hyatt, Hilton, InterContinental…) similar to this: Please see our next newsletter, in which we will discuss the various forms of dispute resolution mechanisms found in modern management agreements. The competition may not be strong enough. It must be made up of hotels that are really comparable and are doing well; The HMA must also be examined accurately the operation of the force majeure carve-out, especially with regard to the performance test. If .B a force majeure event and its likely effects on revenue and profits on the date of the agreement or the calculation of the annual budget are taken into account by the operator, there may be formulations that may prevent such an event from being used to neutralize the GOP test, since these issues should have been considered on that date. Baker McKenzie is present for hotel owners and a wide range of national and international hotel operators in many countries around the world. The advice of our clients in this sector over a long period of time has allowed us to gain perspective and to make some observations on the intricacies of performance testing. The right to healing should not be unlimited and should allow only one or two healing rights for the duration of the management contract; Perhaps the operator can overcome a control error by paying the deficit to the owner, which is also commonly referred to as the «right of healing.» The budget test deals with financial issues relevant to the hotel concerned. The objective is to measure the hotel`s actual financial performance using an approved budget compared to one year of operation. The budget is usually formulated by the hotel operator, subject to the owner`s agreement.

The best performance test in a management contract is fair to both the managing company and the owner – and also encourages the management company to achieve the owner`s financial goals. The test is not missed if the deficit can be attributed to a large «force majeure event»; For IICAIs that have been closed between the owner and the operator before or during the construction period (which remains the most common form of HMA in the area), the owner is required to meet various key dates, which usually involve the start, completion and opening of the hotel, which, if not completed, puts the owner at risk of being licensed by the operator. However, force majeure events generally extend the relevant milestone date to a long maximum shutdown date. Supply chain problems caused by the pandemic have a significant impact on construction schedules. Owners should therefore review the force majeure clauses contained in their HMA if it is likely that such construction delays could infringe the owner and present a risk of termination. With regard to the RevPAR test, there may also be formulations that force majeure cannot be invoked as it generally applies to other hotels in the rate of competition (as RevPAR will likely be affected in the same way for all of these hotels).