31 May, 2016
Introduction
We are currently running a 10-part series discussing particular provisions and concepts within hotel management agreements.
The purpose of this series is to discuss common hotel management agreement provisions and concepts from the perspective of both hotel managers and hotel owners. Hopefully, we will touch upon one or more topics, which spark an "I've always wondered why that is the way it is, but nobody has taken the time to explain it" reaction with you. We trust the discussion goes some way to demystify the topic.
Our 10-part series will cover the following topics:
1. Why is the manager's fee based on hotel's revenue and profit and not
some other basis?
2. Why do some agreements provide that the manager is the owner's agent
and some do not?
3. Why does the owner employ most or all of the hotel employees (and not
the manager)?
4. What is the risk/reward relationship between an owner and manager?
5. Why does the owner indemnify the manager?
6. Why do we need a non-disturbance deed between the owner, manager and
financier?
7. Why do we need an area of protection?
8. Why is the owner usually prevented from selling the hotel to one of the
manager's competitors?
9. Why does the manager impose restrictions on the owner's ability to finance
the hotel?
10. What is the importance of brand standards?
We should also mention that there are many partners and other lawyers in our firm scattered across the globe that have experience and expertise in negotiating hotel management agreements. These lawyers have views on all the topics discussed in this series, which may vary from the views of the authors. Today, we will continue this series with the seventh topic.
For those readers who may not have received all of the prior newsletters in this series, and who would like to read any of such newsletters, then please click on the heading of the relevant newsletter above and a link will take you to the relevant newsletter.
Why do we need an area of protection ("AOP")?
It is relatively standard for an Owner to request a Manager to agree not to manage another hotel within a specified radius of the subject hotel. In former times, this restriction usually took the form of an absolute prohibition on the Manager. In more recent times, in an environment where many of the hotel management companies both international and domestic have multiple brands, the tendency is for the restriction to be solely in relation to the same brand as the brand ascribed to the subject hotel.
The traditional justification for this restriction is that an Owner does not want to find itself in a situation where the Manager agrees to manage a hotel of the same brand competing in the same vicinity as the subject hotel with the potential consequence that reservations and other business, which would otherwise find its way to the subject hotel is diverted to one or more other hotels operated by the Manager under the same brand.
The restricted area can be described in a variety of ways. It is usually delineated by reference to a specified circumference from the subject hotel (e.g. two kilometres from the perimeter of the subject hotel) or by reference to a plan attached to the management agreement which may contain a hatched area that represents the restricted area. In some circumstances, typically gateway cities, the management agreement can contain multiple restricted areas. Usually, there is a larger area which may come to an end at an earlier point in time than a second restricted area of smaller geographic reach.
Typically, there are a number of carve outs to the restriction including:
- the Manager conducting unrelated activities under the restricted brand such as timeshare, residential products (including single family homes and multi unit apartment buildings), restaurants and other products and business
operations; and
- any hotel or hotels that are members of a chain or group of hotels:
– with a specified minimum number in operation;
– if acquired by or merged with the Manager; and
– in circumstances where it is intended that one or more of such hotels will be rebranded to the same brand as the subject hotel.
As you would expect, although each AOP restriction will necessarily deprive the hotel manager from receiving more income streams from other hotels within the restricted area, these days most hotel managers are willing to agree with owners for an appropriate AOP clause. Obviously, both parties need to discuss the appropriate geographic reach and duration under the AOP clause and seek to accommodate and balance each other's legitimate interests in this respect.
We would be happy to elaborate on this topic, and the key negotiation considerations, to any interested reader.
For further information, please contact:
Graeme Dickson, Partner, Baker & McKenzie
graeme.dickson@bakermckenzie.com
