Hotel Lawyer: How to negotiate a Hotel Management Agreement. 10 tips for a smoother process

20 March 2012

Hotel Lawyer: Are you thinking about negotiating a new hotel management agreement? Here are 10 things to consider about making your process smoother and more successful.

It seems like hotel management agreements are on everyone’s mind these days. Development is coming back. Many owners of existing property are repositioning their hotel properties. And old management agreements continue to expire or occasionally are terminated.

In any event, we have been getting a lot of calls lately to help owners, developers, investors (and some lenders who have become owners) negotiate new hotel management agreements. One of the first questions usually raised is how the process of negotiating a management agreement works, with all the different parties involved, usually in different parts of the country (or the world).

So my partner Bob Braun and I decided to share the process we usually use with clients to streamline the process. Let us know if you have any thoughts or insights on this.

How to negotiate a Hotel Management Agreement
10 tips for a smoother process
by
Robert E. Braun | Hotel Lawyer, JMBM Global Hospitality Group®

We have negotiated, renegotiated, litigated, arbitrated and advised our clients on more than 1,000 hotel management agreements or HMAs. From that experience, we have distilled 10 suggestions to help Owners and Developers optimize their success in getting a fair Hotel Management Agreement on terms they can live with.

Most of these suggestions are focused on expediting the negotiating process, because time is not your friend if you are an Owner or Developer. You need to complete the entire process, and you can’t afford to cave on critical points too quickly just to rush things along. But generally speaking, the faster you can complete a well-orchestrated negotiation, the less the process will cost, and the better your terms will be. Deadlines and delays can put too much leverage in the hands of the operators, and all operators know that. If you want some information about the substance of the deal points you should be negotiating, see the references at the end of this article.

So how do you expedite a Hotel Management Agreement negotiation, while maintaining stamina to win important economic and business points?

Here are our 10 Tips for negotiating hotel management agreements:

1. Select your team and get access to a virtual data base of “market” terms. You should identify the members of your group who will have the authority to make decisions and will be dedicated to the process. Just as importantly, you need to seek the outside advisors – lawyers and consultants – that can bring you the expertise and sense of “market” terms that you don’t have in your organization. Our business and legal experience from more than 1,000 hotel management agreements provides the largest virtual database of hotel management and franchise agreement deal terms in the world.
2. Identify and prioritize the issues. There are at least 20 or 30 business issues that are “tier 1” or “tier 2” issues that need to be raised and negotiated in a term sheet or LOI. (See “The HMA PRO™ Checklist.”) While such term sheets and LOIs are usually “nonbinding,” the failure to raise these major issues at this stage will subject you to angry claims that you are retrading if you want to raise them later. It will certainly be harder to accomplish them later – if you can at all – and will delay your process.
3. Control your own draft of the Hotel Management Agreement. Get the Operator to provide you with a Microsoft Word copy of the form of HMA they propose to use. The Operator may want to “control” the document revisions, but that’s not realistic in an age of universal word processing, and we can often conform their HMA to the agreed-upon terms faster and better than they can. In any event, we need it for the process as described below.
4. Shaping the form HMA to meet your needs. We don’t mind starting with the Operator’s form HMA. That is generally the accepted custom of the industry. However, after working with you to identify the most important business and legal points, we revise the Operator’s form agreement to meet your needs, using specialized redlining software that tracks all changes in the document. Usually, we will suggest the exact language to be used. Sometimes, we will just highlight issues or options for discussion.
5. Making sure we are all on the same page. Based on our earlier discussions about your priorities and goal, we then circulate a marked up draft of the Operator’s form HMA showing all of our proposed changes. This draft only goes to you for your review, followed by a conference call to discuss the agreement and any necessary revisions. We review the document with you, page by page, to get your input and approval for what we have suggested. Most of the changes will be obvious as to their purpose and effect. Some will not be, and we will discuss these so we are all agreed to all proposed changes.
6. Revise and confirm. After our joint review of the document, we make any necessary revisions to reflect your decisions. If changes are minor, we may not recirculate to our team prior to sending to the Operator. If there are major changes or there is a desire to see the revised language, we may recirculate to gain final approval before sending the document to the Operator.
7. Send the revised draft to the Operator. The next step is to send the proposed changes to the Operator in the form of the marked up draft we have already cleared with our client. We jointly want to press the Operator for a fast turnaround with its own indication of what changes the Operator can accept or proposed changes to our changes. If at all possible, it is very much to your advantage to keep control of the drafts. If not, we can make it work, but the process is more laborious and time consuming.
8. Set the all hands meeting. The goal is to get the Operator’s markup or written response to our proposals, and then to arrange a “meet until the deal is done” meeting. This usually takes at least one, and perhaps two, working days. The biggest problem for you will be convincing the Operator to make someone available for the entire time necessary. Otherwise, there can be a delay of days or weeks until the follow up meeting is scheduled and the negotiations can be completed.
9. Location of the all hands meeting. It is not important where we meet. There is a benefit to meeting in our offices in terms of our ability to generate documents quickly, but we can meet at the Operator’s corporate offices, their attorney’s offices, the Hotel or your offices. The availability of representatives with decision-making ability will probably drive this location, and you should be prepared to travel to meet the Operator on their “turf,” if it means they will have the necessary people available.
10. Exchange and finalize. After the all hands meeting, we will circulate revised drafts of the HMA reflecting the decisions. There may be a very small handful of “final issues” to be resolved that we hold to the very end before we give them up or trade them off. But there will be an exchange of documents reflecting the final decisions that should lead to an expedited signing of the HMA. If something goes awry, we will do another meet-until-we-sign meeting.

For more information on hotel management agreements

You will find a lot more information related to this topic on the Hotel Law Blog under the Topic hotel management and franchise agreements. The following are only a few of the resources you will find there:

The HMA Handbook, Hotel Management Agreements for Owners, Developers, Investors & Lenders

Checklist for negotiating Hotel Management Agreements/Hotel Operating Agreements – The HMA PRO™ Checklist

Hotel Lawyer with insights on “How to get a great hotel operator”

The 5 questions every owner should ask before selecting a hotel brand

How to get the right hotel operator

This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to help investors be successful in bidding for hotel acquisitions, and helping investors and lenders to unlock value from troubled hotel transactions. Who’s your hotel lawyer?

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Robert E. Braun is a senior member of the Global Hospitality Group® at JMBM. Mr. Braun advises hospitality clients with respect to management agreements, franchise agreements and spa agreements. He also advises on business formation, financing, mergers and acquisitions, venture capital financing and joint ventures, telecommunications, software, Internet, e-commerce, data processing and outsourcing agreements for the hospitality industry. Contact him at 310.785.5331 or rbraun@jmbm.com.

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Our Perspective. We represent hotel owners, developers, investors and lenders. We have helped our clients find business and legal solutions for more than $125 billion of hotel transactions, involving more than 4,700 properties all over the world. For more information, please contact Jim Butler at jbutler@jmbm.com or +1 (310) 201-3526.

Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.

Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.