Hotel Management Agreements - Always Start With A Letter Of Intent (1/3) Douglas Wignall
Tuesday, August 22, 2017
So why is the Heads of Terms/Letter of Intent (LOI) such an essential stage of the management agreement negotiation? From a hotel owner or developer’s perspective, the negotiation of a hotel management agreement has to start with the LOI for several reasons.
Objective of the LOI
The LOI comes into play once the preferred operator has been selected and the main commercial terms have been agreed. But too many people use it as a term sheet just setting out the headline commercial terms. But this misses a trick of getting all the hairy issues and deal breakers out in the open and upfront at the first crucial stage.
Yes it can make the process longer, but it saves time in the end. Negotiations of the Hotel Management Agreement (HMA) can take months or over a year. The development and in-house legal teams of international hotel operators can be hard pressed, particularly in EAME where multiple countries are involved.
Too many deals fail in management agreement negotiations. All of which can be avoided in well thought through LOI negotiations. Early acknowledgement of potential deal breakers avoids months of wrangling where money and time is lost, but also opportunities.
Get the Owner up to speed
HMAs can be intimidating documents from an Owner’s perspective. The first draft HMA is usually prepared by the Operator and based on the Operator’s handy template. From an Operator’s point of view, an ideal HMA is one in which the Operator has no risk, no liability and which is non-terminable and many HMAs are written with this in mind.
This sits uncomfortably with Owners and therefore, even prior to the commencement of the LOI negotiations, consultants should ensure that their clients are familiar with the essential elements of the HMA. Particularly if your client is an owner/operator experiencing branded hotel management agreements for the first time and who is likely to be horrified by the degree of control of the management of the hotel he is expected to surrender to the operator.
The LOI needs to be taken seriously. Make sure it is properly discussed and negotiated. It could save a potential hotel owner a great deal of time and money. If done properly, by the end of the negotiation of the LOI, the Owner should know whether or not there is a reasonable chance of reaching a deal with this particular operator.
Douglas Wignall is a hotel and leisure lawyer in the Cubism Law Hospitality department. He has over 35 years' experience in the hospitality industry in advising predominantly hotel owners and developers.