In the course of our professional life, my colleagues and myself have seen numerous hotel management contracts of all sorts, from franchise over straight management to lease contract.
We’re amazed at times of how very little is understood by different parties that are bound by these contracts.
Management contracts define the roles and responsibilities for each party.
Some of these contracts can be extremely detailed, mostly contracts with an American influence at some stage, others can be rather vague, relying more on the spirit, the understanding of the contract rather than in the details. You cannot specify for every opportunity.
The main thing however about any contract is that there are generally 2 parties involved, sometimes more when guarantees are needed or when licences go over different parties.
There is a difference in the objectives of all parties and the contract is there first and foremost for every party to specify what it is they need to get out of the contract, not only short term but also long term.
An owner will need to talk about NOP, about how much cash is going to come his way. He will need to know also how and in which condition the building or the object of the contract is to come back to him.
Many smaller owners or first time owners see a contract as a blessing and do not negotiate the end of the contract as much as they negotiate the immediate beginnings.
We’ve seen owners hungrily entering management contracts but then still insisting they need to be involved in the daily operations, yet at the same time expecting the operator to deliver on his promise of results.
And there lies the first fundamental difference, Hotel Management Companies will maximise GOP and we’ve seen many a property not maintained properly, because saving on maintenance costs will improve the GOP.
We’ve seen management companies struggle to give back the buildings in a state as promised because they did not set enough cash aside for the upkeep of the buildings entrusted to them. This happens mainly with lease contracts.
We’ve also seen that, apart from some of the larger hotel companies, the General Managers and their teams are not well enough aware of the dispositions of the contract nor do they work towards more long term objectives.
Their employment is for a couple of years and targeted towards incentives based upon GOP, sometimes augmented by some short term quality standards like guest satisfaction or staff contentment.
We’ve seen timid solutions of certain owners entering discussions with their management companies in order to address these issues of how they will get back the property at the end of the contract. A little like an anxious landlord seeing his tenant leave but unsure about the state of the apartment he rented out.
We’re convinced there must be a more robust approach to these contracts, insofar that owners will need to be more specific about what they want to get out of the contract and not only money but also reputation and the physical protection of their asset.
The various operating companies must do more to involve their general managers more and not keep the management contracts secret.
Not so long ago did I meet a General Manager of a large city hotel, who had never seen the management contract of his hotel.
Sadly, this is not a lone case.
Yet seeing the contract is one thing, understanding it is another.
All parties should understand the contract not only from their perspective, but understand it also from the perspective of the other party.
What does an owner want, what does the operator want, for sometimes these are different?
For more information or development possibilities look at our programmes for November 2016