The Lodging Conference speakers reflected on how a functional owner-operator relationship can be managed in a management agreement with third parties. The most fundamental element of control that an owner will have is the right to approve the operating budget of the hotel. The owner should maintain strict control over the budget process and expenses should be made in such a way that they match the budget as soon as it has been approved by the owner. If, for any reason, the owner and the management company are unable to agree on a budget within a reasonable time after its submission (which should take place at least annually), the parties should agree to separate and terminate the contract. The management company will often endeavor to negotiate some form of lump sum damages in the event of termination after the failure of the budget agreement. The owner may object to this and perhaps have the feeling that the management company could arbitrarily propose a much higher budget than is necessary, knowing that the owner will not approve it. In this case, the management company is licensed and is therefore entitled to lump sum damages. Ultimately, the parties must agree to work in good faith towards a budget that is acceptable to both parties and rely on each acting prudently during the budget process. The budget process is a key element to focus on when negotiating a management contract. Assuming that a management and owner company can agree on the scope of the services provided by the management company and on a method for determining the financing of the management company`s provision of those services, how should the parties determine whether the management company is complying with its obligations? Paying attention to what your third-party providers send – and what those third parties do with that data – is no longer just a best practice on offer. Regulatory oversight has been extended to make tracking sensitive third-party data and processes critical to a company`s operational success. Most management agreements provide for either a fixed fee as basic remuneration or a basic management fee determined by reference to the hotel`s gross revenue or gross operating margin.
There may also be a separate fixed fee for certain services provided by the management company, such as accounting services, payroll services and marketing services. The management contract may also include a fee for construction management services in the event of a major hotel renovation project or a major property improvement plan that must be implemented for a franchisee. Management contracts usually have a duration of one year which defines the period during which the parties are bound by their agreement. Most contracts also provide that the owner can terminate the contract “for an important reason,” for example.B.