A Brief Introduction About the Hotel Contract
When a hotel owner doesn’t want to manage their hotel, they bring in a third party by drafting a hotel contract. For several different causes, many hotel owners do not wish to get into the day to day administration duties of the hotel business. They may not have the right set of skills, but want to hire a person who does. In some cases, there might be a group of hotels that a person would delegate to a firm to administer. In that case, a hotel group contract is drafted.
Who Takes the Hotel Contract?
This contract is also known as a hotel management contract, which is a legally binding agreement between the hotel owner as well as the management firm. It must set forth the party’s expectations, duties, and obligations. The term in the contract must include all necessary provisions relating to the exchange of services.
Purpose of the Hotel Contract
Hotel owners are turning towards Hotel Contracts with an inclination to allotting most of their duties towards management firms. This makes the hotels to be run by franchisees or independent operators as opposed to the actual owner of the hotel. As per the contract, the hotel owner acts more like an investor of the hotel as opposed to its manager. Many hotel owners have a slight to zero experience running a hotel, and that is the main reason they delegate it to a firm who has know-how in the hotel management industry.
Contents of the Hotel Contract
The hotel contract clauses shall vary with a groups’ needs. However, comprehensive sample Hotel Contract clauses cover all the critical needs.
- The contract must describe the relationship between the hotel owner and the management firm. The management firm has the duty of managing the day to day operations of the hotel, which usually comprises hiring and firing employees, dealing with customer service, managing every division of the hotel, etc. The management firm would also be in charge of maintenance, marketing as well as advertising, and promotion.
- The details of the management firm’s duties must be clearly described in the agreement. There would likely be negotiations taking place back and forth amid the hotel owner and hotel management firm until they both settle and agree with each other’s positions. When this takes place, those duties must be written down in the contract as finalized.
- If either of the parties intends to modify the contract at a later date, they can do so as long as both parties agree toward the modifications.
- In order to properly amend the contract, both parties are required to document the change in writing, sign, and date the document as well, and then attach it to the original hotel contract.
A generic Hotel Contract template specifies the standard provisions and clauses that help reimburse the business facilities.
How to Draft the Hotel Contract
While different hotel contracts might stipulate different things, there are few basic requirements that every contract must contain:
- Names of the parties to be bound: The contract must include the names of the hotel owner as well as the hotel management firm. It must describe the location of the hotel and whether or not it is independently owned or part of a franchise. It must also comprise any other relevant descriptive information relating to the parties.
- Length of the contract term: The contract must state how long the working relationship between the hotel owner and the hotel management firm would last. Any contract with a term of 1 year or longer should be in writing. This section could also consist of an option to renew the contract if both parties wish to do so.
- Responsibilities of both parties: The most important part of the contract is that the document should explicitly describe in detail the obligations and duties of the hotel management firm, and the expectations placed on the hotel owner.
- Attrition: This defines the rights assigned to you for all the rooms, regardless of how they are booked.
- Condition of Premises: A clause that specifies the condition of the premises that is expected to be the same or better than what was initially assigned.
- Dispute Resolution: A clause stating how the arbitration will be selected and where.
- Force Majeure: A clause that protects against acts of terrorism, extreme weather, outbreak of disease and so on.
- Liquor Liability: A clause that requires the provider to indemnify and hold harmless in case of any liquor liability claim.
While the hotel owner gives the funds to keep the hotel running, most of the other responsibilities are covered by the management firm. These duties include:
- Overseeing employees
- Preparing budgets
- Supervise daily hotel operations
- Maintenance
- Bookkeeping
- Ordering hotel inventory
- Customer service
While most of the obligations fall on the hotel management firm, the contract must also outline the hotel owner’s duties, such as making sure the hotel complies with applicable laws, keeping the hotel monetarily stable, as well as maintaining insurances.
Benefits & Drawbacks of the Hotel Contract
Benefits: The hotel owners increasingly depend on hotel management firms in order to operate their hotels through formalized hotel agreements. Separating ownership as well as operations may benefit both parties: owners can invest in hotel real estate as well as access the professional operating expertise of hotel management firms, while operators could generate important income streams, develop any brands they might have, and earn profits, all without having towards investing in the underlying real estate.
Drawbacks: Even though both parties have a vested interest in the hotel’s success, their diverse sources of income, risk profiles, as well as investment strategies mean they often have different interests, which might lead to misaligned and perhaps even conflicting goals.
In Hotel Contracts renewal terms are less common for non-branded operators. Branded operators would seek to secure multiple automatic renewal terms and owners would seek to make renewal terms subject to a performance metric such as receipt by the owner of its priority return.
What Happens in Case of Violation?
When a hotel owner can negotiate the right to terminate on sale, owners usually must pay the operator a termination penalty (liquidated damages)(1) of an amount equal towards a multiple of prior years’ management fees, by means of which the operator could carry out the remaining initial term of the contract.
To conclude this, it could be said that these contracts are used across the US, majorly for upscale, as well as luxury tier hotels worked under a major hotel brand. As franchised brands have augmented across the US in recent years, third party managers operating under a brand franchise too have increased.