The current balance of power in North American hotel management contracts

Abstract

This paper discusses the current status of relations between branded hotel operators and owners of lodging assets. Although increasingly sophisticated hotel owners have gained greater input into the process of creating value for their hotel assets, there remains a fundamental misalignment of interest between operators driven to increase the number of rooms comprising the brand and the owner's objective of maximising returns from individual assets. This tension is explored by contrasting the views of the branded operator and the owner towards six management contract provisions critical to the operating flexibility and economic value of hotels: contract duration, fees and fee structures, operator financial contributions, performance clauses, termination provisions and budgetary and spending limitations. As the discussion of each provision suggests, the evolution of North American hotel management contracts over the last 30 plus years has yielded a degree of standardisation in how the provisions are structured, reducing some of the frustration felt by both parties to the agreement. The current balance of power, however, represents détente rather than a resolution of the underlying misalignment.