Types of hotel management contracts: leasing and management
What types of contracts exist for hotel operations? In this post we will focus on the characteristics of the two most common hotel management models: the lease or rental contract and the hotel management contract.
In fact, according to a recent publication by Hosteltur, three out of four hotel establishment operations are regulated by one of these two types of contracts. We will therefore leave aside other types of contracts, such as franchises and brand licences.
In both cases, the hotel management contract and the rental contract, the starting point is to adequately regulate the management and operation of one or several hotel establishments by a third party, other than the one that owns them. In practice, this is not always basically the case, as it sometimes happens that, although one company owns the hotel and another operates it, this is due to a strategy of minimising legal risks, with both companies belonging to the same corporate group.
What is a hotel lease contract?
The hotel lease or rental contract is one whereby the owner transfers the use and operation of the establishment in exchange for a payment or rent (which may be monthly, quarterly or accrued in the term freely agreed by the parties). The pure and simple use of the asset is granted for a specific period, which may or may not include contents (chattel, machinery, computer equipment, etc.). Generally, the hotel lease excludes the staff assigned to the hotel, who are usually hired directly by the lessee at his own risk and expense.
What is a hotel management contract?
In the hotel management contract, the property entrusts the management of the business to a third party, providing a series of services, the extent of which varies according to the specific transaction. We can highlight some of the main characteristics of this hotel management model. Generally, its object includes at least strategic, commercial, and marketing, financial, and human resources management services. The remuneration of the hotel management contract, unlike the rental contract, is usually variable in nature (e.g. a certain percentage of the establishment’s turnover or EBITDA) or mixed (a fixed amount plus a success or variable amount according to the accounting magnitude chosen for this purpose).
Common clauses in the hotel management contract
In both contractual modalities, it will be critical to delimit the responsibilities and obligations of each party with respect to issues such as the maintenance and/or refurbishment work to be undertaken, the personnel working in the establishment, the obligations to ensure the building and its contents or the relations with the public administrations (permits, licences and possible administrative contingencies arising from inspections).
Another of the usual clauses to be negotiated is the early termination of the contract due to a change of control of the company that owns the hotel, or due to the sale of the hotel to a third party as a real estate asset. The second cause for discussion in this regard, in the case of renting, will be the application or not of pre-emptive acquisition rights in favour of the lessee.
Having broadly explained both contractual concepts, it should be borne in mind that the autonomy of the parties’ will, which prevails in private law, can blur somewhat the differences that initially exist between the rental contract and the hotel management contract (for example, the rent in the rental contract can also be agreed on a variable or mixed basis).
In any case, for the transaction to be successful, whether we are considering a rental contract or a hotel management contract, it is crucial to study each case in detail and to properly and meticulously regulate any possible vicissitude or contingency that may arise in the future.
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