Hotel Management Agreement Negotiations - The Issues Taking Up Time and Generating Angst
This edition's issue - The implications of the owner employing the hotel employees whilst being under the direction of the operator
During the course of a hotel management agreement negotiation there are many issues to be identified, negotiated and resolved. Some issues seem to come up more regularly than others and seem to take a disproportionate amount of time to deal with to the satisfaction of both owners and operators. In this series we will focus on a number of issues which fall into this category.
We will start with the issue which is particularly perplexing to first time owners - the requirement of most hotel operating companies (particularly the international operators) that the owner is required to employ the hotel employees (except perhaps for a small number of senior employees such as the general manager, finance director, and/or director of sales and marketing), but that such employees are to be under the control of the operator.
A typical clause to effect this arrangement is as follows:-
"Subject to the terms of this Agreement, Owner engages [Operator] to supervise, direct and control all aspects of the operation of the Hotel on a sole and exclusive basis during the Operating Term, and [Operator] accepts such engagement. During the Term, Owner grants to [Operator] the sole and exclusive right, authority and discretion to take or cause to be taken all such actions in the name and on behalf of Owner that [Operator] reasonably deems necessary or advisable."
The reason why operators insist upon this requirement is simple. In the event of the owner's financial collapse which necessitates closure of the hotel and the termination of hotel employees the operator does not want to be the party legally required to make termination payments which may involve hundreds of employees and very substantial amounts of money.
Since we are based in Australia, we will approach the questions below from a broadly Australian perspective. Local employment laws in other jurisdictions may vary the discussion on any one or more of the questions posed.