How hotel owners can protect their interests in management agreements

Hotel management agreements can expose owners to financial, operational and contractual risks. Clear performance targets, financial oversight and effective exit provisions can help protect hotel investments.

Owning a hotel does not necessarily mean controlling its operations. Under a hotel management agreement (HMA), an owner may invest substantial capital in a property while entrusting its day-to-day management to an external operator.

This arrangement gives investors access to professional expertise without requiring them to run the hotel themselves. However, it can also create tensions over profitability, operating costs, investment priorities and strategic control.

For hotel owners, the challenge is to benefit from professional management while protecting the property’s financial performance and long-term value.

A well-negotiated management agreement, supported by effective oversight and clearly defined contractual rights, can help achieve that balance.

Why hotel owners and operators may have competing priorities

Hotel management companies provide the expertise, systems and personnel needed to operate hospitality properties. Depending on the arrangement, they may also offer access to established brands, distribution networks, loyalty programmes and central services.

In return, operators typically receive management fees, sometimes supplemented by payments linked to financial performance.

Owners generally retain substantial financial exposure through their investment in the property and, depending on the contractual structure, responsibility for funding operations and capital expenditure.

Although both parties benefit from a successful hotel, their commercial priorities may differ.

Owners typically focus on cash flow, investment returns, asset value and the property’s long-term condition. Operators must balance operating performance, service delivery, staffing and brand standards while generating fee income.

These interests can diverge when decisions involve major expenditure, commercial strategy or the future of the management relationship.

Research involving 499 hotel general managers, published in the International Journal of Hospitality & Tourism Administration, found that owners generally exercised greater influence over financial than operational decisions. It also found that owners of independently operated hotels were more involved in property-level decisions than those employing management companies.

The findings underline the importance of governance arrangements that give owners meaningful oversight while preserving the operator’s responsibility for running the hotel.

Negotiating a hotel management agreement

An HMA defines the responsibilities of the owner and operator, how management fees are calculated, who controls key decisions and the circumstances in which the relationship can end.

Some agreements remain in force for many years, potentially restricting an owner’s flexibility as market conditions and investment priorities evolve.

Owners should consider not only their immediate requirements but also future scenarios, including refurbishment, refinancing, a property sale or a change of operator.

Aligning management fees with performance

Management companies commonly receive a base fee calculated as a percentage of hotel revenue, sometimes alongside an incentive fee linked to operating profit.

Although this structure can encourage commercial growth, it does not automatically align the operator’s interests with those of the owner.

A revenue-based fee, for example, may remain payable even when profit margins decline or the hotel generates insufficient cash to meet its wider financial obligations.

Owners should examine how fees are calculated, which costs and deductions apply, and the conditions governing incentive payments.

The review should extend beyond headline management fees to cover marketing contributions, reservation charges, technology fees, central services and other operator-related expenses.

The aim is to establish a transparent fee structure that reflects the commercial value delivered by the operator.

Retaining control over expenditure

Operating budgets and capital expenditure are common sources of disagreement between owners and operators.

An operator may recommend refurbishment, technology investment or additional staffing to maintain service quality and competitiveness. The owner, meanwhile, may prioritise cash preservation or seek to defer expenditure.

The HMA should clearly establish who prepares and approves budgets, the operator’s spending authority and the financial thresholds requiring owner consent.

It should also set out procedures for emergency repairs, unexpected expenditure, procurement commitments and disagreements over proposed investments.

These controls must be proportionate. Excessive owner intervention in routine decisions can undermine the efficiency and accountability that professional management is intended to provide.

Strengthening financial transparency and accountability

Reliable financial information is essential for owners assessing hotel performance and the effectiveness of their management company.

Regular reporting should cover revenue, operating expenses, cash flow, management fees, working capital and capital expenditure.

Reports should explain significant differences between actual results and approved budgets, identify their causes and outline corrective action.

Particular attention should be paid to labour costs, distribution expenses, departmental profitability and charges for operator-provided services.

Owners should consider requiring financial reporting under recognised hospitality accounting conventions, such as the Uniform System of Accounts for the Lodging Industry (USALI). The contract should specify the applicable edition and any agreed adjustments.

Independent audit rights can help owners verify whether fees, expenditure and other transactions comply with the agreement.

The HMA should define the scope of these rights, access to supporting records, document-retention requirements and responsibility for audit costs.

Appropriate controls over hotel bank accounts, payment authorisations and financial reconciliations are equally important, particularly where the operator handles funds on the owner’s behalf.

Together, these measures can help owners identify irregularities, cost overruns and operational problems before they become more serious.

Using performance tests to address underperformance

Performance tests can give hotel owners a contractual means of addressing sustained underperformance and, in certain circumstances, terminating an HMA.

Two commonly used measures are revenue per available room (RevPAR) and gross operating profit (GOP).

RevPAR measures rooms revenue relative to available room inventory. Compared with an appropriately selected group of competing hotels, it can indicate how effectively a property generates room revenue relative to its market.

GOP measures operating profitability under an agreed accounting definition, providing insight into the hotel’s ability to manage revenue and expenses.

A performance test may combine a competitive RevPAR benchmark with a minimum GOP threshold.

Crucially, the contract must specify how these measures interact. Some agreements require the operator to fail both tests before termination becomes possible, while others may permit termination if either threshold is missed.

This distinction can substantially affect the protection available to the owner.

Other considerations include when performance testing begins, how many consecutive failures are required, adjustments for exceptional circumstances and whether the operator has the right to remedy a failure.

Some agreements allow operators to avoid termination through a financial payment or another agreed remedy. Although such provisions may offer compensation, they can also restrict an owner’s ability to replace an underperforming operator.

Performance tests should therefore be assessed alongside the wider termination provisions, rather than treated as an automatic guarantee of accountability.

The value of independent hotel asset management

An independent hotel asset manager can help owners monitor performance without becoming involved in day-to-day operations.

Unlike the hotel’s general manager, who oversees operational delivery, the asset manager represents the owner’s investment interests.

Responsibilities may include reviewing financial results, scrutinising budgets, monitoring capital expenditure, evaluating commercial strategies and checking compliance with the HMA.

Asset managers can also advise on refurbishment programmes, market positioning and longer-term investment decisions.

This support can be particularly valuable for institutional investors, portfolio owners and investors without extensive in-house hospitality expertise.

The research involving 499 hotel general managers cited earlier also found that asset managers helped owners become more involved in hotel decision-making.

However, the asset manager’s authority must be clearly defined.

Effective governance distinguishes between the owner’s strategic objectives, the operator’s operational responsibilities and the asset manager’s monitoring and advisory role.

This helps preserve accountability while ensuring that the owner’s commercial interests are represented.

Managing conflicts of interest and procurement risks

Hotel management companies often use extensive supplier networks and centralised purchasing arrangements. These can deliver economies of scale, consistent standards and access to specialist services.

However, potential conflicts of interest can arise when operators use affiliated suppliers or receive financial benefits from procurement arrangements.

Owners should seek transparency over related-party transactions, purchasing rebates, commissions, supplier incentives and charges for central services.

The HMA should establish appropriate disclosure and approval procedures for material conflicts, alongside clear rules governing supplier selection, competitive tendering and the allocation of shared costs.

The objective is not necessarily to prevent operators from using established purchasing networks. It is to ensure that these arrangements are transparent, appropriately priced and consistent with the hotel’s commercial interests.

Similar scrutiny may be appropriate for technology platforms, marketing programmes, distribution services and other centrally provided functions.

Protecting termination and exit rights

An owner’s investment strategy may change over time. A hotel may be sold, refinanced or repositioned, or the owner may wish to appoint another management company.

Long-term HMAs can complicate these decisions, particularly where termination rights are restricted or substantial compensation payments apply.

Owners should therefore assess their exit options before signing.

Termination for poor performance or breach

The agreement should define the circumstances in which the owner can terminate for sustained underperformance or material contractual breach.

Notice requirements, opportunities to remedy breaches and the consequences of termination should be clearly stated.

Ambiguous provisions can increase the risk of disputes and weaken the practical value of the owner’s contractual rights.

Termination following a hotel sale

An HMA can affect a hotel’s attractiveness to potential buyers.

A prospective purchaser may wish to retain the existing operator, renegotiate the agreement or appoint a different management company.

The contract should establish whether it continues following a sale, whether assignment is permitted and whether a transfer of ownership creates any termination rights.

Associated compensation, consent requirements and restrictions should be understood well before a sale is contemplated.

Termination without cause

Where commercially achievable, owners may negotiate the right to terminate without having to establish operator default.

Such rights may be subject to notice periods, termination payments or other conditions.

Their value depends on whether the financial and legal consequences make them practical to exercise.

Operator insolvency

The HMA should also address operator insolvency and other events that could threaten business continuity.

Relevant provisions may cover access to financial records, operating systems, personnel arrangements and the appointment of replacement management.

Across all termination scenarios, owners should ensure that their rights are enforceable under the applicable law and commercially workable.

Preparing for a change of hotel operator

Replacing a management company involves considerably more than ending a contract.

A transition can affect employees, guest reservations, supplier relationships, financial records, technology systems and brand affiliation.

Owners should establish clear handover obligations within the HMA, covering access to operational records, financial information, cooperation with incoming management and continuity arrangements for existing bookings.

Employment obligations require particular attention, as labour laws and business-transfer rules differ between jurisdictions.

Data protection requirements may also affect the transfer or continued use of guest information and hotel systems.

Where a property operates under a separate franchise agreement, the owner must consider whether the brand relationship can continue following the management change.

Appointing a replacement operator may require franchisor approval or amendments to existing contractual arrangements.

Lenders may also have rights relating to termination notices, operator replacement or opportunities to remedy certain defaults.

Addressing these matters in advance can reduce disruption and help protect the hotel’s trading performance during a management transition.

Choosing the right hotel operating model

Third-party management is not the only option available to hotel owners.

Depending on their investment objectives, operational expertise and appetite for risk, they may consider self-management, franchising or leasing.

Each structure allocates responsibilities, control and financial exposure differently.

Operating model	Principal considerations for owners
Third-party management	Delegates day-to-day operations while generally retaining substantial investment and financial exposure.
Self-management	Provides direct operational control but requires management expertise and internal resources.
Franchising	Offers access to an established brand and distribution systems, while leaving operational responsibilities with the owner or its appointed operator.
Leasing	Transfers agreed operating responsibilities to a tenant in exchange for rent, subject to lease terms and the tenant’s financial strength.

A lease may provide more predictable income, depending on its structure, but owners remain exposed to risks such as tenant default, property deterioration and lease expiry.

Franchising can offer brand recognition and commercial support, but it also involves fees, brand standards and contractual obligations.

Importantly, franchising and third-party management are not mutually exclusive. An owner may appoint an independent management company to operate a franchised hotel.

The most suitable structure depends on the property’s market position, financing arrangements, ownership strategy and available management resources.

Understanding legal protections across jurisdictions

Hotel management agreements operate within different legal systems, and there is no single global framework governing owner-operator relationships.

Contract law, agency principles, employment legislation, insolvency rules and property law can all influence the parties’ rights and obligations.

In some arrangements, the operator acts as the owner’s agent when conducting hotel business. Depending on the contract and applicable law, the owner may be responsible for obligations arising from transactions entered into on its behalf.

Clearly defining the operator’s authority, spending limits and contractual responsibilities is therefore essential.

The enforceability of termination provisions and the legal remedies available to owners may also vary between jurisdictions.

Owners should obtain independent legal advice covering governing law, dispute resolution, liability allocation, indemnities, insurance and termination rights.

Cross-border arrangements may require particular scrutiny where the law governing the HMA differs from that of the country in which the hotel operates.

Hotel management agreements should also be distinguished from franchise arrangements. Some jurisdictions impose specific disclosure or regulatory requirements on franchise relationships, but these should not be assumed to apply automatically to management contracts.

Contractual safeguards must reflect the legal and commercial environment of each property.

Building a sustainable owner-operator relationship

Protecting hotel owners’ interests does not require an adversarial relationship with management companies.

Professional operators can deliver significant value through their expertise, commercial networks, operating systems and ability to respond to changing guest expectations.

A successful partnership, however, depends on clearly defined responsibilities and an appropriate allocation of authority, financial exposure and accountability.

Owners should treat the HMA as a long-term commercial framework rather than simply a means of outsourcing hotel operations.

Transparent reporting, realistic performance measures, proportionate approval rights, independent oversight and workable termination provisions can help keep both parties’ interests aligned.

Equally important is the owner’s ability to evaluate operating results and challenge decisions when necessary.

An effective hotel management agreement should give the operator sufficient authority to run the property while preserving the owner’s ability to protect its investment, manage risk and make strategic decisions.

Achieving that balance is central to a resilient owner-operator partnership and the hotel’s long-term commercial value.