Hotel management and license agreements - major issues in dealing with US hotel brands

by Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP

Global growth opportunities

In recent years, most of the major US-based hotel brands have sought growth opportunities abroad, particularly in emerging market locations. These opportunities may come in the form of developing new hotels or rebranding existing hotels. Hotel owners, investors or developers outside of the US should be aware of some of the major issues they may encounter in negotiating a management or license deal for hotel projects with a US hotel brand.

A hotel typically acquires its brand name in one of two ways. First, the hotel owner may enter into a management agreement with the hotel brand, pursuant to which the brand management company will have exclusive possession of the hotel property and control of the hotel operations. In this case, the brand identity of the hotel comes from the hotel manager. Second, the hotel owner may enter into a license agreement with the hotel brand. In that event, the owner (or a third party non-branded operator approved by the licensor) operates the hotel, and the hotel’s brand identity comes from the licensor. It is generally more common for luxury or upscale hotels to be operated by the hotel brand under a hotel management agreement and for midscale or limited service hotels to be branded pursuant to license agreements, but there are many exceptions to this general rule.

Regardless of whether a hotel owner enters into a management agreement or a license agreement with the hotel brand, both documents will be negotiated based upon the brand’s form of agreement, which heavily favors the brand and provides relatively few rights to the hotel owner. In addition, the major brands will want the definitive version of the agreement to be in English, particularly in the case of license agreements. While negotiating revisions to either of these agreements is difficult for an owner, the owner will usually find that hotel brands are particularly reluctant to make changes to their prescribed forms of license agreements. Therefore, it is important that the owner enlist the help of legal and business advisers to determine the best strategies for dealing with the hotel brand in each of these agreements.

Due diligence

The hotel owner or developer should anticipate that, as a condition of approval of the deal, the US hotel brand will require extensive information about the owner’s or the developer’s structure, principals, financial condition and sources of debt and equity finance. All US hotel brands have detailed internal due diligence requirements related to these matters. In addition, each brand must determine that no other party with which the brand is dealing is a “specially designated national or blocked person”1 under US anti-terrorism laws.2 Compliance with US anti-terrorism laws, particularly anti-money laundering laws that were enacted in the effort to prevent, detect and prosecute international money laundering and the financing of terrorism, is a threshold matter to be addressed in any international business transaction involving a US party. Transactions involving hotel and resort properties have been historically viewed as vulnerable to infiltration by money launderers because these transactions tend to deal with valuable tangible and intangible business assets and thus may offer an opportunity for concealing illegal sources of funds.

In addition to compliance with anti-terrorism laws, US brands conducting business abroad are responsible for compliance with the anti-bribery provisions of the Foreign Corrupt Practices Act of 1977 (FCPA)3. These provisions prohibit any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity; induce the foreign official to do or omit to do an act in violation of his or her lawful duty; or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person. Therefore, a US hotel brand will be attuned to how the FCPA relates to its course of dealing with local partners, local governmental officials and other parties involved in the transaction. As a result, in addition to extensive due diligence, US hotel companies typically require, for projects in offshore locations, that owners under hotel management agreements and hotel license agreements provide detailed disclosures about their business dealings with local governmental officials.


The fee structure of the deal varies depending on the type of agreement. For a hotel management agreement, there are usually two main fee components: a base fee, expressed as a certain percentage of hotel revenues per year, and an incentive fee, which is typically a certain percentage of the gross operating profit of the hotel per year (although the incentive fee can have many other structures as well). License agreements commonly require payment of license fees based on a certain percentage of hotel room revenues per year.

In addition, both management agreements and license agreements require a number of services fees, such as fees to cover the cost of (i) the brand’s reservation system, (ii) the brand’s marketing and advertising programs, (iii) the brand’s centralized accounting services, (iv) the brand’s technology hardware and software installation and upgrades, and (v) the brand’s cost of personnel training. In total, these services fees can be very expensive for the owner, but they are almost never negotiable. Rather than attempting to reduce the scope or amount of such fees, the owner should try to obtain the brand’s assurance that the hotel will be treated substantially the same as other similarly situated brand hotels with regard to such fees.

As a last item on the fee front, it is important for the owner to know that if any withholding or similar taxes apply to the fees to be paid to the brand under these agreements, the brand will require that the owner pay an amount of fees that is “grossed up” so that the brand gets the same economic benefit from the negotiated deal as if no such taxes applied. Therefore, deal underwriting by the owner (and the owner’s lenders and investors) should factor in any such applicable tax. Otherwise, the owner may realize too late in the process that the deal is economically unfeasible.

Termination rights

In management agreements in particular, most US brands require an initial term of at least 10 years and often an option (in the brand’s sole discretion) to renew the term for one or more successive periods of five or 10 years each. The brands also seek to severely limit, or completely eliminate if possible, any right of the owner to terminate the management agreement. On the other hand, the owner should attempt to obtain at least the right to terminate the management agreement in the event that:

  • The hotel is destroyed or materially damaged by casualty;
  • The brand breaches any of its material obligations under the agreement and does not cure the breach within a specified time period after notice from the owner;
  • The hotel fails to achieve a certain specified performance standard (such standard will vary from deal to deal and depending on the type of agreement involved; for a management agreement, such standard is usually expressed in terms of the hotel achieving a certain level of gross operating profit and/or performing well in comparison to other hotels in the same competitive market; for a license agreement, the standard is more likely to reflect what percentage of the hotel’s business is produced by the brand’s reservation system as opposed to independent sources); or
  • The owner wishes to sell the hotel to a third party and the third party wishes to change the hotel brand (many owners find that, over time, the value of a hotel may decline if it is tied to just one brand, since the pool of potential purchasers will be smaller).

While the hotel brand will typically require some kind of termination fee in the event the owner terminates the management agreement upon the sale of a hotel to a third party, the owner should not have to pay any termination fee or liquidated damages upon a termination in any of the other instances described above.

Brand standards

The concept of brand standards presents another area of concern for a hotel owner. Although the hotel brands may use various terms to define this concept, “brand standards” generally refers to the standards or criteria that define all aspects of the hotel brand (for example, physical design, standards for furniture, fixtures and equipment, standards for operation and maintenance, life safety standards, and levels and types of standards for services and amenities). Management agreements and license agreements often do not provide a precise definition of this term, thus allowing the brand maximum flexibility to revise and upgrade the brand standards over time. From the brand’s perspective, this ability to change and improve brand standards is crucial to the brand’s ability to stay competitive and produce optimum profits for its hotel owners. From the owner’s perspective, the brand’s unlimited power to revise standards means that the owner may pay a substantial price for its hotel to comply with those standards (thus reducing profits to the owner). While some owners may be successful in negotiating certain limitations on the brand’s ability to require the owner to implement changes in brand standards, in most cases the owner will have to accept that the brand has the right to impose such requirements. On the other hand, in many cases, a balance is achieved in practice (if not in the document itself), because hotel brands are generally not incentivized to deal arbitrarily or unreasonably with their hotel owners on this front.

Hotel owners should also anticipate that brand standards may include certain requirements that are in excess of the requirements of applicable local laws. For example, many of the major US hotel brands include many of the disabled access requirements of the Americans with Disabilities Act (ADA)4 as well as many US-oriented life-safety requirements in their design standards, even for non-US properties. In addition, the brands are increasingly adopting various “green” standards applicable to hotel design, construction and operation; the cost of compliance with these standards may be substantially more than compliance with applicable local codes. Therefore, developers and investors need to make sure that their feasibility studies and project budgets take into account the cost of various hotel brand requirements that may exceed the standards mandated by local law.

Territorial restrictions

Finally, as various US hotel brands seek to expand their presence in particular markets, a hotel owner should negotiate some kind of territorial restriction that protects the owner from any expansion of the brand that could have a detrimental impact on the hotel. Hotel brands routinely agree to grant such protections to the owner within certain periods of time and within a certain distance from the hotel, although the brands rarely agree to a territorial restriction for the entire term of the agreement or for significantly large areas. A hotel owner would be wise to seek the advice of an expert consultant in determining the parameters of the restriction that it should seek from the brand.

In addition, if the hotel owner is in the business of owning, operating or franchising other hotels, the brand may seek to impose a territorial restriction on the owner so that the owner cannot compete with the brand from another nearby location. While some reasonable restrictions may be acceptable, the owner should take care that such restrictions do not materially interfere with the owner’s ability to conduct its business.


Aside from the issues described above in dealing with a US hotel brand, there are many other items to be addressed by the parties to any hotel management or license agreement. In particular, an owner without significant hospitality industry experience will be at a disadvantage in the process of negotiating these agreements with a hotel brand. It is therefore important that the hotel owner identify and retain, as soon as possible in the process, legal and business advisers with appropriate knowledge and experience.
1 A “specially designated national or blocked person” is (i) a person designated by the US Department of Treasury’s Office of Foreign Assets Control from time to time as a “specially designated national or blocked person” or similar status; (ii) a person described in Section 1 of US Executive Order 13224, issued on September 23, 2001; or (iii) a person otherwise identified by government or legal authority as a person with whom the applicable company is prohibited from transacting business.
2 Generally “anti-terrorism laws” can be understood to refer to any laws relating to terrorism or money laundering, including, without limitation, Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, as the same has been, or shall hereafter be, renewed, extended, amended, modified or replaced; the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (also known as the PATRIOT Act), P.L. 107-56, as the same has been, or shall hereafter be, renewed, extended, amended or replaced, together with all other laws administered by the US Department of Treasury’s Office of Foreign Assets Control.
3 15 U.S.C. §§ 78dd-1, et seq.
4 42 U.S.C. § 12101 et seq.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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