Hotel Management Agreements

Horwath Industry Report: MOUs Explained - By Clémence Derycke

The negotiation of a hotel management agreement is a complex process, typically preceded by the negotiation of a memorandum of understanding (MOU) or a letter of intent. The MOU sets out the prime commercial terms presented by the operator on which the hotel management agreement package will later be drafted. Missing out on resolving issues at this preparatory phase may lead to either party finding itself in an unfavorable position when the management agreement package arrives.
A man signing a document - Photo by Helloquence on Unsplash
Horwath Industry Report: MOUs Explained

Horwath HTL

The arrangement between a hotel owner and a hotel operating company has been a well-accepted business model in the hospitality industry for several decades, originally developed to allow hotel operators to expand their portfolios globally with minimal risk associated with real estate ownership. Approximately 21% of all hotels in Europe and 13% of all hotels in North America were operated under management agreements as of 2015 (HVS), and although each management agreement is unique, the same principal issues are typically identified and negotiated between the parties. The negotiation of a hotel management agreement (or HMA) is a complex process and typically preceded by the negotiation of a memorandum of understanding or a letter of intent. According to the Cambridge Dictionary (2018), a memorandum of understanding (or MOU).

The MOU sets out the prime commercial terms presented by the operator on which the hotel management agreement package will later be drafted.

Despite its non-binding nature, once the MOU has been signed, re-negotiation of the main commercial terms becomes difficult. Missing out on negotiating and resolving issues at this preparatory phase may lead to either party finding itself in an unfavorable position when the management agreement package arrives. To achieve an optimum balance between a hotel owner’s and operator’s interests (Figure 1) and ensure that both parties’ goals are aligned, it is important to understand the rationale behind key terms and common issues that arise during the negotiation process.

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