Read the fine print before signing
In the era of e-signatures and quick transactions, it’s easy to underestimate the importance of meticulously reviewing and negotiating hotel contracts before signing on the dotted line. Your signature isn’t just a formality; it carries weight. Whether you’re buying a hotel property, transitioning operations, or entering into a franchise agreement, dedicating time to scrutinize and negotiate contract terms is paramount. Here, we’ll explore four prevalent types of contracts in the hotel industry: purchase and sale agreements, franchise agreements, third-party management agreements, and lease agreements.
1 PURCHASE AND SALE AGREEMENTS
Conducting a comprehensive review and negotiation of your PSA is crucial for ensuring a smooth and advantageous transaction. PSAs serve as blueprints for the escrow process as well as post-closing rights and responsibilities. Beyond the fundamental terms like purchase price and closing date, it’s critical to:
- Clearly delineate terms like franchise and financing contingencies to avoid misunderstandings.
- Have a well-drafted due diligence provision to address when and how earnest money will be refundable, what contracts the buyer will assume, and how inspections will be conducted.
- Incorporate reciprocal warranties and indemnities to safeguard both parties post-closing.
Beware of first right of refusal clauses, which essentially require franchisor’s approval before you can sell your property.
2. THIRD-PARTY MANAGEMENT AGREEMENTS
Vigilant examination of third-party management agreements is vital for ensuring a hotel’s profitability and effective management performance. These contracts outline key responsibilities, performance metrics, and financial arrangements, providing clarity on the roles and expectations of manager and owner. By addressing potential ambiguities or discrepancies upfront, owners can prevent misunderstandings and legal disputes that may arise during the course of the contract. Key considerations entail:
- Aligning business objectives with the management company’s strategies.
- Optimizing fees, bonuses, and performance benchmarks.
- Implementing cure periods and termination clauses to address non-performance issues effectively.
A meticulous review and negotiation process mitigates risks and fosters a constructive owner-management relationship. It allows for both parties to thrive together.
3. FRANCHISE AGREEMENTS
Reviewing franchise agreements allows potential franchisees to comprehend the terms and conditions set forth by the franchisor. These may include fees, reservation/revenue management services, operational standards, and opening obligations. Understanding these elements in addition to the countless other provisions of the typical hotel franchise agreement is essential for making informed decisions about your investment and operational aspects of the franchise. Key elements to negotiate include:
- Royalty fees, marketing contributions, and protected territorial rights.
- Cap liquidated damages and establish termination windows.
- Indemnities, insurance requirements, and events of default.
Negotiate closing and due diligence extensions prior to signing to allow for flexibility throughout the process. Investing time in reviewing and negotiating franchise agreements lays the groundwork for a prosperous partnership and prevents surprise or regret down the road.
4. LEASE AGREEMENTS
Thoughtful drafting of hotel lease agreements is necessary for both tenants and landlords. For tenants, a comprehensive review of the lease agreement allows for clarity on terms, which helps tenants plan their budget effectively and ensures they are not caught off guard by unexpected expenses. On the other hand, landlords must also carefully assess lease agreements to safeguard their physical property and financial interests. Key steps include:
- Clarifying lease duration, renewal options, and termination procedures.
- Establishing terms related to rent increases, property maintenance, and dispute resolution.
- Negotiating equitable terms that align with market value and business plans.
Discuss tenant-made capital improvements and parties’ rights in the event of early termination or upon sale of the property.
Transparent communication and cooperation establish a robust foundation for a successful hotel lease.
Navigating the language and structure of hotel contracts demands diligence and attention to detail. A thorough review and negotiation process ensures all parties are secured and positioned for success in our dynamic industry. Should you need assistance in drafting, reviewing, or negotiating a hotel contract, consider consulting an attorney who is well-versed in hotel operations and contract law. You or your counsel should take the time to think of all the things that could go wrong and incorporate a well-defined plan before signing by any contract.
Keep in mind the party drafting the contract will likely include language that prioritizes their interests, so if you are the reviewing party, you must analyze the contract meticulously.
