Hotel Management Contracts in the U.S.

Abstract

One of the most effective mechanisms for expanding full-service chain hotels, the management contract saw substantial changes in the early 1990s when the hotel industry ran aground and foundered. Both are alive and well but in changed circumstances. Owners have achieved greater bargaining power in management contracts due to substantial competition by a crowded field of operators. Lenders and asset managers have become parties to the negotiations, generally siding with owners' interests. Courts have ruled that management contracts are agency agreements with the operating company as agent for the owner, greatly circumscribing the operator's rights and sphere of activity. Moreover, the reentry of REITs as substantial hotel investors has reduced the number of properties available for management contract, because REITs are legally required to operate using leases. Nevertheless, operators that are willing to work with the new variety of activist owner still have substantial potential for growth, albeit mostly in reflagging existing properties.