Negotiating Management Contracts

When negotiating management contracts, both hoteliers and management companies have a single, simple goal in mind: Finalizing a deal that is fair and satisfying to both parties. But what if a hotelier is new to the management company game? What is negotiable and what isn’t? Who makes the first move? And, most importantly, how can hoteliers be sure they’re getting a contract that meets their needs and expectations?

For any hotelier looking to ink a new management contract, there is a clear first step—hire a lawyer familiar with not just management contracts, but also the hospitality industry as a whole. Albert J. Pucciarelli, partner at McElroy, Deutsch, Mulvaney & Carpenter, explains, “It’s crucial that a lawyer who works on hotel contracts understand the hotel business. They need to be able to help clients with more than just the legalese in contracts, especially clients who are building their first hotel.” Pucciarelli has nearly 30 years of experience as a hospitality lawyer, and he says that when looking for a lawyer, hoteliers should be prepared to interview prospects to ensure they know their stuff. “You need a lawyer who knows what RevPAR is and how central service charges work,” he says.

This is especially important when hoteliers consider the process of negotiating a management contract. Lawyers who are familiar with the hospitality industry will be better negotiators, knowing what a hotelier needs for his or her business to succeed. “If you come into management contract negotiations with reasonable suggestions that are based on your client’s particular needs, management companies will respect your expertise and are more likely to negotiate certain aspects of the management contract,” Pucciarelli describes.

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Once a hotelier chooses which management company she would like to work with, the management company will typically bring its standard contract to the table for negotiations. Robert Habeeb, president and CEO of First Hospitality Group (FHG), says that FHG and many other management companies will try to stick as close to their boilerplate management contract as possible. However, there are certain areas that are more negotiable than others. “We are most flexible on performance-type issues where the owner has the right to expect that the manager is going to perform in a certain way,” Habeeb explains. “So we will usually allow potential clients the first swipe at negotiations so they can get any issues they have with the contract out in the open early.”

Habeeb notes that while FHG has a standard contract it brings to negotiations with new clients, having a lawyer on hand on the management company’s end is crucial. “While we’re negotiating business terms from business head to business head, management contracts govern the relationship of these parties, and there are significant liability issues. In these kinds of things, you’re always better off with a professional who can translate any questionable wording.”

And, even though hoteliers and management companies are often working toward the same goal, leverage plays a big role in who is able to dictate certain aspects of the contract. “While management companies seem to have the most leverage, there are certain ways hoteliers have the upper hand,” Pucciarelli says. “For example, if a prospect looks particularly attractive, a management company may offer key money to entice the owner to close the deal.”

Regardless of the circumstances, a hotelier’s relationship with her management company is one of the most important business relationships. Being able to negotiate a contract that equally serves and benefits both parties is integral to making this relationship flourish and last.