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Australia: How do hotel owners and operators consummate their legal relationship?

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In short

As hotel, resort and tourism legal experts, we are often asked about the different ways in which the legal relationship between hotel owners and operators can be framed.

While across Australasia the relationship is most documented through a Hotel Management Agreement (HMA), it is not the only way. Other reasonably common formulations are by way of franchise, lease, or commission.

In this newsletter, we have prepared a comparative analysis of HMAs, franchise agreements, leases and Manchise agreements, including an explanation of each and a comparison of their respective advantages and disadvantages.

References to the Operator refer to the operator of the hotel. References to owner mean the owner of the property/hotel.

Hotel Management Agreement (HMA) Franchise To rent out sleeve
What is that?

An agreement in which an operator is engaged by the owner to provide a set of services including:

  • Control of hotel operations
  • Branding
  • Centralized services such as reservations
  • Technical support

In the context of a hotel, a franchise agreement is an agreement in which the operator (as franchisor) allows an owner (as franchisee) to operate under the operator’s brand under certain conditions. It will contain obligations for the Owner (as franchisee) regarding performance criteria, payment of royalties (royalties, marketing fees, training fees, transfer fees, termination fees, utility levies, etc. ), marketing, reporting, training, supply of products and services, territory.

Similarly, the agreement will often contain obligations of the Operator (as franchisor) relating to brand use, advertising/marketing, and assistance and support.

Under this agreement, the operator provides the brand, centralized services such as reservations and technical support, but does not control hotel operations.

The owner grants the operator a lease of the property with the permitted use to operate the property as a hotel. This is an HMA that contains a provision that allows a party (usually the owner) to convert the HMA into a franchise agreement essentially in the form of a franchise agreement appended to the HMA.
Party roles

The owner owns the hotel business and the property.

The Operator provides the operation service of the hotel.

The owner is the franchisee.

The Operator is the franchisor.

The Owner is the lessor.

The Operator is the Tenant.

According to the HMA during the HMA phase.

According to the franchise during the franchise phase.

Costs

The owner pays the following costs to the operator:

ü Management Fee for the management of the hotel (being a Base Fee [based on turnover] + Incentive Fee [based on profit])

ü Royalty fee/license fee (for using the brand)

ü Centralized service fees (for the provision of marketing type services provided by the Operator)

ü Technical services fees if new construction hotel (for the provision of design services)

The owner pays the following costs to the operator:

ü Initial fees (application fees/pre-opening service fees which are generally flat fees).

ü Royalty fee/license fee for brand use based on turnover

ü Centralized Services Fee (for the provision of booking and marketing type services provided by the Operator)

ü Technical services fees if new construction hotel (for the provision of design services)

The owner pays the operator:

ü No fees.

The Operator pays the Owner:

ü Rent (sometimes including a base rent and a turnover rent)

ü According to the HMA during the HMA phase.

ü Depending on the franchise during the franchise phase.

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