Renegotiating to Realize Opportunities

Renegotiation may be required because of financial and operational improvements to the hotel

Renegotiation must address changes in management fees

Some changes, such as annual budgets and operation of the performance clause, may be subject to arbitration

So far, renegotiation of the hotel management agreement has been presented as a means to deal with serious problems at the property. But HMA renegotiation can also be a way of dealing with positive opportunities for the hotel. Both the asset manager and the hotel manager may have any number of good ideas for improving the financial or operational performance of the hotel. Many of these may have an impact on the management agreement and therefore require some renegotiation of the agreement to reflect desired changes.

Let’s begin by considering some of the possibilities that might require renegotiation. These might include constructing a new spa, deciding to lease the restaurant, or deciding to expand the number of food and beverage offerings. They might include return-on-investment projects or a significant repositioning of the property. Each of these could have a significant impact on management fees and on other agreement provisions. Consider, for example, leasing the restaurant. Because the restaurant is now leased, the hotel doesn't receive the restaurant revenue, which would diminish the base management fees. The manager would be reluctant to approve the lease if it didn't include a provision to make the change "fee neutral" to the manager.

Other possibilities might not affect fees but would affect the rest of the agreement. These include, for example, a change in the competitive set as a result of a new competitor, a change in lender, or a change in insurance provider. Each of these may require changes to the management agreement.

HMA renegotiation must address the effect of any changes on the management fees. If there is an impact, especially if the proposed changes will probably diminish the management fee, the manager will want to be "made whole." Reaching an agreement on this may require a number of rounds of negotiation. Until the owner and manager commit to good-faith negotiation about the fees, little progress can be made on the impact on the rest of the agreement.

Usually changes to the agreement do not require that it be completely rewritten. They can be handled with a memorandum of understanding that summarizes the new agreement, which is generally incorporated into the agreement as a addendum. Over time, if a significant number of addenda are created, it may make sense to formally incorporate them into a revised HMA.

Certain matters may be subject to arbitration, as stipulated in the original agreement. Items commonly subject to arbitration are approval of the annual budgets, definitions within the agreement, and the operation of the performance clause. Increasingly, many agreements mandate that all disputes be subject to binding arbitration. In these instances, an arbitrator would determine any formal changes to the management agreement.

Renegotiating a management agreement can be an important part of making improvements to a hotel property. The asset manager needs to keep in mind that renegotiation is both a means to an end (designed to facilitate the planned changes) and an end in itself (the asset manager can leverage the renegotiation to achieve other objectives).