Franchise Agreements and Hotel Management Contracts

Posted on Jan 9, 2025 in Hotel Administration and Management

Key Elements of a Franchise Agreement

  • Royalties: The contract involves a payment from the franchiser to the franchisee. There are various types of payment and calculation methods.
  • Advertising: The design of general advertising campaigns must always be reserved for the franchiser. Any local or specific campaigns for each franchise establishment should preferably be designed by the local establishment, although with the franchiser’s consent.
  • Signs and Advertisement: This addresses the issue of refusal to remove signs or other advertisements.
  • Supply: In the case of franchises where there is a fixed standard of product quality, franchisees are normally supplied by the franchiser or by the latter’s designated suppliers.
  • Prices: The franchiser cannot legally impose uniform prices on the franchisees. They may merely recommend prices and prevent the application of low or loss-making prices.
  • Franchise Registry: This is a public register created by article 5 of RD 2485/1998. It registers the details of any franchiser listed in article 7 whose activities will be carried out on Spanish territory (in more than one autonomous region). The local franchiser, who only acts within the confines of a single autonomous region, has the duty to be listed in the Register of the Autonomous Region where they carry out the business.

Hotel Management Contract

  • Definition: A hotel management contract is an arrangement whereby a hotel’s owner contracts with a separate company, or an operator, to run a hotel.
    • The owner retains limited control over the operation of the asset, often through measurable performance standards, albeit that the owner retains more risk than if the hotel were leased to the operator.
    • An operator, or hotel management company, hired to run a hotel business will provide supervision, expertise, established methods and procedures, and normally also a track record of verifiable past performance.
    • The operator runs the hotel for a fee according to specified terms negotiated with the owner.
  • Term:
    • The initial term of a management contract is the length of time that the agreement is to remain in effect. Initial terms usually last 10, 15, or 20 years, depending on the brand and positioning of the operator selected.
    • Renewal terms generally extend the total length of an initial term. This is commonly done by mutual consent and is rarely unilateral. In general, renewal terms occur in multiples of five years, occasionally ten.
  • Operating Fees: An operator will typically receive remuneration from the owner, often termed a base fee, in exchange for performing the duties specified in the contract.
    • Base fees typically range from 2% to 4% of total revenue.
    • In addition to the base fee, an operator usually receives an incentive fee based on a percentage of profits.
  • Operator Guarantees: An operator guarantee ensures that the owner will receive a certain level of profit. If this level of profit is not achieved by the operator, the operator guarantees to make up the difference to the owner through their own funds.
    • For example, if the contract states a guarantee of 1,000,000 per annum, and the operator only achieves 800,000, the operator will then make up the remaining 200,000 from their own funds.
  • Owner Approval: Approval clauses set out the extent to which the consent of the owner is required for decisions affecting the operation of the hotel. These typically include budget, employment of key management positions, outsourcing, capital expenditure, and leases and concessions.