Hotel Management Agreement Performance Test

In the Indian context, although owners have been successful in obtaining the right to accept/refuse an extension through the mutual agreement condition, a performance-based extension is rare, as shown in Figure 2. The HMA should also be closely examined the operation of the force majeure carve-out, in particular with regard to performance control. For example, if a force majeure event and its likely effects on turnover and profits at the time of the agreement or determination of the annual budget are the operator`s knowledge, there may be wording preventing such an event from being used to neutralise the gop test, given that such aspects should have been taken into account at that time. The right to healing should not be unlimited and should allow only one or two healing rights for the duration of the management contract; As a general rule, HMAs also contain a general clause on the case of force majeure, under which one of the parties is released from its obligations and is not violated when such a performance is prevented due to an event of force majeure. These vary in nature. Sometimes they only provide that the period for performance of the obligation in question is extended accordingly and that the parties consult each other on the best way to overcome and mitigate the force majeure event. However, some clauses may include a long stop date which, in the event of a persistent force majeure event, creates a right of termination for one or both parties for a given period. Such clauses may apply if the effects of the virus persist over a long period of time, for example. B in case of long-term closure. If the management company has budgeted for gross revenue with too much optimism in the first of two years that the test was not passed, it can adjust next year`s budget to make budgeted gross revenue more accessible.

The owner should be wary of applying the management company`s healing payment for the two years to undercover or, at the very least, denying only the year for which the payment was made (useful if the test applies for two out of three consecutive years); Other non-financial performance tests: the number of non-financial tests based on the results increases. The integration of these tests allows for a more comprehensive assessment of the operator`s management capabilities. Some examples are TripAdvisor reviews; the number of materialized bookings generated by the operator`s distribution system compared to those generated by ASAs or third parties; the effectiveness of the sustainability measures taken by the operator; and, among other things, levels of customer and staff satisfaction. The operator may be able to overcome a test failure by paying the deficit to the owner, which is also generally referred to as the «right to heal.» The owner should always insist on aggressive and stretching budgets, not an easy-to-reach «softball budget», which could be offered by the management company after failing the first of two consecutive annual tests; Let the performance test measure the net income paid to the owner. This is difficult because management companies in a hotel-guV only measure their performance on expense lines over which they have no control, such as the FF&E replacement reserve, non-life insurance, property taxes, investments and especially debt service. But net income is ultimately the only result of the benefit that is really important to the owner. While performance mechanisms such as performance testing and incentive fees are common in the market, not all experts agree that these tests actually test and reward operators, based on how the hotel operates, but reflect market trends. As a result, some experts propose that the owners also take into account the performance of the hotel through the REVPar index, that is, to measure the market share that the operator has been able to gain through its management of the hotel. . .