Bahrain: Hospitality Industry Takes A Major Stride In The Last Decade

Last Updated: 3 July 2015
Article by Simon Green

The hotel industry has seen a significant rise in activity in Bahrain and the region at large in the last decade. Major international operators have entered the region in force, and have run successful and profitable operations. Most regional jurisdictions, however, have relatively restrictive laws with respect to international investors owning real estate. In addition, most operators are now disposing of their hotel property portfolios. As a consequence, few hotels in the region are owned by the operators. Instead local companies will own and develop the hotel and enter into management agreements with operators. This article is the first of two which looks at hotel projects in Bahrain, and this article briefly examines the structure of the Hotel Management Agreement (HMA) (the central contract in hotel projects) and the wider suite of ancillary agreements. The second article, which will appear next month, will address some of the key issues to consider in relation to the provisions of a HMA.

Under the HMA, the owner or developer of the hotel (Owner) appoints an operator (Operator) (often a household name in the hotel industry such as the Four Seasons which opened earlier in the year in Bahrain Bay) to operate the hotel on an exclusive basis. While all HMAs will share a common anatomy, their structure and content can vary widely among Operators.

Being less frequent commercially than, say, loan agreements or construction contracts, HMAs do not come in standard forms, and are individually tailored to reflect the commercial bargain of the parties. Key areas such as fees and termination are often so heavily negotiated that the agreement reached is complex and unique to that particular hotel project.

Due to the size and scale of many operators, and the commercial success their depth of experience will bring to a hotel project, most Operators will require the HMA to be on their standard form agreement. These days most major Operators have developed significant in-house legal capability, relegating the Owners to the other side of a distinct knowledge gap. For these reasons the prospective Owner would be well advised to engage specialist legal counsel.

While the HMA is the main contract, a hotel agreement between an Operator and an Owner can require several other ancillary contracts. If the hotel has yet to be developed, the parties may enter into a Technical Services Agreement, which requires the Operator to provide certain consultancy services to the Owner (for a fee) to ensure that the hotel's construction meets the Operator's requirements and specification. If the Operator offers additional hospitality services (e.g. a club loyalty programme or centralised booking services) there may be a Central Services Agreement to govern such matters (although if not too complex in nature, these additional services may be dealt with in the body of the HMA). Many major Operators require a separate IP Licence Agreement relating to the use of the Operator's brand by the Owner. Finally, where the Owner is seeking finance in relation to the development or acquisition of the hotel, the Operator may require a Non-Disturbance Agreement to ensure its continued operation of the hotel without Simon Green Partner, Head of Real Estate & Development, interference from the financier.

A successful hotel deal should see the Owner achieving profits as a result of the Operator's experience and expertise in running hotels. In return, the Operator receives a fee, which can be structured to include one or more of a basic management fee, an incentive fee (usually profit based), a licence fee and fees for other mandatory billable services. Owner's however should be on guard against risk allocation provisions in the HMA which can rapidly erode their margins for such profit.

Prior to each year of the HMA term, the Owner and Operator will agree an operating budget which covers the revenue and expenses for the forthcoming year. There are usually two main accounts; the Operating Account and the FF&E Account (Furniture, Fixtures and Equipment). Hotel revenue goes into the Operating Account to cover operating expenses, and where there is a deficit, may require a "top-up" from the Owner.

The Operator will be entitled to use the Operating Account for the payment of expenses which have been agreed pursuant to the operating budget or otherwise in accordance with the HMA. The Operator will pay a certain amount from the Operating Account into the FF&E Account to cover expenditure on, replacement or substitution of the FF&E during the term. The Owner will be obliged to ensure that there is sufficient monies in the FF&E Account to meet the FF&E requirements pursuant to the operating budget.

The Owner is typically responsible for undertaking any repairs to the hotel of a structural or capital nature. If the Owner fails to undertake such repairs, the Operator may be able to do so from the FF&E Account.

Following the payment of all operating expenses, the contribution to the FF&E Account and the payment of the management fees, the Operator is usually under an obligation to remit to the Owner any remaining funds (if any) held in the Operating Account.

Consequently, the provisions regarding the operating budget and ensuring that the Owner has sufficient control over the Operator (both in relation to its powers as well as in relation to its permitted expenditure) are essential.

Another key provision within a HMA relates to the calculation and payment of the management and related fees. In this regard, there is no one size fits all position. Each HMA will be different and will reflect the commercial agreement of the parties. A current emerging trend is the introduction of enhanced risk/ reward alignment (arguably in the Owner's favour) within the HMA structure.

Previously, the normal fee structure was known as "three plus ten" (where the Operator's fees were 3% of revenue and 10% of profit). This was not efficient at aligning risk and reward as the Operator could usually make a sufficient return from the revenue based fee so that even if the hotel failed to make a profit, the HMA was still profitable for the Operator.

In our experience, there has been a gradual reduction in the quantum of base fees and a corresponding increase in the level of incentive (i.e. profit based) fees resulting in closer alignment between both the Owner's and the Operator's ultimate remuneration from the bargain.

In Part 2, we will highlight a number of key issues to consider in relation to the main terms within a HMA and examine further some of the points mentioned above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions