Hospitality Industry Takes A Major Stride In The Last Decade

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...