Termination of Hotel Management Agreements - When Things Go Wrong

Very few in the hotel industry will be unaware of the recent problems affecting the Banyan Tree Al Areen resort in Bahrain (which we understand may be rebranded as "Al Areen Palace and Spa" subject to receipt of necessary approvals). As experienced industry professionals know, one of the toughest decisions to make in relation to development of a new hotel is finding the right partner – whether you are an owner or an operator. This is usually the single most important consideration and much time and effort will be spent on selecting the right brand which fits the hotel project. However, finding the right brand to achieve the best returns for an owner and enhance an asset's value, financing and operational success is not the only consideration. Of equal value is the relationship, particularly given the long-term nature of a hotel management agreement (30-50 years is not uncommon, and some run to longer than this). We have seen the recent boom of the Gulf hotel industry and this is a wonderful wave to ride. However, a long-term view must be taken to ensure that you have the most appropriate tools (and partner) to ride out the tough times when (not if) they happen. Unfortunately for Banyan Tree and Al Areen, the relationship appears to have disintegrated, with accusations and counterclaims being issued on both sides. Ultimately, it is not just the asset that will suffer, but also the brand value of the operator and, of equal importance, the employees are become caught in the middle. There is very rarely a win-win solution in these cases. How to find that perfect partner? It is never going to be perfect, however a robust and carefully managed Request for Proposal (RFP) process will go a long way towards ensuring that both parties interests are aligned through the life of the management agreement. It will help to show whether the parties share the same vision of what the hotel should be and how it should operate, and should enable the parties' interests to be balanced, so far as possible. Consideration of the owner's ambitions, the specifics of the project and the underlying market conditions and competition against a list of potential operators and brands, with open and transparent negotiation of commercial terms, should give both parties comfort that the partnership ultimately entered into is the right one. When the relationship crumbles...? Termination of a hotel management agreement is not something to be undertaken lightly. In my experience...