Hotel Contracts

Until the 1950s, when hotel groups started their worldwide expansion, almost all hotels were owner-operated without needing any form of hotel contract. Today, while the majority of small and medium-sized hotels globally remain owner-operated or independent, in North America and Europe, large international properties are in the main under a brand agreement with some form of system affiliation, and despite the disruptive technological and distribution influences currently impacting the hospitality market this trend continues to grow.

Structure of Hotel Contracts

The structure of hotel brand and operational management contracts are now somewhat varied in format, and they continue to evolve to meet the trends and requirements of the hospitality and real estate markets. In the simplest of forms, under the various arrangements, the hotel group provides the licenses and services as follows:

• Hotel Management Agreement (HMA) – Operational management + brand
• Hotel License Agreement (HLA) – Brand franchise
• Manchise – HMA with a future option to convert to a HLA
• Referral – Affiliate brand membership
• Soft Brand – HMA or HLA with reduced brand requirements/profile
• White Label – Operational management (usually with HLA in a separate agreement)
• Lease – Business risk, operational management + brand
• Hybrid Lease – Shared business risk, operational management + brand

The most common forms of hotel brand and operational management contracts in emerging markets are the HMA and HLA. Lease agreements are relatively usual in mature hotel markets. In Europe, for example, they are most prevalent in markets such as Germany and Scandinavia.

See also on hoteldevelopmentguide.com:

• HMA Terms
• Hotel Contract Bargaining Power

Hotel Management Agreement (HMA)

A Hotel Management Agreement (HMA) is a legal service contract between a hotel Owner and a professional hotel management company (Operator) in which the Operator is hired to manage and operate the hotel on behalf of the Owner. Under an HMA, the Operator is responsible for the day-to-day management of the hotel, including staff hiring, marketing, revenue management, and guest services. At the same time, the Owner retains ownership of the property and assumes most of the financial risk.

The key features of an HMA are (a) Ownership and Management Separation: The hotel owner retains ownership of the property and is typically responsible for financing, maintenance, and major capital expenditures while the operator manages all aspects of hotel operations. (b) Fee Structure: The operator is paid through a combination of Base Management Fee (a fixed percentage of the hotel’s total revenue, commonly 2-4%) and Incentive Fee (a percentage of the hotel’s profit, e.g., gross operating profit or net operating income), designed to align the operator’s interests with the hotel’s financial performance, plus additional fees for services like marketing, loyalty programs, and IT support. (c) Responsibilities of the Operator: Oversee day-to-day operations, including guest services, staffing, marketing, and budgeting. Implement brand standards if the hotel operates under the operator’s brand. Use the operator’s global systems for reservations, revenue management, and loyalty programs. (d) Responsibilities of the Owner: Provide the property, fund major capital expenditures, and ensure compliance with local regulations. Pay operational expenses and any other costs not covered by the management fee. (e) Performance Standards: HMAs often include performance benchmarks (e.g., revenue per available room (RevPAR) or occupancy rates) that the operator must meet. If these standards are not achieved, the owner may have the right to terminate the agreement. (f) Duration: Depending on the market, hotel segment and relationship, HMAs are typically long-term agreements, lasting 10-25+ years.

The advantages of an HMA for the Owner are (a) access to expertise that professional management companies bring, such as industry expertise, established operational systems, and brand reputation. (b) Focus on ownership, property investment and long-term value while delegating operations to experts. (c) Global network access to established global distribution systems, loyalty programs, and marketing platforms. The disadvantages of an HMA for the Owner are (a) limited operational control as the owner has little say in day-to-day operations and relies on the Operator’s decisions. (b) The financial risk Owner bears most of the financial risk, including operating expenses, regardless of the hotel’s performance, and (c) long-term commitment as HMAs are notoriously tricky to terminate, even if the Operator underperforms.

The advantages of an HMA for the Operator are (a) expansion without ownership as HMAs are a tool that allows Operators to grow their brand and footprint without the financial burden of owning properties. (b) Revenue-linked compensation whereby the incentive fee structure aligns rewards with performance, motivating operators to maximise revenue and profitability. The disadvantages of an HMA for the Operator are (a) performance pressure as the Operator may face termination or financial penalties if they fail to meet performance benchmarks. (b) Profit dependency as incentive fees is tied to profitability, which can fluctuate based on market conditions or operational challenges.

The contract typically has an arrangement as follows:

The hotel brand Licensor / Hotel Operator grants (for a % of gross revenue) to the property owner’s Operating Company (Opco) the long-term right (usually not less than 15 years) to use their brand and ALSO to manage (for a % of gross profit) almost all functions of the property. The Opco, controlled and supervised by the Hotel Operator, will follow specified service standards and provide and maintain the product (including withholding from the P&L the necessary funding of FF&E) throughout the agreement and will participate in programs such as sales and marketing, training, inspection, etc. The Hotel Operator directly controls the Opco, which manages all of the business processes and employees of the business. However, the Opco remains under the ownership of the property Owner. Thus, the GM, Chief Accountant and Engineer report primarily to the Operator but, depending on the terms of the HMA, may also have some reporting obligations to the Owner.

Hotel License Agreement

A Hotel License Agreement or Franchise Agreement is a legal contract between a hotel Owner (franchisee) and a hotel brand (franchisor) that allows the Owner to operate the hotel under the franchisor’s established brand name, using its systems, standards, reputation and other intellectual property. In return, the franchisee pays fees to the franchisor, typically including upfront costs and ongoing royalties. Unlike with an HMA, the Owner is responsible for day-to-day hotel operations, either managing it directly or hiring a third-party operator.

The key features of a Hotel License/Franchise Agreement are (a) the use of brand and intellectual property, whereby the franchisor grants the franchisee the right to use its brand name, logo, trademarks, and other intellectual property. The hotel is marketed as part of the franchisor’s portfolio and benefits from its reputation, global marketing, and distribution systems. (b) The Owner’s responsibility as the franchisee is to manage and operate the hotel independently or through a third-party operator. The franchisor does not directly manage the property but provides guidance, tools, and brand standards. (c) Franchisor’s support in marketing and sales, including access to global distribution systems (GDS) and loyalty programs. Standardised operating procedures (e.g., design standards, guest experience protocols). Training for staff and access to centralised systems (e.g., revenue management, reservations). (d) Fee structure: Franchise agreements typically include an initial franchise fee (A one-time fee paid upon signing the agreement), royalty fees (ongoing fees based on a percentage of the hotel’s gross revenue (typically 4-8%) and marketing/reservation fees, contributing to the franchisor’s marketing fund or reservation systems. (e) Term and renewal: Franchise agreements usually last for a fixed term (e.g., 10-20 years) with renewal options, subject to meeting brand standards. (f) Brand standards and quality assurance: The franchisor enforces strict compliance with brand standards to maintain consistency across its portfolio, and periodic audits may be conducted to ensure compliance.

The advantages of a Hotel License/Franchise Agreement for the Owner (franchisee) are (a) brand recognition under a globally recognised brand increases visibility and attracts loyal customers, especially in competitive markets. (b) Access to global systems as franchisees benefit from established distribution channels, loyalty programs, and marketing platforms, reducing customer acquisition costs. (c) Operational flexibility as the Owner retains control over operations, allowing them to make localised decisions (within brand standards) or hire their own management team. (d) Lower risk associating with a reputable brand can reduce the risks of operating an independent hotel, particularly regarding marketing and guest trust. The disadvantages of a Franchise Agreement for the Owner (franchisee) are (a) high fees as ongoing royalty and marketing fees can be significant, reducing profit margins. (b) Limited independence as franchisees must strictly adhere to brand standards, limiting their ability to customise or differentiate the hotel; (c) operational responsibility, full responsibility for operations, which may require significant expertise and resources; (d) Reputational risk, for example, negative actions or incidents involving the franchisor’s brand elsewhere, can impact the perception of the franchisee’s property.

The advantages of a Hotel License/Franchise Agreement for the Operator (franchisor) are (a) rapid expansion as franchising enables the brand to expand its footprint without investing in property ownership or operations. (b) Revenue streams generate recurring income through franchise fees and royalties, minimising operational risks. The disadvantages of a Franchise Agreement for the Operator (franchisor) are (a) brand dependence relying on franchisees to uphold brand standards, and poor performance by one franchisee can damage the brand’s reputation, and (b) limited operational control with no direct control over the day-to-day operations of the franchised property.

Use cases for franchise agreements are independent Owners seeking brand power in competitive markets and wanting the advantages of an established brand, especially Owners who have the expertise to run a hotel but want to leverage a recognised brand for better market positioning. Franchise agreements are prevalent in limited-service mid-scale and economy brands with lower operational complexity.

The contractual arrangement of which is typically:

The hotel brand Licensor, usually a Hotel Operator, grants (for a % of gross or room revenue) to the property owner’s Operating Company (Opco) the long-term right (usually not less than 10 years) to use their brand. The Opco, controlled and managed by the owner, is obliged to follow specified service standards and provide and maintain the product (including required funding) throughout the agreement, and to participate in programs such as sales and marketing, training, inspection, etc., which also usually come at a cost. The Owner directly controls the Opco, which manages all of the business processes and employees of the business; thus, the GM, Chief Accountant and Engineer solely report to the Owner.

Manchise

A “Manchise” agreement in the hotel industry is a hybrid model combining management and franchise agreement elements. It is often used as a transitional arrangement or in specific markets where a combination of management and franchising makes sense. In the Management to Franchise Model, initially, the hotel is operated under a management agreement, where the brand (operator) oversees all aspects of the hotel’s operations. Over time, the agreement transitions into a franchise agreement, where the owner takes over operations while still using the brand’s name, systems, and support.

The dual-stage agreement is divided into (a) the management phase (transitional period), whereby the brand operates the hotel directly, providing expertise in areas such as marketing, operations, staff training, and compliance with brand standards, and (b) the franchise phase whereby after the management phase (usually a fixed number of years), the hotel transitions into a franchise model. The owner operates the hotel independently but continues to use the brand name and resources. The management phase is typically used to establish the hotel, train the staff, and ensure it meets brand standards before transitioning to the franchise phase.

Owners benefit from the expertise of a professional management company during the critical early years of operation. Over time, they gain operational control, reducing long-term fees associated with full management agreements. A Manchise allows the brand to expand its footprint quickly, as they don’t have to remain operationally involved long-term. The initial management phase ensures the hotel is aligned with brand standards, reducing the risk of brand dilution after the transition.

The Manchise model is most common in markets where there are (a) new hotel openings that require support for new hotels to establish themselves with the backing of a professional operator and (b) emerging markets where hotel owners are less familiar with international standards and prefer guidance before taking control, and especially when (c) owner-driven markets in regions like Asia or the Middle East, where owners often desire long-term control but recognise the need for professional management in the initial years.

Referral – Affiliate Brand Membership

Referral or Affiliate Brand Membership refers to a type of partnership where an independent hotel becomes part of a network or brand affiliation program without fully integrating into the brand’s standards, systems, or direct management. The hotel operates independently but gains the right to associate itself with a recognised brand or referral network. It does not adopt all the parent brand’s operational standards or branding elements.

Membership benefits include access to a Global Distribution System (GDS): The hotel is listed in the brand’s reservation and booking systems, making it more visible to international travellers and travel agents. The hotel benefits from the brand’s marketing campaigns, loyalty programs, and promotional activities. Guests are “referred” to the hotel via the brand’s network or loyalty programs. The hotel may use the brand’s name as a descriptor or in advertising (e.g., “An Affiliate of [Brand]”), but it is not fully branded as the parent hotel chain.

The property maintains its operational independence and autonomy regarding management, operations, and service standards. It is not typically subject to the same level of oversight or compliance as fully branded properties. Usually, the hotel pays a membership or referral fee, often structured as a percentage of room revenue or a flat annual fee. These fees are generally lower than the franchise fees required for full branding agreements.

This model is common for boutique or independently managed hotels that want access to the benefits of a more extensive network without losing their unique identity or incurring the high costs of full brand integration. Examples include independent luxury hotels affiliating with organisations like Preferred Hotels & Resorts or The Leading Hotels of the World. This type of agreement is particularly appealing for independent properties aiming to boost visibility and sales while retaining their operational independence and local charm.

Soft Brand

A “Soft Brand” refers to an independent hotel affiliating with a larger hotel chain’s marketing, distribution, and loyalty platforms while maintaining its unique identity, design, and operational independence. This arrangement blends the individuality of a boutique or independently owned hotel with the commercial advantages of being part of a global brand network.

The key characteristics of a soft brand are: (a) Maintains Independence: The hotel retains its name, character, and unique branding (e.g., design, architecture, and service philosophy) and is not fully integrated into the parent company’s strict branding standards like hard brands. (b) Access to Brand Benefits: The hotel gains access to the chain’s resources, such as global distribution systems (GDS) and gains from enhanced visibility in online travel agencies (OTAs) and booking platforms. (c) Loyalty Programs: Participation in the parent brand’s guest loyalty programs. (d) Marketing and Sales Support: Inclusion in global marketing campaigns, sales initiatives, and corporate accounts. (e) Operational Tools: Revenue management systems, staff training, and operational advice. (f) Flexible Standards: Soft brand hotels are not required to adhere to many of the rigid operational and design standards typical of fully branded hotels. Instead, they align with the parent brand’s broader quality expectations or specific service levels.

The advantages of soft brands for hotel Owners are they (a) preserve the uniqueness and can retain the hotel’s distinct identity and local charm, which often appeals to travellers looking for authentic experiences. (b) Providing global reach through affiliation with a worldwide brand increases the hotel’s visibility and access to a more extensive customer base, and (c) they can be cost-effective with lower costs compared to full branding agreements, as soft brands typically involve less stringent requirements and fees.

Examples of Soft Brands include: 

• Accor – MGallery and Handwritten Collection
• Choice – Ascend Hotel Collection
• Hilton – Curio Collection, Tapestry Collection and LXR Hotels & Resorts
• Hyatt – Unbound Collection, Destination by Hyatt and JDV by Hyatt
• IHG – Voco and Vignette Collection
• Marriott International – Autograph Collection, The Luxury Collection and Tribute Collection
• RHG – The Radisson Collection
• Wyndham – Trademark Hotel Collection

A soft brand is often suitable when (a) Owners want to retain the distinct character of their property while benefiting from global brand resources, (b) boutique and luxury properties with a solid local or historical identity that do not want to conform to the rigid uniformity of hard brands, and (c) in emerging markets where independent hotels are looking to compete with larger chains but are hesitant to lose autonomy.

White Label Operator

A “White Label Operator” is an independent company that manages hotels on the Owners’ behalf without using their brand name or identity. Depending on the agreement, the Operator manages the hotel under the Owner’s preferred brand or as an unbranded property. This arrangement provides professional hotel management services while allowing the hotel to maintain flexibility in branding or operate under a bespoke identity.

The key characteristics of a White Label Operator are (a) Independent Management Company: A white label operator specialises in running hotels but does not attach its own name or brand to the property. The hotel can operate under a third-party brand or a custom or independent name the Owner chooses.

(b) Professional Hotel Management: The White Label Operator oversees all day-to-day operations, including staffing, marketing, guest services, and revenue management, bringing expertise in hospitality management without requiring the hotel to adopt a specific corporate identity. (c) Flexible Branding Options: The hotel Owner has the freedom to decide whether to join a franchise or soft brand and let the White Label Operator handle the management or Operate as a fully independent hotel without affiliating with any brand. (d) Fee Structure: White Label Operators typically charge a management fee, a percentage of the hotel’s revenue, and sometimes include performance-based incentives tied to profitability.

The advantages of White Label Operators for Hotel Owners are (a) branding flexibility whereby Owners can choose to affiliate with a global brand or soft brand or remain independent without being tied to the operator’s identity. It is ideal for boutique hotels or properties in unique markets that thrive on individuality. (b) Expertise Without Overhead whereby Owners benefit from the Operator’s hospitality expertise, operational systems, and management capabilities without hiring their own in-house team. (c) Cost-Effective as White label operators are often more cost-effective than signing full management agreements with major hotel brands, as the fees are lower, and branding decisions remain to some degree with the Owner. (d) Owner Retains Control as Owners have significant input in branding, positioning, and other strategic decisions.

White Label Operators are prevalent with (a) Independent Hotels for a property wanting to maintain individuality while delegating management to experts. (b) Franchise Hotels whereby the Operator manages the property under a global franchise, but the Operator itself stays anonymous. (c) Asset Management Groups when property Owners want professional management without tying themselves to a single brand. Third-Party Operators like Highgate, Valor Hospitality, and Aimbridge Hospitality often act as white label Operators for branded and independent properties. Other smaller Operators manage unbranded luxury or boutique hotels using customised concepts.

Scenarios for using a White Label Operator are for hotels undergoing rebranding or ownership changes, needing professional management during the interim, cost-conscious Owners who want professional management without the premium costs of big-name Operators and Hotels in niche markets needing a tailored approach instead of rigid brand standards.

Lease Agreement

A Lease Agreement is a contract where the hotel Owner (Lessor) leases the entire property to a hotel Operator (Lessee) for a fixed period. Under this model, the operator assumes complete operational control and runs the hotel as a tenant, typically paying the Owner a fixed or variable rent. The Owner, in turn, is not involved in the hotel’s day-to-day operations.

The key characteristics of a Lease Agreement are (a) a fixed tenancy structure whereby the Operator rents the hotel property from the Owner for a predetermined period (e.g., 10-20+ years and assumes complete control over operations, staffing, marketing, and profitability, (b) the payment structure for the payments for Operator to Owner can be structured in several ways, via fixed rent with consistent rental payment, regardless of the hotel’s financial performance, variable rent based on a percentage of the hotel’s revenue or profits, or hybrid rent with a combination of fixed rent plus a variable component tied to the hotel’s performance. (c) Risk allocation is that the Operator bears the financial risk associated with running the hotel, including operational costs, revenue fluctuations, and market conditions, and the Owner is typically responsible only for structural maintenance of the property, as specified in the agreement. (d) The Owner has no operational role in the hotel’s management or operations; their role is limited to property ownership and receiving rental income.

The advantages of Lease Agreements for the Owner are (a) a steady income with consistent revenue for the property owner, regardless of hotel performance; (b) there is no operational burden as they are not involved in the complexities of running the hotel, reducing their risk and management responsibilities and (c) predictable financial returns are ideal for investors looking for stable, long-term income without exposure to operational volatility. The disadvantages of Lease Agreements for the Owner are (a) limited upside as the Owner does not benefit from the hotel’s success beyond the agreed rent, even if the hotel generates significant profits, and (b) risk of the Operator defaulting if the Operator struggles financially or defaults on rent payments, it can affect the Owner’s income stream.

The advantages of Lease Agreements for the Operator are (a) Full control and complete autonomy to run the hotel as they see fit, making strategic and operational decisions independently, (b) profit retention, retaining all profits after rent and operating costs are paid, allowing for potentially higher returns if the hotel performs well and (c) flexibility in branding as subject to the terms of the lease the Operator can choose to operate under their brand, a third-party brand, or as an independent property. The disadvantages of Lease Agreements for the Operator are (a) the financial risk as the Operator bears the total financial burden of running the hotel, including market fluctuations and unexpected costs, and (b) high initial investment as lease agreements often require significant upfront capital investment from the operator to fit out or renovate the property.

Lease Agreements are popular (a) with Institutional Investors, real estate investors or property owners (e.g., pension funds) who want a steady income stream without managing operations. (b) with Established Operators and hotel companies with strong financial backing and operational expertise who are willing to take on the risks and rewards of running the property. In (c) Strategic Locations with properties in prime locations or with high demand, where the operator expects to generate significant profits.

Lease agreements are more common in Western and Central Europe, where institutional property owners lease hotels to established operators like Accor, IHG, or Hilton. Third-party Operator companies like Pandox or Event Hotels lease properties from Owners and operate them under various brands.

Hybrid Lease

A Hybrid Lease in hotel management agreements is a variation of a traditional lease agreement (see above) that blends elements of both fixed lease agreements and variable revenue-sharing agreements. It aims to balance risk and reward for the hotel Owner (Lessor) and the Operator (Lessee). This structure offers the Owner a guaranteed income while allowing them to benefit from the hotel’s financial performance if it exceeds expectations.

A Hybrid Lease has a mixed payment structure. The Operator (Lessee) pays rent to the Owner (Lessor) based on a combination of fixed and variable rent. The predetermined fixed base amount provides a stable income stream to the Owner regardless of hotel performance. A percentage of the hotel’s revenue, gross operating profit (GOP), or net operating income (NOI) allows the Owner to benefit from high performance. The fixed rent ensures the Owner receives a minimum guaranteed income, even in low-performing periods. The variable rent component incentivises the Operator to maximise the hotel’s performance, as both parties benefit when revenue or profits increase.

The Operator typically retains complete control over the hotel’s day-to-day operations, much like in a traditional lease agreement. However, some hybrid lease agreements include performance clauses that require the Operator to meet specific financial targets. The hybrid model can be customised based on the property type, location, and market conditions. For instance, the fixed rent may be adjusted annually (e.g., based on inflation or market trends). The variable rent could have a cap or floor to limit extreme outcomes for either party.

The advantages of a Hybrid Lease for the Owner are guaranteed income, stability, and reduced risk of relying entirely on the hotel’s performance while giving upside potential, whereby the variable component allows the owner to benefit from market growth or exceptional hotel performance. The Operator shares some financial risk, aligning incentives to maximise profitability. The disadvantages of a Hybrid Lease for the Owner are the limited upside in poor markets and the dependence on the Operator’s performance and ability to run the hotel effectively.

The advantage of a Hybrid Lease for the Operator is that it lowers the financial burden as the fixed rent in a Hybrid Lease is usually lower than in a pure lease model, reducing the operator’s financial risk during downturns. The hybrid structure motivates the operator to boost revenue and profitability since they directly benefit from variable payments. The disadvantage of a Hybrid Lease for the Operator is revenue pressure to meet revenue targets due to the variable rent component and complex agreement terms, whereby negotiating and managing a Hybrid Lease can be more complicated than a traditional lease or management agreement.

Hybrid Leases may be appropriate in new or unproven markets with uncertain demand, as they provide a safety net for the owner while offering flexibility for the operator. Both parties want to share the upside of solid market performance for high-value properties such as luxury or high-profile properties. In seasonal locations such as resorts, Hybrid Leases can accommodate fluctuations in revenue by blending fixed and variable payments.

Examples of Hybrid Lease Structures:

• Base Rent + Revenue Percentage: The operator pays a fixed base rent plus a percentage of total room revenue (e.g., 10% of annual gross revenue).

• Base Rent + Profit Sharing: The owner receives a fixed rent plus a percentage of gross operating profit (GOP) or net operating income (NOI).

• Agreements may include performance clauses requiring the operator to meet minimum revenue or profit thresholds, with penalties if targets are not achieved.

A Hybrid Lease is used when Owners seek stability with upside potential, which is ideal for property Owners who want a guaranteed income but also wish to capitalise on strong market performance. When Operators need flexibility, it works well for Operators who wish to minimise fixed financial obligations while aligning incentives with performance. A Hybrid Lease may be suitable in markets with fluctuating demand, where a fully fixed rent structure may not reflect performance accurately.