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Unformatted text preview: Copyright 2003 Graham & Dunn PC. All rights reserved. 1 MANAGEMENT CONTRACTS AND FRANCHISE AGREEMENTS IN THE SALE OF A HOTEL By Irvin W. Sandman Chair, Hospitality, Beverage and Franchise Team Graham & Dunn PC I. INTRODUCTION The purchase and sale of a hotel is, in many respects, no different from the sale of other kinds of real estate. Due diligence is conducted, agreements are drafted and signed, real estate and personal property are transferred at closing, expenses are pro-rated, and the purchase price is financed and paid. But a hotel is not just real estate. It is also an active business in a very specialized industry that has developed unique kinds of relationships. The way hotels are managed and franchised are primary examples of the unique kinds of relationships that exist in the hotel industry. If these relationships are not properly handled in the sale context, many problems can arise and the value of the hotel can be damaged. This article discusses how to effectively evaluate and handle management and franchise relationships and agreements in the sale of a hotel. II. MANAGEMENT CONTRACTS Typically, hotels operate under one of two different configurations. In the first configuration, the hotel is run by a management company that owns a prominent brand and that operates the hotel under that brand. A management company of this kind is often called a “branded manager.” The relationship between the branded manager and the owner is usually governed by a detailed management contract. The contract is long and complex because the branded manager needs to protect its brand and assure that it will be able to operate the hotel in a way that builds the brand, or at least does not hurt it. In the second typical configuration, the hotel operates under a brand that the owner franchises pursuant to a franchise agreement. If the owner does not operate the property itself, then the owner may hire a non-branded manager to run the hotel. These non-branded management agreements tend to be shorter and less complex because the management company does not have 2 its own brand to protect while operating the hotel. A. Branded Management Contracts The branded management contract creates a relationship that is rather unique to the hospitality industry. Under it, the management company brings with it an established brand that it owns, and it operates all aspects of the hotel in accordance with “brand standards” that the management company has established. To the guest, the hotel appears as though it is owned by the brand owner, not the hotel owner. The branded manager uses many programs to drive guests to the hotel, such as frequent guest rewards programs and branded marketing programs. Accordingly, most branded managers believe that they, not the owner, “own” the guests and their goodwill....
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- Spring '08
- Branded Manager