Mexico - Hotel Management Agreements

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General

QUESTION ANSWER
1. Are Hotel Management Agreements (“HMAs”) common in your jurisdiction?

Yes. Major international brands always use an HMA. International brands generally use their own form of HMA applicable to all jurisdictions and they are adapted to the local jurisdiction in case necessary.

2. If not HMAs, what are the alternatives/what is commonly used?

The alternative is to have a lease. There are some situations where there is a combination of a commercial lease and an HMA in order to have the commercial lease registered in the Public Registry of Commerce when the term of the lease is longer than six years. This option is not generally accepted by international operators due to the fact that (i) commercial leases may not exceed a term of 15 years and (ii) rent will have to be paid to owner by the operator. 

3. Is it common or usual for the HMA to be governed by (i) local laws; (ii) the laws of one of the parties’ country of incorporation; or (iii) an alternative jurisdiction?

Subject to negotiation. US-based hotel operators typically push for Maryland law, which is favorable to Hotel operators, as the applicable law. Often the compromise is to have the above-property service agreements governed by US law and the property level operating agreements governed by Mexico law. 

4. Are there any significant or unusual points to note in respect of tax on HMA payments in your jurisdiction?

With US-based hotel operators, tax withholding and "gross-ups" can be significant modifiers of management fees. Most hotel operators require the hotel owner to pay for any withholding or similar taxes (including VAT) which apply to the fees to be paid to the operator under the HMA and related agreements. This is done by "grossing up" the fees paid to the operator so that the brand gets the same economic benefit from the negotiated deal as if no such taxes applied. 


Term and Termination

QUESTION ANSWER
1. Is there a standard contract period of an HMA?

Generally from 20 to 30 years.

2. Is the term usually fixed? Are early exit or similar options included (contractual or implied)?

The term is generally a fixed term and extension options are established. HMAs may be terminated early in case of breach by the parties which may include low performance or other criteria negotiated by the parties. 

3. Is it usual to include fees/liquidated damages for early termination?

In case of early termination due to a breach by any party, a conventional penalty (i.e. liquidated damages) may be negotiated in favor of the non-defaulting party.

4. What is the usual position in respect of renewal?

Renewal options are generally included in HMAs and it is subject to mutual agreement of the parties.


Fees

QUESTION ANSWER
1. Is there a standard fee structure for HMAs (e.g. base + incentive)?

The standard includes a base fee calculated on revenues and an incentive fee based on profits. 

2. What other fees and charges are there (such as royalties, accounting, marketing, license fees, etc.)?

Operators normally have license agreements, trademark license agreements etc.

3. Are owners typically required to set aside funds for fixtures and fittings?

FF&E reserves are very common.


Performance and Operations

QUESTION ANSWER
1. What is the usual standard imposed on an operator in respect of the operation of the hotel?

Contractual performance standards vary between operators, type of hotels, etc. 

2. What performance measures are commonly used in your jurisdiction?

Performance measures vary depending on the form of Hotel Operating Agreement (HOA) used by the operator and is subject to negotiation of the parties. As mentioned above, international operators tend to use their own forms applicable to all jurisdictions.

3. Is an operator or owner guarantee common in your jurisdiction?

Guarantees on both sides tend to be usual.

4. What is the usual position in respect of employees? With whom does the liability for the employees sit?

The owner employs all the employees, except top management, who are generally employed by operator. However, the operator has the right to select employees even though they are ultimately hired by the owner. 

5. Is it usual to have a non-compete clause, e.g. that no other property with that brand can open within a certain radius?

Yes. Non-compete clauses are common and may include a radius restriction which varies, depending on the market and brand.

6. Who is responsible for insurance? Insurance of the property will be at the owner’s cost.
7. Does the HMA give rights in real estate in your jurisdiction?

No.

8. Does the HMA need to be recorded against the property, if this possible in your jurisdiction?

No.

9. Where financing is taken is it standard to obtain a Non-Disturbance Agreement (“NDA”) as part of a management or lease agreement?

Yes; however, this may be a hard discussion with financial institutions especially in case of breach of the loan.

10. What other agreements usually sit alongside an HMA in your jurisdiction?

Depending on the operator, the following agreements may also be executed:

  • Technical Services Agreement
  • Trademark License Agreement
  • Pre-opening Services Agreement

Transfers and Assignments

QUESTION ANSWER
1. What are the standard rights/restrictions in respect of transfer/sale of the hotel?

Changes in ownership of hotel or change of control of the owner will often be subject to the operator's prior approval.

2. When a managed hotel is sold (either asset or share deal), is it usual in your jurisdiction that either the Operator's consent is required for the sale, or that the hotel may only be sold if the HMA transfers with the hotel?

Yes.

3. Do HMAs commonly include a right of first refusal for the operator to purchase the hotel?

No.

4. Is it usual to include provisions which enable the sale of the property with vacant possession i.e. without the brand? No.

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