Norway - Hotel Management Agreements

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General

QUESTION ANSWER
1. Are Hotel Management Agreements (“HMAs”) common in your jurisdiction? HMAs are widely used for upper tier hotels under a brand and in brand franchise hotels. Whilst similar, the two forms of HMA have many differences.
2. If not HMAs, what are the alternatives/what is commonly used? Lease if not franchise is the alternative, which is also quite common between Norwegian parties outside the big international chains. Most hotel operators resist taking a real estate interest and the growth of corporate owners (and investment into them) with internal operating capacity has seen a growth in franchised hotels.
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? HMAs in Norway with international chains as operators will commonly be governed by English law. Between Norwegian operators and Norwegian property owners, Norwegian law would apply.
4. Are there any significant or unusual points to note in respect of tax on HMA payments in your jurisdiction? No, but this largely depends on corporate structures. At a simplistic level there should not be, but VAT and withholding issues on payments should be viewed.

Term and Termination

QUESTION ANSWER
1. Is there a standard contract period of an HMA? HMAs for branded operators tend to be longer in duration (20+ years).
2. Is the term usually fixed? Are early exit or similar options included (contractual or implied)? The norm is for an HMA term to be fixed. Under Norwegian law it is unlikely an HMA could have implied early termination (for convenience) rights.
3. Is it usual to include fees/liquidated damages for early termination? Exit fees for early termination will definitely be included if accepted by the owner in the first place. Exit fees must always be viewed in respect of the terms for the financing of the property to avoid breach of the financing conditions. The level of fees can vary widely depending on a number of issues (e.g. location, brand, scale).
4. What is the usual position in respect of renewal? This varies between different operators. Usually, HMAs will be extendable in tranches of 5 or 10 years. This can be mutually agreed or at the operator’s discretion.

Fees

QUESTION ANSWER
1. Is there a standard fee structure for HMAs (e.g. base + incentive)? Fee structures vary between operators. The standard is a base fee calculated on revenues and an incentive fee based on profits. Some branded operators may intersperse this with royalty fees.
2. What other fees and charges are there (such as royalties, accounting, marketing, licence fees, etc.)? As above, branded operators may require royalty fees and most require marketing contributions and other fees for certain centralised services, which may or may not be optional (e.g. accounting services).
3. Are owners typically required to set aside funds for fixtures and fittings? An FF&E Reserve is common in HMA agreements. Contributions and how it is operated can vary widely depending on practical matters associated with the hotel(s) (e.g. is the hotel part of a portfolio, the hotel’s age, standing etc).

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 hotel etc.
2. What performance measures are commonly used in your jurisdiction? A performance test is fairly standard (together with a termination right for failure to meet such a test), but the type and nature can vary depending on the operator, nature of the hotel, location, etc. A standard performance test would consider achievement against budget and/or against a competitive set of local or similar hotels.
3. Is an operator or owner guarantee common in your jurisdiction? For branded operators, an operator guarantee would be unusual. For more ordinary lease structured agreements a guarantee would often be more usual, depending on the initial investments in the hotel made by the owner.
4. What is the usual position in respect of employees? With whom does the liability for the employees sit? The operator would normally be the employer, but it could be either.
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? Non-compete clauses are common and usually negotiated.
6. Who is responsible for insurance? The owner is responsible for the cost of property insurance (even if sourced by the operator) and the operator may put operational insurances in place (albeit this would be an operating expense).
7. Does the HMA give rights in real estate in your jurisdiction? Not in itself. However, where key money is granted or rights of first refusal on a sale etc., restrictions can be registered on the title of the hotel.
8. Does the HMA need to be recorded against the property, if this is possible in your jurisdiction? It can be, but normally not the HMA itself. However, specially agreed rights and terms in relation to the property as such given to the operator under the HMA may be recorded, as per the above.
9. Where financing is taken is it standard to obtain a Non-Disturbance Agreement (“NDA”) as part of a management or lease agreement? This depends on the bank and the operator. Traditionally, NDAs have always been required where there is finance and a management agreement.
10. What other agreements usually sit alongside an HMA in your jurisdiction?

There could be a number of different agreements depending on the operator, these include:

  • (Brand) Licence Agreement
  • Central Services Agreement
  • Technical Services Agreement – on a new build or redevelopment
  • Central Reservation Services Agreement.

Transfers and Assignments

QUESTION ANSWER
1. What are the standard rights/restrictions in respect of transfer/sale of the hotel? Transfer rights under HMAs can vary widely. Commonly, operators will require consent to any change in ownership of the hotel. There may be restrictions on transfers to competitors, restrictions in relation to financial covenant strength and “reputation” tests.
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? Traditionally this has been common in standard international HMA agreements.
4. Is it usual to include provisions which enable the sale of the property with vacant possession i.e. without the brand? More recently this has been sought by owners. A standard HMA will not provide for this and if it is ever given, there is usually an exit fee.

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