Thailand - Hotel Management Agreements

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General

1. Are Hotel Management Agreements (HMAs) common in your jurisdiction?

Yes. Internationally managed hotels tend to be concentrated in Bangkok and resort destinations, as expansion into second tier Thai cities has been slow.

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

Use of franchise agreements, particularly between operators and owners with strong track records, is increasing and sometimes preceded by a manchise arrangement (i.e. a managed hotel converts into a franchised hotel if certain criteria are satisfied). Leases are less common and used mostly by upstart operators.

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?

Thai law is most common in the HMA. There are instances where Singapore, Hong Kong or English law may be used and/or preferred by operators, depending on the transaction structure.

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

No. Although international operators normally have the right to manage hotels in Thailand by a local or an offshore entity, and this decision may be driven by tax considerations (i.e. the different withholdings rates on payments to the operator.)

Term and Termination

5. Is there a standard contract period of an HMA?

No, but a rule of thumb is 20 or more years for luxury/upscale brands and 10-15 years for midscale/economy brands or white labels.

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

Yes, the term is fixed. Early exit options for breach or underperformance are normally negotiated in the HMA. Termination on sale provisions in favor of the owner may be agreed, although exit payments normally are required. Implied termination is unusual in the HMA context.

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

Yes. Although the methodology to calculate fees/damages will depend on the governing law of the HMA.

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

Agreement between the parties.

Fees

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

The fee structure will depend on the operator and the brand, but in most cases will be calculated as a base management fees (against total revenue) and incentive fee (a sliding scale against (adjusted) profit).

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

License fees, centralized services fees, and marketing service fees are the most common, and additional fees will vary widely amongst operators and their a-la-carte services. Condotels and hotels with branded residence components are common in Thailand and there may be additional fees involved in these type of structures (e.g. fees for condominium association management, branded residence marketing fee).

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

Yes. The funds take the form of an FF&E Reserve that is calculated as a percentage of total revenue, taking into account the hotel's positioning. Accounting for these funds as a notional book entry may be agreed.

Performance and Operations

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

The standard is usually negotiated in the HMA but generally will be to operate to the standard of comparable hotels in the market and with aim to maximize profits, while taking into account other factors.

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

The GOP test, where the performance of the hotel is measured against the profit estimated in the annual budget, is the common measure. Depending on the strength of the parties, and the hotel segmentation, the RevPAR test, where the revenue per available room generated by the hotel is benchmarked against similarly positioned hotels, is a second test that may be used. In either case the operator normally has a right to cure before the owner can exercise a termination right of the HMA for underperformance.

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

Parent guarantees of the owner are common if the owner is an SPV granted land use rights by way of a lease. Operator guarantees are rare.

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

The owner is almost always the employer and the liable party for the hotel employees.

16. 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.

17. Who is responsible for insurance?

The owner. Some operators may seek to carry operational insurance in their name and to list the owner as an additional insured.

18. Does the HMA give rights in real estate in your jurisdiction?

No.

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

No.

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

No, but operators typically require owners to use best efforts to obtain an NDA.

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

This depends on the operator and whether it uses one agreement for its HMA or splits its agreements, and if split, there is usually a technical service agreement, license agreement, centralized services agreement and various side letters personal to the owner with key commercial terms on which the operator has agreed to deviate from its standard position.

Transfers and Assignments

22. What are the standard rights/restrictions in respect of transfer/sale of the hotel?

Operators will require consent to any change in the ownership structure, and consent can be withheld for a number of reasons, including if the owner fails the operator's compliance checks or is deemed a competitor.

23. 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.

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

No, unless the operator is a Thai-based hotel operator or already has real property assets in Thailand.

25. Is it usual to include provisions which enable the sale of the property with vacant possession i.e. without the brand?

No, but if agreed, the operator likely would require a termination fee.

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