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Hotel Management Agreements and UAE Law

Published on : July 2015
Author(s):Sunil Thacker

Agreeing with your spouse to reimburse him or her after a shopping trip? A contract. Buying a plane ticket? A contract. Signing an offer letter from an employer who has offered you a job? A contract. A multi-page complex document laying out the terms and conditions of a high-value corporate deal? A contract. 

1rDoes contract law really serve any purpose? If so, why do businessmen often resort to and rely on ‘a man’s word’ knowing that a transaction may involve inherent risks?i  Even in the current investment climate, are contracting parties now employing more sophisticated or advanced risk planning and management policies or pleasantries and ambiguity in contracts still continue to operate?  If the objective of contractual clauses is to cement the relationship between the parties then why is such binding effect often flexible and informal? Would imposition of strict legal sanctions disrupt the relationship of two contracting parties? The term contract as per standard contract law textbook theory is nothing but meeting of ‘wills’ or ‘minds’. If the will is really free, why can it not change its mind? ii Will holding parties strictly to their promises, ‘ operate harshly and unfairly in many instances?’ii

By way of example, in the infancy stage of a transaction the parties are willing to accommodate the needs and demands of the other. But as with all infants, they grow up to be toddlers who now demand more and eventually into teenagers who cannot agree on anything. This is where future planning and drafting of agreements that relies on contract law plays an important role. Contract law indisputably forms the nucleus of most arrangements as it dictates, supports and controls the millions of agreements that collectively make up our economic nexus. Commercial transactions require parties to assure each other of certain rights and obligationns. This is where Contract law comes into play- both when drafting the terms sufficiently so as to ensure that the contract will be upheld in a court of law and in case where either party defaults on its obligations.

In order to understand how different a real deal is from a paper deal, sophisticated investors who have clear requirements often engage seasoned counsels and financial advisers in the planning process. When speaking of sophisticated and complex investments, the hospitality industry becomes a dire favorite discussion, primarily because the complexities and stakes involved in building, operating and managing a hotel property are intricate.
law comes into play- both when drafting the terms sufficiently so as to ensure that the contract will be upheld in a court of law and in case where either party defaults on its obligations.   Dubai’s thriving hotel industry recorded an average occupancy of approximately 85 percent in 2014. The statistics suggest that Dubai’s, and on a broader note UAE’s, hospitality landscape presents a significantly healthy prevalence of hotel operation and hotel management agreements therein.  
 

As the Middle East began to develop in the 1970s and 1980s and the subsequent need for hotel accommodation arose, the large international chains were first on the scene. Given the open and predominantly empty market such chains were free to enter into management contracts on their own terms. Yet as development continued and the tourist industry flourished in the 1990s, competition increased and owners began to insist on retaining more control over their properties in order to maximize their operating profits in the booming market. Predictably, the growing  market attracted further investment, thus having the effect that the number of operators in the Middle East increased. Strong competition within the industry has consequently resulted in incentive fees, shorter contract periods, fewer renewal options and strict performance clauses. The dynamics of hotel industry and hotel management contracts have clearly witnessed a dramatic change in recent years. The first installment of this two part series aims at covering some of these changes along with the broad areas of hotel management agreements in the UAE. In Part II (to be covered under Court Uncourt Volume II, Issue III) we will be looking at the different forms of hotel management arrangement in UAE and Qatar.

1qUnlike in the past, where American and European hotel operators predominantly had a fair share of footprint in managing hotel industry across the World, today developments in the field of science and aviation have increased opportunity for travelers globally, thereby increasing demand for hotels and a subsequent dilution in the once prevalent dominance. Although the power of international brand name continues to enjoy its privileges, competition in the hotel management industry has evidently resulted in the entry of new players, new ways and productive means of negotiating the hotel management contract with the owners. This competition is indeed healthy and allows operators and owners to fully determine the synergies and prospects before executing the deal. Based on experience, let’s take the case of a hotel management contract that is due for renewal.

ABC is the owner of a plot and appointed JKL as their hotel operator almost fifteen years back. The term of the hotel management contract was limited to fifteen years, and ABC and JKL will now need to sit and re-negotiate the terms of renewal. Emphasis here is on the ‘renewal’ process and technicalities surrounding therewith. Prior to or during the course of renewal, each party is likely to have thought over the renewal process and those terms of negotiating the contract that will serve theirbest interest. During the process, each party is advised by their counsel on conditions precedent for renewal under the present contract. One of such conditions agreed mutually by owner and operator is refurbishment of the hotel property. The Parties are now posed with some serious questions including but not limited to the following:-

1-Treatment of employees during the refurbishment – whether the employees must be terminated from the existing pay roll, be retained or whether only key employees must be retained;

2- Role of operator during the refurbishment process and payment of management fees if the contract is silent in this regard;

3- Possibility of operator entering in to a non-disturbance agreement with owner for smooth operation of the hotel property and to ensure revenue generation is not hampered;

4- and Provisions relating to sale of hotel by owners and valuation of hotel property

The hotel management agreement, considered by many as cliché, is infact one of the key documents that acts as a moderator in defining the ownership and operation roles. Regardless of ABC and JKL’s respective positions, both are subject to the effects of the way in which the hotel is managed, and thus would mutually benefit from a contract structured in such a way so as to include the following provisions:-

-Term of appointment;

– Operator’s fees; 

-Operator’s obligations and guarantees;

– Owner’s obligations;

– Reserve Fund – Furniture, Fixtures and Equipment;

– Capital expenditure and insurance;

– Termination and events of default;

-and – Dispute resolution procedures

There is no denying that Dubai is set to see rigorous growth in the hospitality sector by 2020. The year 2014 saw positive amendments for the licensing of hotels in the region. Dubai Department of Tourism and Commerce Marketing (DTCM) formed a specialized office to oversee the licensing and approval procedure for hotels, and at the same time the period for preliminary consent was reduced to two months, as opposed to the earlier six months period. The Government now aims to provide land for development of three and four star hotels on favorable terms. It also aims to waive off the ten percent Municipality tax for hotels that are due to be operational by 2017. As such, foreign investors have varied options ranging from choosing a joint venture partner or owning and managing properties in designated areas.
 

While the options seem too many and too lucrative, a prudent party to such contract would not ignore the conservative nature and the infancy stage of legislative reforms within the hospitality domain in this part of the world. As the introduction to this article suggests- it is never the ‘getting in’ of a contract which causes trouble, but the ‘getting out’. Dubai has and continues to witness its fair share of court battles between parties that were once allies in hotel operations. Regardless of internationally acknowledged boiler plates, the need to intrigue local and legal customary usage remains a driving force for successful ventures in the UAE.