With the rise of “reverse” hotel management agreements (HMA), efficiently negotiating with international hotel operators makes it possible for owners to reconcile investment profitability with operational and financial risk control.

1/ The objective for the owner is to manage the financial ramifications of transferring the management of hotel staff

Hotel owners considering a reverse management agreement need to be aware of the financial ramifications of transferring the management of hotel staff to the operator (usually affiliated to an international hotel group, the only entity capable of offering this type of à la carte service). In fact, even though the operator is considered the legal employer under a reverse HMA, the owner is still financially responsible for payroll costs.

With this in mind, French hotel owners should pay particular attention to the following points in a reverse management agreement:

• Operator’s powers: the operator will exercise sole authority over hotel staff, holding both management and disciplinary powers. In other words, the operator will manage all individual and collective working relationships, without any intervention from the owner. Should the owner intervene, it risks incurring liabilities, such as those relating to co-employment, and could even face termination of the HMA for fault.
• Payroll cost control: although the operator will assume the role of employer, the owner needs to ensure that staffing costs are contained. In this respect, the HMA must clearly stipulate salary conditions, especially for the General Manager and hotel executives. Pay levels should be in line with the brand’s practices and those of similar hotel properties – often monitored through benchmarks. The parties need to agree on the budget allocated to staff recruitment and management.
• Budgeting and transparency: another key aspect is the discussion between the owner and operator during the annual budget process. The owner must be informed of and involved in decisions concerning any changes in expenses (e.g., recruitment, training, employer contributions) or any redundancies or disputes.

2/ The objective for the operator is to understand the risks and negotiate financial assurance

One of the operator’s main concerns when negotiating a reverse HMA is to protect itself against the risks associated with a drop or interruption in hotel trading. The operator should not have to suffer the consequences if revenues are insufficient to cover operating expenses – including payroll costs.

For this reason, operators almost always require financial assurance, usually in the form of an on-demand guarantee (“GAPD” in French). Alternatively, the owner may choose to provide a bank guarantee (“caution bancaire”). This point is often at the crux of negotiations, since the provision of a bank guarantee (“garantie bancaire”, different from a “caution bancaire”) represents a significant additional cost for the owner, who must maintain this guarantee throughout the term of the management agreement.

Operators usually prefer an on-demand guarantee (“GAPD”) from a bank, rather than a “corporate” guarantee that is less protective of its interests. The theoretical risk to which the operator would be exposed must therefore be quantified and capped. Some risks, such as fire or water damage, are covered by insurance, while others (COVID-19, for instance) are partly covered by the State. The maximum financial risk with regard to staff roughly equates to the total cost of making staff redundant – this is what the owner would have had to pay in the worst case scenario, in the event of a drop or interruption in hotel trading.

This guarantee issue needs to be addressed from the pre-contractual stage, ideally when drawing up the term sheet. Providing a “corporate” guarantee, usually issued by the owner’s holding company and constituting an off-balance sheet commitment for the entire term of the agreement, should not be played by ear.

3/ The objective for both parties is to properly manage the agreement’s termination, and the fate of hotel staff

It should be expressly stipulated in the HMA what will happen to hotel staff when the agreement expires or if it terminates early. In this respect, it is often specified that staff will, by law, be transferred to the business owner that takes over the hotel’s management. This is entirely theoretical, however, since the owner will in any case entrust the management of staff to the current operator’s successor.

The potential new operator will negotiate the terms of its succession with the hotel owner after having carried out a social audit. The transfer of staff from the current operator to the new operator generally happens fairly smoothly on the basis of a three-way agreement and agenda. That said, the issue can be more complex if the owner and the incumbent operator part on bad terms.

The HMA must also clearly stipulate that if the conditions of article L. 1224-1 are not met, the owner will undertake to make its “best efforts” to ensure the transfer of employees to the operator’s successor. It is also important for the agreement to specify that if the hotel closes permanently (again, a fairly theoretical scenario), it is down to the operator to make staff redundant. This is why HMAs outline the operator’s obligations regarding the transfer or reclassification of staff, as well as the redundancy procedures to be followed and the agenda prior to closure.

Reverse hotel management agreements (always drawn up by operators, let’s not forget!) habitually stipulate that redundancy costs, compensation and any other sums owed to staff are to be regarded as expenses to be reimbursed to the operator, unless it is at fault. These costs and expenses are fully covered by the previously mentioned guarantee and form part of the final settlement in the event of the agreement’s termination.

Christopher Boinet
FR – IE Paris – Avocats
In Extenso Avocats