The decision that shapes everything else — made long before any lawyer sees a management agreement
Every hotel management agreement negotiation begins from a decision made earlier, and often with far less rigour than it deserves: which operator, and which brand, should run this hotel? By the time lawyers are engaged to negotiate fees, performance tests, indemnities, or termination rights, the owner has usually already chosen its partner. Yet that choice, made at the very start of a project that will typically bind the owner for fifteen to thirty years, does more to determine the hotel’s eventual commercial success — and the owner’s later room to manoeuvre — than almost anything negotiated afterwards. This is the first article in a series looking at the issues owners face across the life of a hotel management agreement, and it is fitting to start where the owner’s own journey actually begins.
Step One: Define the Product Before You Choose the Brand
Most owners approaching this decision already have a property, or a site, in mind. What they do not always have, at least not with real precision, is a clear answer to the question of what kind of hotel that property should become. A transit or traveller’s hotel serving business and leisure guests passing through is a fundamentally different product from a destination resort built around leisure stays, which is again different from a business-focused hotel anchored to a commercial district, which is again different from a luxury, top-end property competing for the smallest and most demanding segment of the market. Each of these carries its own expectations around average daily rate, occupancy pattern, seasonality, and guest profile.
Layered on top of this is the question of whether the hotel should stand alone or form part of a larger mixed-use development — combined with a retail podium, an office tower, or a residential component, and if residential, whether those residences should themselves be operator-branded. Branded residences in particular have become an increasingly significant feature of new developments, but they introduce their own separate negotiation track, generally run in parallel with the hotel HMA and requiring close coordination with the project’s broader design and financing teams.
None of these choices can be made in isolation from the owner’s budget. A higher market segment is not simply a marketing decision — it carries a direct and substantial build cost impact. Moving up the segment ladder typically means higher specification finishes, a larger and more varied food and beverage offering, spa and wellness facilities, larger meeting and event space, and higher staffing ratios, all of which must be underwritten by a construction and financing budget that genuinely supports them. A positioning decision made without rigorous reference to the owner’s actual capital capacity is one of the most common and costly mistakes at this stage, and is properly the subject of a feasibility study before any operator conversation begins in earnest.
Step Two: Match the Brand to the Segment — and Understand What the Brand Actually Delivers
Once the segment and product type are settled, the question becomes which specific operator, and which specific brand within that operator’s portfolio, is the right partner. This is where owners should look well beyond name recognition alone. Relevant factors include the strength and recognition of the brand specifically within the chosen segment and source markets, the operator’s genuine track record in the relevant hotel type — a brand with a strong reputation in urban business hotels does not necessarily bring the same expertise to resort or leisure operations — and, increasingly importantly, the strength of the operator’s loyalty programme and distribution system.
Loyalty programme strength is not a soft or secondary factor. A large, active loyalty membership base is a genuine driver of direct bookings, repeat guest revenue, and rate stability, and can materially reduce a hotel’s reliance on higher-cost third-party distribution channels. Where an operator can credibly cross-feed demand between its own portfolio brands within a market — moving guests between a full-service flagship and a nearby select-service property under the same loyalty umbrella during periods of high demand — that capability has real, measurable commercial value to an owner, and is worth probing directly rather than assumed.
Step Three: Understand the Fee and Term Correlation — and the Full Fee Picture
As a general pattern across the industry, lower star-rating and budget-segment agreements tend to carry shorter terms and lower fees, while upscale and luxury brand agreements carry longer terms, often running fifteen to thirty years, and higher total fees. Owners should resist evaluating this purely on the headline base management fee, which typically runs in the region of 2% to 4% of total revenue, with 3% being the most common figure. The base fee is only one layer of a considerably larger fee stack that commonly also includes an incentive management fee tied to profitability, reservation fees linked to bookings generated through the operator’s own systems, loyalty programme charges that can range from roughly 2% up to 5% or 6% of relevant revenue for the largest global points-based programmes, marketing and system fund contributions, and a range of further technology, training, and centralised service charges.
Requesting a complete, itemised schedule of every fee and charge at an early stage — rather than negotiating the base and incentive fee percentages in isolation — is essential to understanding the true, all-in economic cost of the relationship being entered into. Cumulative brand-related fees have also been rising faster than revenue growth across the industry in recent years, making this full-fee-stack analysis more important now than it may have been in the past.
Step Four: Check for Brand Proliferation and Portfolio Competition
Modern global hotel companies operate extensive, and still growing, brand portfolios — major hotel groups have on average roughly doubled the number of brands in their portfolio since 2014, often now operating in the region of twenty or more distinct brands simultaneously. This matters directly to an owner’s exclusivity expectations. Owners often assume that signing with a major operator secures a degree of market exclusivity, but exclusivity provisions in modern agreements are increasingly narrow, and they virtually never extend to protect against the same operator introducing a different, directly competing brand from its own portfolio into the same market.
An owner should ask directly, before committing to a brand: what other brands does this operator currently have, or plan to introduce, in this market, and what — if any — genuine contractual protection exists against a sister brand opening nearby. This is not purely a negative consideration; a well-coordinated multi-brand cluster from the same operator can, as noted above, create real cross-feed demand benefits. But an owner needs to understand clearly which side of that dynamic its own hotel is likely to sit on before signing, rather than discovering the answer after a competing sister-brand property opens two streets away.
Step Five: Management Agreement or Franchise — the Underlying Structural Choice
A further threshold decision, increasingly significant across the industry, is whether the hotel should be run under a full management agreement, where the operator’s own team directly runs the hotel day to day, or under a franchise arrangement, where the owner or a third-party operator runs the hotel independently under brand licence, retaining considerably more control — including, notably, control over the annual operating budget. Franchise arrangements generally carry a different, often somewhat lower, fee structure than full management agreements, but shift meaningfully more operational responsibility and risk onto the owner.
Global brand groups have been pushing increasingly hard toward the franchise model in recent years, since it is a more asset-light and faster-scaling growth strategy for the operator itself. For owners, the right choice between the two models depends heavily on the owner’s own experience, its appetite for direct control, and the strength of its own operational team — a first-time hotel owner will often be better served by the fuller support of a management agreement, while an experienced, multi-property owner may increasingly find a franchise structure delivers greater control and, potentially, better net economics.
Step Six: The Property Improvement Plan — the Cost That Comes Later
Finally, owners should look well beyond the initial construction budget required to meet a brand’s opening specification. Virtually every brand relationship carries an ongoing obligation to periodically renovate and upgrade the hotel to keep pace with evolving brand standards, commonly known as a Property Improvement Plan, or PIP. This recurring capital obligation is frequently the single largest financial commitment an owner faces over the life of the relationship — often larger than any concession won during the initial fee or key money negotiation — and should be factored into the owner’s long-term capital planning from the outset, not treated as a future problem to be dealt with when it arises.
Where Hotel Consultants Add Real Value — and Where the Lawyers Take Over
It is worth being honest about where different professional advisers genuinely add value in this process. The decisions set out above — market positioning, feasibility analysis, financial modelling against the owner’s actual budget, and running a structured, competitive search and selection process across several potential operators rather than simply accepting the first proposal received — are precisely the areas where an experienced hotel asset management consultant earns its fee, and owners approaching a new development without this kind of advice are taking on unnecessary risk at exactly the stage where the most consequential decisions are made.
Once an owner has identified its preferred operator and brand through that process, the relationship moves into a different phase — negotiating the actual management agreement package itself, where the issues become fees, performance tests, indemnities, exclusivity, and the termination provisions discussed elsewhere in this series. That negotiation is where specialist hospitality legal counsel becomes essential, translating the commercial positioning already established into contractual protection that will govern the relationship for the next fifteen to thirty years.
Tim Dobson is the Founding and Managing Partner of Dobson & Partners, a boutique international law firm based in Bangkok, and is ranked by Chambers Asia-Pacific for his hospitality and hotels practice. He has acted for hotel owners across Thailand, Vietnam, Cambodia, Bangladesh and the Maldives in the negotiation of hotel management agreements against most of the world’s major international hotel operators.