The clause owners trust most to escape a bad operator is, in most agreements, quietly engineered so it almost never has to.
Ask most hotel owners what stands between them and being locked into a poorly performing operator for the next twenty years, and they will point to the performance test — the clause that promises a right to terminate if the hotel’s results fall short. It feels like real protection. In practice, across the vast majority of agreements actually signed, the performance test is structured with enough built-in friction that it rarely, if ever, actually delivers that outcome. This is not an accident. It is the product of years of careful drafting by operators who have every incentive to give owners the comfort of a performance test without the substance of one.
The Double Test — Failure Should Not Require Failing Twice
Industry-wide research into current hotel management agreements confirms that the dominant structure is what is known as a dual or collective test — the operator is only considered to have failed if the hotel underperforms on both the GOP test and the RevPAR test simultaneously, in the same consecutive years. Agreements that allow either metric alone to trigger a failure remain the rare exception, not the rule.
This distinction matters enormously in practice. A hotel can be genuinely and persistently underperforming its own budget, failing owners on profitability year after year, while the broader market itself is soft enough that its RevPAR still roughly tracks the competitive set — meaning the RevPAR prong never fails, and the whole test survives despite real, sustained financial underperformance. The reverse is equally possible. A dual test does not make the performance bar higher; it makes it easier for the operator to find at least one metric that happens to hold up in any given year, which is often enough to keep the whole test from ever being triggered. A single test, requiring failure of only one metric, is a meaningfully stronger and fairer standard for owners, and it is a specific point worth pushing for at the negotiating table rather than accepting as an established norm.
The Threshold Percentage — Not Just Which Test, But Where the Bar Sits
Even where the structure of the test itself is sound, the actual percentage threshold written into it is just as decisive, and it is a number owners frequently spend far less time negotiating than they should. Published market ranges typically place the GOP threshold somewhere between 85% and 90% of budgeted GOP, and the RevPAR threshold somewhere between 80% and 90% of the competitive set average. Within those ranges sits a genuinely wide gap between a test that offers real protection and one that offers almost none.
The incentive on each side of the table is entirely predictable. Operators want the threshold set as low as the market range will allow — a RevPAR Index requirement of 80%, for instance, meaning the hotel only has to reach four-fifths of what its direct competitors are achieving before the test is satisfied, a genuinely low bar to clear even for a mediocre performer. Owners should be pushing firmly toward the top of the published range, and testing whether it can be pushed higher still, since a threshold set at 90% or above leaves an operator with far less room to underperform the market before the test actually engages. The specific number agreed here does as much to determine whether the performance test ever has real teeth as the structural questions of single versus dual testing and the length of the failure period — it deserves exactly the same level of scrutiny and the same refusal to simply accept an operator’s opening position as the market standard.
The Three-Year Stretch
Two consecutive years of failure is the most common standard used across the industry for the number of years required before an owner’s termination right actually crystallises. When operators push this out to three consecutive years, as they frequently attempt to, the practical effect is an additional full year of confirmed underperformance an owner must simply endure before any contractual remedy becomes available — on top of whatever time it already took to identify and confirm the first failure. On a hotel that is already losing money or damaging an owner’s reputation with poor operational standards, that extra year is not a technicality. It is real, ongoing, avoidable damage.
The Weak Competitive Set
The RevPAR prong of the test is only as meaningful as the competitive set it is measured against, and this is one of the most quietly consequential elements of the entire clause. Best practice guidance is explicit on this point: the competitive set should be locked at signing, with any subsequent change requiring the owner’s written consent — because, left unchecked, an operator can propose or later substitute a competitive set skewed to make its own performance look stronger relative to the market than it genuinely is. An owner who accepts an operator-defined competitive set with no real right to contest or control changes to it has, in effect, allowed the operator to help mark its own homework.
GOP Must Be Defined by USALI, Not by the Operator
The GOP figure a performance test is actually measured against is only meaningful if “GOP” itself means the same thing every year, measured against an objective external standard rather than the operator’s own discretion. The industry standard is the Uniform System of Accounts for the Lodging Industry (USALI), currently in its 12th edition, which sets out standardised account and expense categorisations precisely so that GOP is calculated consistently from one hotel, and one operator, to the next. A management agreement that fails to expressly reference USALI 12th edition — or that allows the operator to apply its own internal chart of accounts instead — leaves room for exactly the kind of category reclassification and P&L presentation choices that can quietly move GOP above or below a performance threshold regardless of the hotel’s genuine underlying trading performance. Owners should insist the agreement expressly ties GOP and NOI calculations to USALI 12th edition, with a defined mechanism for handling future editions, rather than leaving the definition to the operator’s own accounting policy.
The Cure Right That Keeps Resetting the Clock
Even where a performance test is genuinely failed on both prongs, in consecutive years, that is still very often not the end of the story. The near-universal cure right allows the operator to pay the owner a sum designed to bridge the shortfall, and once that payment is made, the owner’s termination notice for that failed period is simply nullified and the agreement continues exactly as before. The real problem is not that a cure right exists — a single opportunity to cure is a reasonable and common commercial compromise. The problem is how many times it is typically available. Industry data from a representative sample of agreements shows an average of two cure rights granted during the initial term alone, with a further additional cure right commonly attached to each renewal term on top of that. A test that can be failed, cured, failed again, and cured again, potentially multiple times across the life of the agreement, is not functioning as a meaningful accountability mechanism — it is functioning as a very expensive delay tactic that an operator can afford to use repeatedly while an owner’s actual returns continue to suffer.
Two Further Traps Worth Knowing About
Beyond the headline issues above, two further mechanisms deserve close attention.
- Who actually sets the budget the GOP test is measured against. In most agreements, the operator prepares the annual budget, subject to an owner consultation or approval right that is often weaker in practice than it appears on paper. An operator with genuine influence over its own budget has a structural incentive, whether deliberate or not, to set a bar it can comfortably clear — which defeats much of the purpose of a profitability-linked test in the first place. Real, meaningful owner approval rights over the underlying budget are just as important as the test itself.
- How broadly “mitigating” or extraordinary events are defined. Most performance tests suspend or exclude periods affected by circumstances outside the operator’s control. That is a reasonable principle in isolation, but broadly or loosely drafted carve-outs can be used to exclude genuinely poor years from the test calculation for reasons only loosely connected to the underperformance itself, further insulating the operator from any real consequence.
What This Means for Owners
None of this means a performance test is worthless — a properly negotiated one remains a genuinely useful tool. But it does mean the version most operators offer as a matter of course, a dual test, over three years, against a competitive set the operator controls, with two or more cure rights available, is not the safety net most owners assume they are getting when they see the clause sitting comfortably in the term sheet. The clause that gives owners the most psychological comfort at signing is very often, in its default form, the one doing the least real work to protect them later. It deserves the same close, sceptical scrutiny as every other part of the agreement — not less.
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.