Hotels are run by managers, not owners

By Sumes Dewan and Tanya Mishra, Lex Favios
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When travellers book their stays at hotels, their immediate consideration is the brand or name of the hotel they want to go to. People choose their preferred hotels because of their previous experiences of living and being looked after in other hotels of the same chain or brand or through the personal recommendations of others. They rarely think about the real identity of these brands and their connection with the hotels in which they stay. It is important to consider the true identity of hotels in India, the rights and liabilities of hotel owners and of their respective brands.

Sumes Dewan, Lex Favios
Sumes Dewan
Managing partner
Lex Favios

A hotel’s identity consists of two aspects, its real estate ownership and the brand of the hotel. In most cases, well-known hotel brands do not own the hotel property. In such situations, the hotel has a separate real estate owner who owns the land the hotel is built on and constructs the hotel according to the brand’s specifications. The owner of the hotel usually has an option either to run the hotel on its own independently or through a brand.

The brand will operate the hotel, playing a key role in managing the hotel property according to the brand label and standards. The owners enter into a hotel management agreement (HMA) with the brand and the hotel is constructed or, in the case of an existing hotel, modified according to the brand specifications and standards. Further, the hotel’s performance success and therefore its profitability, is attributable to its brand value. Owners of hotels therefore prefer collaborating with large hospitality brands, which act as operators of the hotels.

Going further, it is important to understand the ways in which hotel owners collaborate with brands and how responsibilities and indemnities are divided between hotel owners and the brand any owner collaborates with.

Tanya Mishra, Lex Favios
Tanya Mishra
Head of the
corporate practice
Lex Favios

An HMA is a contract entered into between a hotel owner and a hospitality brand to collaborate in operating the hotel. The brand takes over the management of the hotel under the appearance and presentation of the brand. When collaborating under an HMA, the hotel owners and the hospitality brands must understand and clearly set out in the agreement their respective liabilities and responsibilities.

The operation of the hotel is under the exclusive supervision and control of the operator. Except as otherwise specifically provided in the HMA, the operator is responsible for the proper and efficient operation of the hotel.

However when it comes to the employees of the hotel, they are always the employees of the owner, except for key hotel employees. These senior staff may, at the operator’s election, be employees of the operator or one of its affiliates; alternatively, they may be seconded to work with the owner under an agreement between the operator or its affiliate and the owner. The operator shall have absolute discretion in regard to all hotel employees, including hiring, promoting, transferring, compensating, supervising, terminating, directing and training all hotel employees. The operator, generally, establishes and maintains all policies relating to employment. This odd arrangement removes the risk that the operator has to make redundancy payments if staff are laid off because of the financial difficulties of the owner.

Having said that, it is noteworthy that the operator has to maintain the hotel in good repair and condition, and is solely responsible for all routine maintenance, routine repairs, and minor alterations as it determines are necessary to maintain safety and standards at the cost of the owner. Beginning no later than the opening date and as necessary during the term of the HMA, the operator shall procure and maintain, on behalf of the owner, insurance coverage on the property, including boilers and machinery, the hotel buildings and contents against loss or damage by fire, lightning and all other risks usually covered by all-risk of physical loss insurance. It is clear that such liabilities and responsibilities of the operator and the owner are clearly defined under the HMA.

To sum up, if it is run by a brand, the performance of a hotel is obviously directly linked to its brand management. However, it is important that the hotel owners set out in the HMA exactly what are their rights against and liabilities to the brands with which they collaborate. They will then be able to arrange indemnities for any future loss.

Sumes Dewan is managing partner and Tanya Mishra is the head of the corporate practice at Lex Favios.

Phoenix Legal

Lex Favios
E-299 Greater Kailash-I,
New Delhi – 110 048

Contact details:
T: +91-11-41435188
E: admin@lexfavios.com
www.lexfavios.com

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