The hotel management agreement is drafted by the operator. It reads that way for twenty-five years.

Term, renewal, and why the operator wants a long no-fault term

Operator forms open at twenty to thirty years, often with renewals exercisable by the operator alone, which can carry the arrangement past fifty. The stated justification is that a brand needs time to recover its launch investment. The real reason is that the management contract is itself the operator's balance-sheet asset: a fee stream, valued on duration, with no capital committed.

Renewal is where the drafting does its quiet work. Renewal at the operator's election turns a twenty-year contract into a fifty-year one, because the operator exercises if the fees are worth having and not if they are not. Renewal by mutual agreement is neutral. Automatic renewal unless the owner serves notice in a narrow window, usually eighteen to twenty-four months before expiry, is the trap: nominally balanced, and dependent in practice on an asset-management team remembering a date a decade after the negotiators have left.

The term drives everything else. It makes the performance test the owner's only exit, which is why the operator negotiates that test as hard as it does, and it makes the transfer fee the price of every future sale. A long term written as genuinely no-fault is the primary target, because it is the clause that makes the others survivable. Our working position is a shorter base term with owner-elected renewals, or a long term paired with a priced owner exit on a declining scale.

Base fee and incentive fee — how the money is actually calculated

The operator is paid twice, from two different lines of the same profit and loss account, and the difference between them decides whose interests the agreement serves.

The base management fee is a percentage of total operating revenue, commonly two to four per cent. It is earned on the top line: in a year when the hotel loses money, when the market collapses, and when the operator's own decisions have driven occupancy at the expense of rate. An operator on a revenue-linked base fee has a rational preference for volume over margin, and owners puzzled by persistent discounting into a soft market are looking at the answer.

The incentive fee is a percentage of gross operating profit, typically six to ten per cent, though the number means nothing until you read the definition. GOP is normally defined by reference to the Uniform System of Accounts for the Lodging Industry: struck after departmental and undistributed operating expenses, but before the FF&E reserve, insurance, property charges, debt service and depreciation. An operator earning ten per cent of GOP can collect a substantial fee from a hotel that is not covering its interest.

The owner's structural answer is subordination: calculate the fee on profit remaining after an owner's priority return, defined as a fixed sum or a percentage of invested equity or actual debt service. Operators resist financing risk they did not underwrite, and the outcome is usually partial subordination or a two-tier scale. Asking still pays, because it reframes the incentive fee as a share of surplus rather than a second fee on operations.

Centralised services, brand standards, and the territorial protection you should get in return

Beyond the two management fees sit the charges for system participation. This is where relationships most often sour, not because the amounts are extraordinary but because the owner cannot see what it is buying.

Centralised services. Reservations, loyalty and redemption costs, central marketing, revenue-management platforms, procurement, technology and training come from the operator's system and are allocated across the estate on a methodology that sits outside the agreement. Three provisions decide whether that is fair: an express prohibition on the operator taking a margin; an audit right reaching the allocation methodology and cost base rather than only the invoice addressed to this hotel; and a cap on annual escalation with a right to decline discretionary programmes introduced after signature.

Brand standards. The manual is incorporated by reference, runs to hundreds of pages, and almost every form lets the operator amend it unilaterally with the owner complying at its own cost — an open-ended capital commitment attached to a document the owner does not control. The protections are narrow but real: changes applied system-wide rather than to this hotel alone; a funding source in the reserve or defined phasing; no compulsory purchase from operator affiliates without competitive benchmarking; and any property improvement plan required at renewal agreed as to scope and cost before the renewal right is exercised.

Territorial protection. The radius clause is the consideration for the premise that the brand is scarce in its market. A radius expressed in kilometres alone is close to worthless in Dubai, where a sister property two kilometres away on a different beach front competes directly and one twelve kilometres away in a business district does not. Define the protected area by market segment and demand source as well as distance, name the portfolio brands caught, and state whether it covers new-build only or also conversions and group acquisitions.

The two-prong performance test, and the cure right that neutralises it

In a long no-fault term the performance test is usually the owner's only route to removing the operator, and it repays reading in a way most owners do not give it.

The architecture has two prongs. The first is a market-share test: RevPAR expressed as an index against a defined competitive set, with failure below a stated percentage of fair share, often eighty-five to ninety-five. The second is absolute: gross operating profit achieving a stated percentage of the approved budget, commonly eighty to ninety. Both must ordinarily fail, in the same year, in two or more consecutive years, before the owner may serve notice.

The competitive set is the most important element and the least examined. If the operator can add or remove hotels it can move the index without changing performance. Fix the set at signature, list it by name, and allow change only by agreement or by an independent expert. The budget benchmark has the mirror problem: where the operator prepares the budget against which it is measured, a conservative budget is a self-administered pass, so test GOP against an absolute floor as well. The exclusions that follow — force majeure, renovation, casualty, market disruption, and the owner's own failure to fund the reserve — are mostly legitimate in principle, and the task is to stop any one of them swallowing the test.

Finally the cure right, whose economics deserve stating plainly. Most forms let the operator, on failing, pay the shortfall between actual GOP and the threshold and deem the failure cured, with the year disregarded for any consecutive-year requirement. If the remaining fee stream is worth more than the shortfall, the operator will always cure. The performance test is then not a termination right at all: it is a floor on the owner's return, purchased at the operator's option. The counter is not deletion, which no operator accepts, but limitation — a fixed number of cures across the term, never consecutive, the full shortfall on both prongs, and no cure once index failure exceeds a defined margin.

Budget, capital expenditure, key personnel and the FF&E reserve

The operator runs the hotel and the owner funds it. The approval provisions are where that division is written down, and the form is drafted so that deadlock resolves in the operator's favour.

The annual budget. The operator prepares and submits; the owner has a review period. Two devices do the work. Deemed approval treats a budget not objected to within thirty or forty-five days as approved. The deadlock fallback applies the prior year's budget escalated by an index, so failure to agree still produces a workable budget and the operator has no reason to concede. Owners should press for line-item objection, expert determination on genuine deadlock, and the carve-out of payroll and brand-mandated lines from deemed approval.

Capital expenditure. Routine FF&E replacement is funded from the reserve and properly within the operator's discretion up to a threshold. Life-safety and compliance works cannot be blocked by an owner and belong outside the approval mechanism entirely. Discretionary projects, brand-mandated upgrades and property improvement plans are the owner's money on the owner's asset and should require written approval, with a defined route for resolving whether an item is brand-mandated or discretionary.

Key personnel. Owners ask for approval of the general manager and director of finance; forms give consultation. The drafting can travel further without reaching approval: interview rights over shortlisted candidates, objection for stated cause, a minimum tenure commitment for the opening general manager, and removal on a substantiated compliance finding.

The FF&E reserve. A percentage of gross revenue is set aside for replacement of furniture, fixtures and equipment, commonly stepping from one per cent at opening to three, four or five at stabilisation. Three questions decide control. Whose name is on the account — it should be the owner's, with the operator as authorised signatory within limits. What happens to unspent balances — they should accumulate as the owner's property and be released on termination. And whether the reserve is a spending cap or a floor: an operator that can require expenditure beyond the accumulated balance has an unbounded call on owner funds, while an owner who declines to top up will find that refusal reappearing as an exclusion in the next performance test. The lender has views on both, which is why these provisions and the finance documents must be drafted against each other.

Getting out — sale, default, and the operator's own termination rights

Every exit route in an HMA is priced, conditioned, or both. The table sets out how the principal routes appear on the operator's form, what an owner should hold out for, and whether the point is genuinely constrained by law or is simply bargaining strength.

Termination on sale surfaces years later at the worst moment. Operators grant a conditional right: the sale must be at arm's length to an unaffiliated third party, the purchaser must not be a competing operator or a person the operator objects to on reputational or sanctions grounds, and a transfer fee is payable, typically a multiple of the fees earned in the preceding twelve or twenty-four months. Left flat and uncapped, that fee is a permanent drag on sale value, because every bidder prices it in. The asks are a declining scale, carve-outs for intra-group transfers and for transfers to a lender or its nominee on enforcement, and a mechanism by which a refusal of a purchaser can be tested rather than merely asserted.

The operator's own termination rights attract less attention than they deserve. Owner failure to fund working capital or the reserve, owner default, insolvency, change of control to a competitor, uncured casualty and failure to complete a renovation all typically appear. What matters is not the trigger list but the consequence: forms commonly claim the present value of fees across the balance of the term. On a twenty-five-year agreement in year four that is a very large number, and it converts a funding dispute into an existential one. Capping it as a defined, declining liquidated sum is among the higher-value amendments available anywhere in the negotiation.

What UAE law constrains, and what is pure negotiation

Most of what is argued over in an HMA is unconstrained by law. Fee percentages, performance thresholds, radius definitions, reserve rates and transfer-fee multiples are matters of bargaining strength and nothing else; no UAE instrument sets any of them and no regulator reviews them. Three areas are not free negotiation, and an owner advised only on the drafting will not hear about them.

Agency characterisation. In the ordinary UAE structure the operator manages the hotel in the owner's name and for the owner's account. The trade licence, the tourism classification, the food, beverage and liquor permits and the employment and residence sponsorship of the workforce sit with the owning company, because the operator generally has no local establishment. Those are the features of a mandate under the UAE Civil Transactions Law, whose mandate provisions contemplate that a principal may bring the arrangement to an end, with the counterparty's remedy sounding in compensation rather than continued performance. That does not make a long HMA unenforceable. It does mean an owner facing an operator it genuinely cannot work with has an argument the termination clause does not disclose, and that an operator relying on a twenty-five-year term to guarantee occupation is relying on something an onshore forum may not deliver. Whether the arrangement also engages the UAE commercial agency regime is a separate question turning on registration and on the operator's role; most structures are built to sit outside it, and that should be confirmed rather than assumed.

Agreed compensation is adjustable. The Civil Transactions Law permits a party to apply to have contractually agreed compensation adjusted so that it corresponds to the loss actually suffered. A transfer fee expressed as a multiple of fees, or a termination payment expressed as the present value of a remaining term, is therefore not automatically recoverable at face value onshore. That cuts in the owner's favour, and equally against the owner where the owner holds the liquidated remedy.

Relief that compels performance. Even where a tribunal finds an owner terminated wrongfully, an order requiring that owner to reinstate the operator in the owner's own licensed premises is difficult to obtain and harder to enforce. The realistic operator remedy is damages — and an award covering the balance of a long fee stream can exceed the value of the exit.

Where this goes wrong

These account for the majority of owner-operator files that reach us. None is a drafting subtlety. All were visible in the first draft.

1. The competitive set was left to the operator. Years later the owner cannot fail the index prong, and the only exit the agreement offered has quietly closed.
2. The cure right was accepted without limitation. The operator underperforms, pays the shortfall, resets the clock and repeats. The owner has bought a return floor and mistaken it for a termination right.
3. The incentive fee sits on unsubordinated GOP. The hotel does not cover its debt service and the operator collects a performance fee in the same year. The owner discovers the misalignment at the first refinancing, when the lender does.
4. Brand standards are amendable at will with no cost discipline. A system-wide refresh arrives as a capital demand with no funding source, no phasing and no benchmarking of the affiliate suppliers named to deliver it.
5. The transfer fee was never capped or scaled. The owner comes to sell in year fourteen and finds every bidder has deducted it, and that operator approval of the purchaser is unreviewable.
6. Centralised services were accepted on trust. The audit right reaches the invoice but not the allocation methodology, so the owner can verify the arithmetic and nothing about proportionality or margin.
7. The radius clause is a distance and nothing else. A sister brand opens in the same demand segment just outside the circle, and the exclusivity paid for through fees turns out never to have existed.
8. The HMA and the finance documents were negotiated separately. The lender requires non-disturbance arrangements and control over the reserve that the signed HMA does not accommodate, and the operator is asked to amend from complete strength.

Dispute resolution, and the practical difficulty of removing an incumbent operator

HMAs over UAE hotels are commonly governed by English law and referred to institutional arbitration, with DIAC, arbitrateAD, the LCIA and the ICC all appearing and seats in the DIFC, the ADGM or offshore. Awards benefit from the New York Convention, to which the UAE is a party, and the UAE has its own federal arbitration legislation for arbitrations seated onshore. Where relief touches the property itself, or enforcement must run against onshore assets, the interaction between the arbitral route and the onshore courts needs attention before the clause is settled.

None of which addresses the problem that defines these disputes. Removing an incumbent operator is difficult for reasons that have little to do with the contract. The reservation system is the operator's, and the forward book sits inside it. The loyalty programme supplying a material share of occupancy is the operator's. The property management system, revenue tools and distribution contracts are configured to the operator's estate. The general manager and department heads are the operator's people even where the owning company is technically their employer. An owner who terminates without a replacement engaged, a transition plan agreed and a rebranding programme funded does not liberate the asset; it strands it.

So the sequence we run starts well before any notice is drafted. Establish the contractual ground and test whether the cure right defeats it. Model the exposure on both sides, including the operator's likely damages claim and the cost of transition. Engage the incoming operator under confidentiality. Map what must transfer at handover — data, guest records subject to data-protection constraints, systems, licences and employee arrangements. Only then decide whether to serve. An owner who has done that work negotiates from a real position, and a substantial proportion of these matters resolve on amended commercial terms rather than in a hearing room.

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