HMAs and Franchise Agreements
There are a number of legal issues and challenges that owners with managers and, to a certain extent, franchisees need to consider.
Firstly, it is highly likely that Brand approval will be required where there is any repurposing of the facilities. This will certainly be the case under most HMAs and with most franchises and so early engagement of the operators/franchisors will be important.
Many operators will claim (with a varying degree of justification) that they can run any third space offering. For example, some operators, such as CitizenM, are offering a subscription package to drive traffic. It may however be that you consider in your specific case that another entity, with specialist skills, will be better suited to operate some or all of these repurposed facilities.
If your choice is to hire a third party, this will throw up a number of other legal and contractual issues and challenges. Brand Standards, for example, are always a sensitive subject and a strict requirement for operators – the hotel operator will need to be convinced that the third party will be at a level that is consistent with the Brand Standards – or at least is not below the standards expected which might negatively impact on the hotel and its performance.
Will the third party be contracted through a lease/license or management agreement? Will this necessitate an amendment to the definition of the hotel by removing the area that the hotel operator is responsible for managing? Operators will be concerned about loss of control and of course the extent to which this will affect their compensation.
Intellectual Property is key and will of course also be relevant for owner operated properties too. Care will need to be taken to ensure appropriate and detailed co-branding terms are agreed and documented with the third party operator. It may be feasible to include these terms in the license or lease etc. or a standalone agreement may be required. These terms would include a license from the owner or brand to license use of the hotel name in return for a license from the third party such as a WeWork. Alternatively, if this arrangement is going to be rolled out across a number of properties, then a more extensive Master Co-branding/license agreement may be needed.
Care should also be taken to ensure that the registration of trademark program covers all the relevant classes. For example, you may need to obtain a registration to cover office rental or housing, as well as the sale of business related products in addition to all the typical classes required for the operation of a hotel.
Perhaps the most sensitive item for many will be the question of remuneration and compensation. How the third party will be remunerated will obviously depend upon (or perhaps dictate) the type of agreement that is entered into with the third party.
But how will the revenue and costs /profit derived from the third space be treated? Will that form part of the hotels total revenue impacting upon the management fees or will it be totally distinct? If the latter, then will changes need to be made to any operator guarantee or performance test?
Finally, thought should be given to the reservations or booking systems including to ensure that bookings for the “Third Space” are distinguished.
One must be cognisant that this is just a brief overview highlighting some of the key issues that will need to be addressed and there will no doubt be a number of others depending upon the exact form that the “Third Space” and its operation takes especially as these uses will probably only become clearer as the world starts to unlock over the next 12 months. However, in all instances careful and timely planning, implementation and documenting will be required.