The Hotel Management Agreement
Hotel operating models in Thailand
A hotel can be managed by its owner and that is the typical case for family-owned businesses. However, there are substantial advantages to consider a more efficient structure for successful hotel businesses in Thailand. In the grand scheme of things, three alternative models to operate a hotel can be distinguished, the hotel lease, the hotel management agreement, and the hotel franchise system. Apart from this, there are mixed forms of these standard models as well.
From the hotel group’s viewpoint, hotel management agreements are a smart mechanism to expand globally with the strength of a chain and brand, but without significant capital investment. This enables a reasonable risk profile if the contracts are professionally designed. The basic idea – separating ownership from the operation of the asset – allows in Thailand expansion without the restrictions of land ownership.
TOP 10: Thailand’s top ten hotel management companies are Centara Hotels & Resorts, ONYX Hospitality Group, Dusit International, Imperial Hotels & Resorts, Minor Hotel Group, Cape Kantary Hotels, Compass Hospitality, Sawasdee Woraburi Group, The Shining Star Group and the LK Group. They cover a combined market share of more than one-third of the total keys (i.e. hotel rooms) in Thailand.
CoronaAlliance: The pandemic results in the necessity for substantial adjustments for the transition in the post-pandemic world. The disruptions that occurred should be utilized to review and adjust existing investment structures and agreements. This relates, above others, on the risk allocation between hotel building owner and hotel business operator. The same principles apply for the villa management agreement of a resort development. #CoronaAlliance
Details of the hotel management agreement
HMA: Under the typical hotel management agreement (HMA), “owner hereby grants to manager the right to manage and operate the hotel pursuant to the terms of the hotel management agreement and the manager accepts said appointment and agrees that it will, as the agent of the owner, operate the hotel during the term of the agreement in conformity with all of the terms, covenants, and conditions herein contained, and use the hotel solely for the operation of a resort business conforming to the standards of comparable first‑class hotels.”
Details: The clauses of such HMA should contain detailed and reasonably balanced clauses regarding responsibilities for licenses and permits, operations and management, personnel and labor negotiations, operation, repair and maintenance agreements, marketing and advertising, budgets, accounts, and expenses, supervision and control, payment and responsibility for operating expenses, insurances and indemnification, management fees, duration and termination, and several other topics.
Agent: Also, the hotel owner may engage the manager to act as agent for the owner, to manage the rental of its hotel and to provide, on behalf of the owner, hotel-related services to the hotel guests under the terms of the Hotel Management Agreement.
Adjustment of villa management structures
By a villa management agreement, an individual villa owner agrees with a hotel management company to use his villa as part of a hotel business during the absence of the villa owners. For such structure mainly two different models are possible with deviating risk profiles, licensing requirements, and tax efficiencies.
Under a villa agency agreement, the hotel is engaged by each villa owner, as its agent, to manage the villa and let it out to the hotel guests. The hotel also renders general management services and, on behalf of the villa owner, provides to the hotel guests hotel-related services associated therewith, i.e. reservation services, food and beverages, hotel guest amenities, etc., including maintenance, accounting and administrative services in connection therewith. In carrying out the above obligations, the hotel company acts solely as an agent for, on behalf of and for the account of the villa owner. Consistent with this principal-agent relationship, the hotel is entitled to a reimbursement of the amounts incurred in carrying out the work for the villa owner.
An alternative structure is a villa letting agreement between the hotel and the villa owner leasing the villa for occasional use as accommodations in the hotel’s operations. Under the villa letting agreement, the hotel company has temporary possession of the villa, collects the rental income from the hotel guests from time to time and pays the villa owner a percentage thereof as occasional rental income.
Consequences: Whether villa owner and hotel company enter into a principal-agent relationship or a landlord-tenant relationship makes a substantial difference on hotel business license requirements, the activities of the villa owner under the Foreign Business Act, income taxation, VAT and withholding tax requirements.
Professional service offer from Bangkok for the hospitality industry in Thailand
PUGNATORIUS Ltd. is involved in hotel and hospitality ventures all over Thailand. Legal and tax advice on Thailand’s hotel and hospitality are one of the law firm’s areas of competence, long-standing experience, and unique market reputation. Typical assignments cover these seven areas: (i) hotel business acquisitions, (ii) new hotel business developments including BOI investment promotion, (iii) condotel developments, (iv) hotel business licensing advice and assistance, (v) structuring of hotel management agreements and villa development contracts, (vi) sale of the hotel business, and (vii) legal opinions on hotel and hospitality topics
Details on the terms for assigning PUGNATORIUS Ltd. are described at “Legal services for the hotel and hospitality sector”.