Not sure who actually runs a hotel you own or might buy? A hotel management company runs it day to day for a fee, while you keep the asset and the risk.
This page is part of the series on hospitality business basics.
| Item | Value |
|---|---|
| Typical initial contract term (European report) | Ten, 15 or 20 years |
| Initial term range (legal guide) | 5 to 20 years |
| Base management fee | 2% to 4% of total revenue |
| Renewal terms | Multiples of five years, occasionally ten |
| Notice to use a renewal | Six months, in writing |
| Average European initial term | Down from 20 years towards 15 years |
The figures come from a June 2007 HVS market report on European contracts and a July 2024 legal guide from Kuits Solicitors. They are broad indications that vary by deal, and they can change, so check the source before you rely on them.
What does a hotel management company do?
HVS describes a management contract as an arrangement in which a hotel’s owner hires a separate company, the operator, to run the hotel. The operator is expected to bring supervision, expertise, established methods and procedures, and normally a track record of verifiable past performance.
The legal guide from Kuits Solicitors lists the operator’s usual day-to-day work. It typically covers:
- Staffing the hotel
- Marketing
- Reservations
- Maintenance
- Compliance with local regulations
In return, the operator runs the hotel for a fee under terms negotiated with the owner. Those terms are set out in a written management agreement, which is the document that matters most to you as an owner.
How control and risk are shared between owner and operator
HVS notes that the owner keeps limited control, often through measurable performance standards. The same report says the owner carries more risk than if the hotel were leased to the operator, and that the contract places the operational risk of profit and loss on the owner.
The Kuits Solicitors guide says owners typically keep certain rights. These usually include:
- Approving the annual budget
- Approving major capital expenditure
- Approving significant changes to operations
- Funding major renovations and improvements
Performance standards can include financial targets and guest satisfaction scores. If the operator misses them, the owner has a documented basis for raising the issue.
HVS also observes that institutional and financial investors often want to separate ownership of the physical hotel from operation of the business. A management company is one way to do that.
How a hotel management company is paid
HVS says the operator usually earns a base fee, typically 2% to 4% of total revenue. On top of that, an operator usually receives an incentive fee based on a percentage of profits.
The incentive fee may be held back until profitability reaches a certain threshold, or until minimum returns to the owner are met. Because the base fee tracks revenue and the incentive fee tracks profit, the two reward different behaviour.
When you review operator reports, you will meet hotel metrics early on. A short explainer on what is RevPAR helps you read them.
Contract length and renewal terms
HVS says initial terms usually last ten, 15 or 20 years, depending on the brand and positioning of the operator. The Kuits Solicitors guide gives a wider range of 5 to 20 years, with options for renewal.
HVS adds that well-respected upscale operators can generally command much longer initial terms, of the order of 50 years. Its 2007 report also records a drop in the average initial term across Europe, from a historical 20 years towards 15 years.
Renewals usually come in multiples of five years, occasionally ten. Most contracts offer two renewal terms, sometimes more, provided six months’ written notice is given before the current term ends.
Brand standards, staff and other contract terms
If the hotel belongs to a larger franchise chain, the guide says the operator sometimes must implement the brand standards. The agreement should also cover the licence to use the brand’s name, logo and other intellectual property. If you are comparing brand options, the trade-offs between a hotel franchise vs independent hotel are worth reading alongside any management offer.
Other clauses the legal guide highlights include:
- Termination conditions that give both sides a clear exit
- Dispute resolution mechanisms
- Insurance each party must hold, matched to the liability provisions
- Whether a TUPE staff transfer applies when the agreement starts or ends
Both sources are general guides. Specialist advice should be sought about your own circumstances.
Frequently asked questions
Is a hotel management company the same as the hotel owner?
Show answer
No. HVS describes the owner contracting with a separate company, the operator, to run the hotel.
How long does a management contract usually last?
Show answer
HVS says initial terms usually last ten, 15 or 20 years, while the Kuits Solicitors guide gives 5 to 20 years. Renewal options often follow.
Who carries the financial risk?
Show answer
HVS says the contract places the operational risk of profit and loss on the owner. The owner retains more risk than if the hotel were leased to the operator.
What does the operator earn?
Show answer
Typically a base fee of 2% to 4% of total revenue, plus an incentive fee based on a percentage of profits, according to HVS.
