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Under the influence of international operators, hotel management methods in France and Europe have evolved, with management agreements increasingly being favoured over leases. The profile of hospitality investors has also changed, with highly professional funds able to adopt this type of management solution.
For the record, hotels in France are operated in several different ways. These include BEFA1 or commercial lease contracts with a predominant trend towards variable rents; civil leases with their proven versatility; multifaceted and flexible lease-management contracts (that transfer the operating risk to the lessee-manager); and lastly, hotel management agreements – the golden ticket.
Hotel management agreements: a one-of-a-kind hotel management solution
Hotel management agreements allow owners to benefit from the value of both the property and business, making management agreements an ideal tool for managing financial risk in the hotel sector.
In addition to agency contracts2 and management leases, hotel management agreements (the most common type of contract in the international market) have gradually become more prevalent in France, with owners assuming the operational risk, including that relating to staff. A hotel management agreement is a contract between the hotel management company (the operator) and the hotel property owner, under which the operator assumes responsibility for the operational management of the hotel. In return, the operator generally receives a fee of between 11% and 13% of revenues, including brand and marketing rights, and a profit-share linked to the hotel’s operating performance.
Hotel management agreements as practiced in France today are not governed by any specific legal text.
Hotel management agreements are thus sui generis contracts, governed by ordinary contract law and practice, where parties have complete freedom to negotiate and draw up the contract in accordance with Article 1103 of the French Civil Code3.
Yet is there a legal status specific to France that should be retained?
Legal status is an essential indicator of whether or not the obligations of parties under a contract are legal and binding in the country concerned.
Case law on the subject is rare in France. In 2012, however, the Paris Court of Appeal ruled on the famous dispute between SAS Hilton International France and SAS Immobilière et Hôtelière du Parc Monceau (SIHPM). The Court of Appeal ruled that the agreement should be considered as an agency contract “contrat de mandat” governed by Article 1984 of the French Civil Code, under which the principal (owner) grants the agent (hotel operator) the power to perform legal actions in its name and on its behalf. This ruling was confirmed in 2014 by the French supreme court, the Court of Cassation, which thus confirmed the agency contract status. In this case, the Supreme Court considered the hotel management agreement to be an agency contract under which the owner had appointed the operator to manage the hotel in its name and on its behalf.
In our view, within the meaning of Articles 1984 et seq. of the French Civil Code, an agency contract does not fully embrace the complex nature of a hotel management agreement.
The latter is generally a partnership with multiple layers of respective contractual commitments concluded over the long term between the parties and often starting with the provision of technical assistance for hotel construction or renovation, followed by hotel operation. Indeed, the term “agency” implies representation. In most cases however, hotel management agreements do not entail representation of the owner by the operator. The notion of agency thus gives only a partial view of the reality of a hotel management agreement.
Management agreements, business contracts and agency contracts: a subtle difference
The difference between these three management approaches may appear subtle yet it can be justified by how hotel management agreements adapt to the particularities of the sector, itself constantly evolving.
The legal status of business contract “contrat d’entreprise“, defined as a contract for work and materials, was rejected by the judge. Indeed, considering the management agreement as a business contract would have meant that the hotel operator own the business, employ hotel staff and bear the hotel’s operating risks. However, this was not the case since hotel employees were hired by the owner. As a result, the material actions on which the operator could rely to invoke a business contract were in fact performed by the owner’s employees.
This was primarily the case for actions performed by the hotel’s General Manager, responsible for the day-to-day management of the hotel and an employee of the owner, even though recruited by the operator under the terms of the hotel management agreement. The Paris Court of Appeal’s instructive November 9, 2012 ruling on this headlining dispute – crucial for the parties involved – endorsed the following principles: the hotel operator shall not bear the operational risk associated with running a hotel; the management agreement shall stipulate that the operator act in the name and on behalf of the owner; and lastly, the operator shall not be considered the owner of the business, or the de facto employer of the staff.
Hotel management agreements have gradually become more complex, adapting to the profile of institutional investors who are not specialised in the luxury hotel sector. This is where reverse management agreements come in, since they specify that the operator is the sole employer of the hotel’s staff, including the General Manager. This relieves the investor of all responsibility for managing employees. Other operational risks, however, are still assumed by the owner.
A hotel management agreement should not be confused with an agency contract, either – an operating model based on the rules of agency and governed by Articles L 146-1 to 4 of the French Commercial Code5. Some institutional investors still use the agency regime for upper-end hotels: this is clearly of no particular interest to the hotel or to the parties involved.
In conclusion, the Paris Court of Appeal’s 2012 ruling confirms the legal status of hotel management contracts and the respective obligations of hotel owners and hotel operators. In fact, most hotel management contracts are governed by the rules of agency set out under Article 1984 of the French Civil Code, thus adopting in practice the analysis of the Paris Court of Appeal.
Moreover, if there is one advantage that hotel management agreements can claim in France, it is their flexibility. Subject to compliance with the contractual principles of common law governing hotel management contracts, parties are free to adapt their contractual relationship as they see fit. When it comes to complex clauses, the balance of interests between investors and operators is becoming tricky to maintain in the face of the vivid imagination of those who draft hotel management agreements within international hotel groups.
However, in France, thanks to the creativity of legal experts working for major operators, the drafting of management agreements can be enriched by other general principles of law, inspired in particular by management leases6 “contrat de location-gérance”.
The question remains as to whether, in the event of dispute following the breach of one of these new complex hotel management agreements, for instance, the courts will continue to consider them under the agency regime.
1. Bail en état futur d’achèvement: Off-plan lease contract
2. Articles L.146-1 et seq. of the French Commercial Code
3. See Article 1103 of the French Civil Code: Contracts which are lawfully formed have the binding force of legislation for those who have made them
4. Article 1710 of the French Civil Code
5. See our articles on hotel agency contracts
6. See our article on LinkedIn – Hotel management contracts vs. hotel management leases: similarities and differences
Christopher Boinet
FR – IE Paris – Avocats
In Extenso Avocats
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