What’s hotel management and what’s not (despite appearances)?

José Manuel Cardona, partner at Tax department of Garrigues in Palma.

Much has been written about hotel management contracts, their legal nature and their place within the different contractual arrangements available under Spanish law. Nevertheless, in our professional lives we too often encounter contracts that include clauses or use descriptions or definitions that collide head-on with how those contracts should actually be framed.

No express provision is made for hotel management contracts in the Spanish Civil Code or Code of Commerce. They are therefore “atypical” contracts, which is the primary reason for ensuring that their drafting correctly covers the full extent of the relations between the parties, the conditions governing mutual obligations and grounds for early termination, etc. And also because there is no single “school of thought” for this type of contract. The proliferation of hotel chains means that each management entity applies its own experience, guidelines and instructions. Thus, in our day-to-day experience, and depending on the profile of the management entity and the hotel owner, there are many alternatives and variables to be considered when drafting the different clauses making up a contract like this. In short, hotel management contracts are unregulated and moreover, in practice, are not governed by their own body of principles serving as a reference point or standard model.

In view of the diversity described above, there is a need for uniformity that should not be questioned. What I am referring to here is the legal nature of these contracts and, in consequence, their non-inclusion within other contractual arrangements which, despite sharing one or two common traits, are not the same as or identical or equivalent to hotel management contracts.

There is a need to take steps to ensure that the drafting of hotel management contracts reflects their true legal nature, even though their legal nature is not established by law, as we have seen. This demand for identity is closely linked to the history and traditions of the sector, to the economic and strategic motives of management entities and hotel owners, and to the meeting of their mutual interests in order to conclude such a contract. In short, it is simply a question of remembering what lies at the heart of this contract: the owner of a hotel business asks an expert professional to, in the former’s name and for its account, manage the hotel in accordance with the latter’s judgment and discretion (thus applying the management entity’s experience and knowledge), in exchange for remuneration which is normally calculated on the basis of or benchmarked to the income and results of the hotel establishment.

In order to clarify all of this, it is perhaps worth having recourse to the classical ontological method of the description or statement of “what something is” by reference to “what it is not”. We have seen in (very) basic terms what a hotel management contract involves. Now, to help determine its identity, let us contrast it with contracts which, although similar, are not the same or do not fit in the same category.

Thus, hotel management contracts are not corporate contracts since, although both parties have a common interest in the same business, only one of them (the owner of the hotel business) assumes the risks and benefits of the contract and at no time shares ownership of the business with the other party. Nor are hotel management contracts joint venture contracts because the profits of the business are not shared, although the remuneration of the hotel management entity is benchmarked to the results of the hotel. They are not the same as contracts of mandate or commission, either, as these usually relate to specific acts rather than a continuous activity; the hotel management entity carries out its activity in accordance with its own criteria and the standards of its own chain, applying its own intangible assets (mainly its know-how), not, as in the case of a straightforward mandate, in accordance with the instructions or rules of the principal. And of course, a hotel management contract is not a lease of a hotel (either of the hotel building or the hotel industry), since the management entity does not assume ownership of the hotel business or, therefore, possession of the hotel, and above all because it is the hotelier (that is, the owner of the hotel) who remains the owner of the operational income and expenditure (of the profits or losses), not the management entity.

It is very important that the hotel management contract is consistent with and does not contradict its legal identity, as otherwise confusion might arise or grow as to the rights and obligations of the parties, leading to conflict between them.