Knowing Your Management Agreement Under Force Majeure
- 19 hours ago
- 5 min read
Protecting Owner Equity When the Contract Was Not Written for War
During COVID-19, we published a widely read article on renegotiating hotel management agreements from the owner's perspective. That guidance helped dozens of owners secure fee deferrals, performance test suspensions, and operational concessions from their operators during the pandemic. The principles we outlined (specificity, leverage, and long-term relationship management) remain sound.
But the current crisis has introduced a contractual dimension that the pandemic rarely triggered with full force: the force majeure clause. And for most owners, what they find when they actually read that clause will be uncomfortable.
The Force Majeure Problem
The majority of hotel management agreements in the Middle East contain force majeure provisions that were drafted with natural disasters, political instability, and acts of God in mind. These clauses typically excuse performance obligations during events beyond either party's reasonable control. In theory, an armed conflict in the region should qualify. In practice, the application is far more nuanced, and the nuance overwhelmingly favors operators.
Here is why. Most force majeure clauses in HMAs are symmetrical in language but asymmetrical in impact. When force majeure is declared, the operator is relieved of performance obligations, meaning their failure to meet revenue targets, GOP thresholds, or brand standards cannot be held against them. But the owner's financial obligations frequently continue: base management fees (calculated on revenue, however diminished), system and marketing charges, and in many cases, required contributions to FF&E reserves.
Put simply, the operator's downside is capped by the clause. The owner's is not.
Force majeure clauses in most HMAs are symmetrical in language but asymmetrical in impact. The operator's downside is capped. The owner's is not.
The Five Negotiation Levers
Lever 1: Base Fee Deferral or Abatement
Base management fees, typically calculated as a percentage of gross revenue, continue to accrue even when revenue collapses. During COVID, many operators agreed to temporary deferrals, postponing collection rather than waiving it. In the current environment, owners should push beyond deferral toward partial abatement for the duration of the conflict. The argument is straightforward: if the operator cannot deliver on its core value proposition (driving revenue through brand power, distribution, and operational expertise) because external conditions make that impossible, the fee structure should reflect that diminished value delivery.
Operators will resist abatement and offer deferral as a compromise. If you accept deferral, ensure the deferred amounts are interest-free, that repayment is tied to a performance recovery threshold (not a calendar date), and that the deferral period is defined by the actual duration of conflict-related disruption, not an arbitrary end date.
Lever 2: Performance Test Suspension
Most management agreements include performance tests that allow owners to terminate if the operator fails defined benchmarks, typically measured against a competitive set or budget. These tests are your most powerful leverage point, and operators know it. In a conflict environment, operators will argue that tests should be suspended because the shortfall is attributable to force majeure, not operational failure. This argument has merit, but it should not be conceded without reciprocal value.
If you agree to suspend performance tests, negotiate for compensating provisions: an extension of the testing period post-conflict, adjusted benchmarks reflecting the new competitive reality, or operational concessions that give you greater oversight. The worst outcome for an owner is a suspension that effectively gives the operator a free pass with no accountability mechanism in its place. Every suspension should come with a replacement accountability framework, even if less formal than the standard test.
Lever 3: FF&E Reserve Deferrals
Contributions to the furniture, fixtures, and equipment reserve represent a significant cash outflow when that cash is desperately needed for operations. During COVID, FF&E deferrals were among the first concessions granted, and the same dynamic is playing out now. However, be strategic. If you are planning to use the current downturn as a CapEx window (as we argue in Article 5), maintaining your FF&E reserve may actually be advantageous. The reserve is your money, earmarked for your asset. Depleting it for short-term operational relief only to face a capital shortfall when the market recovers is a false economy.
Lever 4: Marketing and System Fee Reductions
Operators charge system fees and marketing contributions that fund centralized reservation systems, loyalty programs, and brand marketing. In a conflict environment where inbound tourism from key source markets has effectively ceased, the value proposition of these fees is significantly diminished. If your hotel's primary feeder markets have issued travel advisories for your destination, you are paying for marketing that is reaching an audience that cannot or will not travel to you.
Demand a reduction in marketing contributions for the duration of the conflict, with the savings redirected to locally relevant demand generation: corporate sales in resilient segments, government and NGO business development, or regional marketing to source markets that remain active. The operator's centralized marketing machine is not calibrated for crisis-specific demand. Your local team is. Fund them instead.
Lever 5: Enhanced Owner Reporting and Oversight
Crisis periods expose the information asymmetry inherent in the owner-operator relationship. When times are good, quarterly reporting suffices. When revenue has collapsed and every dollar matters, quarterly visibility is grossly insufficient. Use the current negotiations to secure enhanced reporting: weekly financial updates, daily occupancy and revenue reports, real-time visibility into procurement decisions and staffing changes. Operators will frame this as micromanagement. Frame it instead as shared accountability during extraordinary circumstances. The owners who maintain the tightest information flow with their operators during this crisis will make better decisions and preserve more value.
A critical observation from our experience across dozens of these negotiations: the owners who achieve the strongest outcomes are those represented by advisors who understand both the legal architecture of management agreements and the operational reality of how hotels generate profit. Legal counsel, by itself, tends to focus on clause construction. Operators negotiate from an asymmetric information advantage, i.e. they know your hotel's numbers better than you do. Bridging that gap requires a discipline that sits between legal and operations: specialist hotel asset management.
The Termination Question
Some owners are asking whether the current crisis provides grounds to terminate their management agreements entirely. The answer is highly contract-specific and jurisdiction-dependent, but we offer this general guidance: termination during a crisis is almost always more expensive than renegotiation. Operator replacement costs, brand transition expenses, system migration, and the disruption to an already fragile operation typically outweigh the benefits of a cleaner contractual structure.
The exception is when the operator relationship was already dysfunctional before the crisis. If performance was subpar, communication was poor, and strategic alignment was absent during normal conditions, the current disruption may accelerate a termination that was inevitable regardless. In those cases, the crisis provides both a practical opportunity (reduced displacement costs) and a contractual basis (potential force majeure triggers or performance test failures in the period immediately preceding the conflict).
For most owners, however, the better path is aggressive renegotiation within the existing relationship. The goal is not to punish your operator. It is to ensure that the financial burden of this crisis is shared equitably between the party that owns the asset and the party that operates it.
Adnan Shamim
Managing Partner, Middle East & Africa
Fred Novella
Founder & Principal
QUESTIONS FOR YOUR NEXT OWNERS' MEETING
1. Have you reviewed your management agreement's force majeure clause since the conflict began? Does it explicitly cover armed conflict?
2. What is the total fee burden (base, incentive, system, marketing, loyalty) you are paying your operator at current revenue levels? What would that same revenue cost under a franchise model?
3. Has your operator proposed any fee relief proactively, or are you initiating the conversation?
4. Are your performance tests currently suspended? If so, what replacement accountability framework has been agreed with the operator?
5. If you were to terminate the agreement today, what would the total cost be, including brand transition, system migration, and operational disruption?
The next article addresses the operational reality many of you are living right now: running a hotel at 10 to 20% occupancy, navigating the painful space between full closure and viable operations.
