Clarity, common sense sought in Middle East contracts
Clarity, common sense sought in Middle East contracts
20 FEBRUARY 2019 8:36 AM

The period of blinkered goodwill seemingly over, each side in the owner-operator-brand triangle must understand the others’ strategies and profit curves.

ABU DHABI, United Arab Emirates—Nervous energy has seeped into the relationships between owners and operators in the Middle East as supply grows at the expense of other metrics, according to sources.

Certain Middle East markets are seeing more heated debate as markets dip and initial alignments that were relatively effortless become skewed. Talk of termination is being heard more as owners learn costly lessons, said speakers on the “What makes a bad owner, and how to avoid being one or signing up with one?” panel at the Gulf & Indian Ocean Hotel Investors' Summit.

The honeymoon in the Middle East is over, and the lack of attention given to pre-opening agreements, as opposed to management contracts, must end, speakers said.

“A technical service agreement is not a contract agreement if owners do not follow them,” said Sarah Khalifa, senior associate of real estate and hospitality at legal firm Clyde & Co.

Ludwig Bouldoukian, regional VP of development, Middle East and Africa, at Hyatt Hotels Corporation, said one problem is the rush to open hotels when supply is not such an issue. In a rush, owners might not have taken sufficient time to discuss contract considerations such as pre-opening and technical services fees, he said.

Panelists said that with green-field developments, there often is no brand as yet involved, nor sufficient time to plan properly and seek advice. However, if all sides don’t initially do their sufficient homework, when a market starts seeing pressure and the brands already are on board, waters can get muddied and poorly-thought-out contracts can inhibit termination and add noticeably to costs.

Safety, security and fire are non-negotiable, but some operators should consider walking away if owners push back too much from other standards, Khalifa said.

On the other side of the coin, owners should push back against terminating contracts too heavily favoring operators, panelists said.

One reason this might not happen in the Middle East often is that one or more of the parties might have sought a footprint in the destination for some time as governments tout expansive tourism visions, panelists added.

Pre-opening agreements are critical, said panelists, who offered a checklist of problem-avoiding must-dos, although they added this was far from being an exhaustive list:

  • Pick up the phone. Relationships are critical, as the contract passes by its honeymoon stage very swiftly, especially in markets that quickly create maturation and then almost as quickly sub-markets.
  • In bad times, no one can expect owners to sit to one side or take a back seat. Include everyone.
  • If owners have control of the budget, putting performance testing on operators must be done sensibly, as operators who feel squeezed likely will walk, especially as operators consider themselves experts in terms of annual management plans.
  • Generally it can be considered that the end is nigh if the consultants are brought in, especially in a market where changes are so fast that there simply is not time for in-depth studies and overhauls.
  • Understand that if the operator fails a second and third performance test, evidently it is not the right product for them.
  • Owners must make provision for securing claw backs of money put into projects as such decisions have a retrospective effect if arbitration takes place.
  • If a deal is signed that includes liquidated damages, operators should sign it with eyes wide open as it might limit the damages to which they are entitled, and make sure it is enforceable in that particular market.

There are clauses, and then there is the law
Panelist Bishoy Samy Edward, COO of construction company Dhabi Contracting LLC and an owner himself, recounted a quarrel which broke out between his firm and a proposed operator, and in which the government indirectly joined in the fray.

“We realized we did not need the operator. In some markets, when they come in, it doubles the price,” Edward said. “A brand finally was signed with, but then the government stepped in and said we had to close the property. We said no, so eventually we signed a contract to shorten the hotel’s height. Obviously, we lost rooms.”

It can be a mistake to assume that the type of contract that lets no water through in already mature markets will be as impervious everywhere, especially in developing markets. For one, hoteliers in the Middle East are learning that performance tests are hard to enforce, although there is be more talk of them as owners become more conscious of risk in the market, panelists said.

An audience member during the panel discussion presented the view that owners are pushing back against what they see as an unfair deck favoring operators of such contract stipulations as force majeure clauses.

But when arguments over such clauses as cure and claw back payments take hold, owners might have no option but to be considered bad owners, panelists said.

“Trying to reprimand owners because they are not paying by asking them to pay more never works,” Bouldoukian said.

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