Hotel management agreements: fees, performance tests and exit clauses

A hotel management agreement is a contract in which the owner keeps the property, the revenue and the costs, and an operator runs the hotel in the owner's name for a base fee, an incentive fee and reimbursed costs. Turkish law does not name it as a contract type, so the written clauses decide everything.

The operator's draft arrives with a fee schedule, a budget calendar and a performance test, and each clause looks reasonable on its own. The owner's real question is narrower: in a bad year, who gets paid first, and how does either side walk away? After reading this you will be able to turn the draft into a written list of questions for counsel, covering fees, budget approval, the performance test, capital spending, the bank accounts and the exit.

What is a hotel management agreement, and who holds what?#

The owner keeps the building, the revenue and the costs; the operator runs the hotel in the owner's name and for the owner's account, and is paid fees for doing so.

The business result stays with the owner. Revenue and operating costs sit on the owner's profit and loss, and the operator's fees are a cost inside it. The operator brings the brand, the reservation systems, the sales effort and the management team, and hires the general manager who runs the property day to day.

The structural test is one sentence: does the operator trade in the owner's name and for the owner's account, or does it trade for itself and pay the owner a rent? The second is a lease, not a management agreement. If the structure is a lease, the rest of this article does not apply and you should read about the difference between an ordinary lease, a hasılat kirası and a management agreement instead.

Why the name of the contract settles nothing#

Turkish law does not name this contract. The Turkish Code of Obligations (Türk Borçlar Kanunu, Law No. 6098) has eighteen chapters of named contracts and relationships, from sale to simple partnership, and a hotel management agreement is not among them; the Code's text does not use the term (Mevzuat Bilgi Sistemi, consolidated text, 2026-11-07). Article 26 lets the parties set a contract's content freely within the limits of the law, and Article 502 applies the mandate (vekâlet) provisions, as far as they fit, to service contracts the Code does not regulate, per the consolidated text of Law No. 6098 on the Mevzuat Bilgi Sistemi (opens in a new tab).

The practical consequence is that nothing is implied by the document's title. A clause that is missing is not supplied by custom, and a clause that is vague is read later by whoever holds the cash and the records. Read the draft as a list of questions for counsel, not as something to accept or reject as a whole.

Base fee and incentive fee: what is each one calculated on?#

A base fee is calculated on revenue and an incentive fee on a profit line. The contract must define both bases exactly, because the definition, not the label, decides who carries a bad year.

For the base fee, the draft must say whether the base is total revenue, rooms revenue, or revenue after named deductions such as commissions and discounts. Each choice moves the fee when the mix changes, for example in a month heavy with groups or restaurant sales. A revenue-based fee is a cost of operation, so it is paid before the owner's return: in a weak year the owner can lose money while the operator still earns.

For the incentive fee, identify the profit line precisely. Gross operating profit is revenue minus departmental and undistributed operating expenses, before management fees, rent, property tax, insurance and capital spending. If the fee is calculated on a line that already deducts the base fee, the two sides are arguing about the same money twice. You can prepare by understanding GOP margin and flow-through from your own P&L.

The profit line is the negotiation#

Ask for a worked example on your own numbers: last year's actual revenue and costs run through the fee formula, so you see the fee in a good month and in a bad one before you sign. Then check the lines around the fees: what the operator charges back as reimbursables and on what evidence, whether those charges sit above or below the profit line used for the incentive fee, and who bears an overspend on pre-opening or technical services during construction or renovation. Finally, currency: which currency the fee is denominated in, which exchange rate applies, and whether the fee is indexed. Confirm the tax and currency treatment with your accountant.

Who approves the budget, and what happens when the two sides disagree?#

The budget clause decides who prepares the plan, who approves it, by when, and what operates if approval fails. If it is silent on the last point, the operator's draft can become the year's plan by default.

Separate the operating budget from the capital budget. The first governs day-to-day spending, the second governs replacement and renovation, and they need different approval routes and different calendars. A good starting point is knowing how to build next year's hotel budget month by month before you judge someone else's.

Name the fallback in writing: a fixed uplift on the previous year's approved plan, an independent expert, or a defined dispute route. Each has a cost, and silence is the most expensive option of the three. Set spending authority too: what the general manager may commit without approval, what needs the owner's signature, and which categories (safety, legal compliance, emergency repair) bypass the limit and must be reported afterwards.

Require monthly reporting against the approved budget, with a written explanation of any variance above a threshold the contract fixes. Decide how the replacement reserve is treated: taken from revenue before the profit line, held in a named account, and released only against an approved capital plan. Say what happens mid-year: who may reforecast, how often, and whether a reforecast needs the owner's approval or only notification.

How does a performance test actually work?#

A performance test compares one number the hotel produced with one number it should have produced, over a defined period, and attaches a consequence to missing it. Without the consequence it is a report.

There are two families of test. A market test compares revenue per available room against a defined competitive set and expresses the result as an index; a budget test compares gross operating profit against the approved plan. The contract must say whether failing one is enough or both must fail. To read a market test properly, it helps to understand MPI, ARI and RGI, the index measures used against the competitive set.

The measurement source must be named: whose data, which index provider, which period, and what happens if the data is late or unavailable. The competitive set is the whole test. The operator often proposes it, so the contract must say who fixes it, on what criteria, and how it changes when a new hotel opens across the road.

Cure mechanisms are the consequence: the operator pays a shortfall into the reserve, the incentive fee is reduced or forfeited, or the owner gains a termination right after a defined number of consecutive failures. Decide between a single-year test, which can be lost to a renovation or a market shock, and a rolling test, which is fairer but slower to trigger. Exclusions for closures, force majeure, government action, or the owner's own failure to fund an approved capital plan are each a hole in the test, so write them narrowly.

Reserve, capital spending and brand standards: who pays for what?#

The owner pays for the building and the operator spends the owner's money on running it. The contract must draw the line between maintenance funded from the operating budget and capital work funded separately by the owner.

The replacement reserve is a set-aside calculated on a defined revenue base, held in a named account, released only against an approved capital plan. Say who holds it, who signs for it, and what happens to the balance at exit. Brand standards are the other commitment: joining a brand brings a schedule of required works and periodic upgrades, so the owner is committing to capital spending whose timing it does not control. Ask for the current standards in writing rather than a summary.

The renovation cycle needs its own clauses: who decides the scope, who appoints the designer, who approves the budget, and what happens if the owner declines to proceed. The contract should say whether refusal is a default, a termination right, a fee, or a loss of the brand, and whether phasing is allowed. Draw the maintenance-versus-capital line in figures: a leaking roof is capital, a broken lamp is operating, and the threshold should be written so the general manager is not guessing and the owner is not surprised. Finally, list the owner costs that sit above the profit line, such as insurance and property tax, because they change the profit figure the incentive fee is calculated on.

Bank accounts, reporting and audit rights: who controls the money?#

Because the hotel's cash is the owner's cash, the agreement must say which accounts hold it, who can move it, what the owner receives each month and what the owner may inspect.

Start with the operating account: in whose name, at which bank, who signs, and how the operator's fees and reimbursables are drawn, whether on invoice, against the approved budget, or by transfer after reporting. Then cash handling: who collects at the front desk, how deposits are banked, and who reconciles the settlements from payment providers and online travel agencies.

The reporting pack and calendar should be fixed: monthly profit and loss against budget, balance sheet, cash flow and ledger detail, delivered by a fixed date. The owner's team should be able to tie the bank statements to the reports without asking for extra files. The audit right should state how often the owner may inspect the books, with how much notice, at whose cost, and whether the owner's accountant sees the underlying ledger or only a summary. Data is the quieter half of the same question: reservations, guest records and financial history belong to the hotel, so the contract must give an export right in a usable format, during the term and at exit, not a PDF at the end. Signing authority and bank mandates are the clauses most often left to a side letter; put them in the agreement itself.

Term, renewal, termination and what happens at exit#

The exit clauses decide the real length of the contract, not the term printed on the first page.

Term and renewal come first: the length, whether renewal is automatic, the notice window for stopping it, and whether renewal depends on passing a performance test. Termination for cause needs defined events, such as insolvency, material breach, failure to fund an approved plan, or failure of the performance test, together with the notice and cure period, and a rule on who decides whether the event occurred.

Termination without cause is the owner's real freedom: whether the owner has it at all, after how long, on how much notice, and at what fee, and whether a sale of the hotel triggers it. Change of control on either side matters too: what happens if the operator is acquired, or if the owner sells the property to a buyer with its own operator. Transition is where value leaks: handover of data, open reservations, guest records, staff, supplier and agency contracts, keys and system access, with a defined cooperation period and the fee for it. Restrictive covenants decide whether the operator may run a competing hotel nearby after exit, and for how long.

Survival is the last question: which clauses continue after termination, such as indemnities, audit rights, confidentiality and payment of accrued fees. Because the Code names no such contract, the termination regime is what the text says, read with the general provisions of the Code; counsel should confirm how those apply.

What to do next#

Take the draft and turn each clause into a written question for counsel, starting with four: what is the base fee calculated on, what operates if the budget is not approved, what happens when the performance test fails, and how does either side leave. Fees, budget, test and exit are one economic argument seen from four sides, and the answer to each one changes the value of the others.