Retail Management Agreements vs. Retail Leases: It's All About Control!
By Tara K. Gorman Partner, Perkins Coie LLP | October 28, 2008
It's simple. It's all about control! A retail management agreement typically provides a hotel owner with much greater control over the day-to-day operations of a retail facility than a retail lease does. The first question a hotel owner should ask is, "do I really want control over the day-to-day operations of the retail facility?" The answer may vary from facility to facility. For example, the hotel owner may not wish to delve into the day-to-day operations of the sundry shop, but the food and beverage operation, that may be quite a different matter because the food and beverage experience is closely tied to the overall guest experience.
There are pros and cons to each scenario, and the terms and conditions of the lease or the management agreement can be creatively structured to reach that fine balance between control and "hands off". Surprisingly, economics do not play into this issue as much as one would think.
What's the Difference?
Management Agreement: A management agreement is an agreement whereby the retail operator agrees to manage the retail facility on behalf of the hotel owner. Typically there is a definitive term, clear expectations as to the day-to-day operations, including layers of consent (i.e. control) from the hotel owner prior to the performance of various activities and clear guidelines and options for termination of the operator, including termination for poor performance on the part of the operator.
Lease: A lease provides the tenant with an interest in real property, exclusive use and possession of the retail facility, and typically, unless there is a default of some magnitude which has not been cured within the applicable notice and cure period, a lease is terminated upon the expiration of the term set forth in the lease. While the hotel owner may have broad consent rights over such things as alterations to the premises and assigning the lease, beyond safety and cleanliness, the landlord typically has little say over the day-to-day operations of the retail facility.
License Agreement: Another option is for the hotel owner to grant the retail operator a license to enter the retail facility and to perform specific acts therein. A traditional license provides a temporary privilege to the licensee and is revocable or terminable at the discretion of the licensor. While the license may offer hotel owners the illusion of maintaining flexibility and control over the hotel, the more a license resembles a lease by incorporating restrictions and provisions typically found in lease, the more likely a court will interpret a license as a lease and grant the licensee under the license the same rights as a tenant would be granted under a lease. In fact, in just such a case the court stated, "the parties' agreement contained many provisions typical of a lease and conferring rights well beyond those of a licensee or holder of a mere temporary privilege." Therefore, the court interpreted the license as a lease and the hotel owner ran up against landlord/tenant law. We will keep our analysis to the comparison between management agreements and leases.