The Performance Test: Time for a Change?

By Paul Courtnell Director, Leisure & Resorts Group, Gunster LLP | November 07, 2010

Introduction

Most hotel management agreements contain a "performance test" that gives the Owner of the hotel an option to terminate the management agreement if the Operator fails to achieve one or more financial benchmarks in the operation of the hotel. Many of these performance tests were negotiated under very different economic conditions than prevail today. Given the new reality that prevails in the hotel industry, Owners, Asset Managers and Operators should be reviewing the performance tests in their existing management agreements to determine if it is time for renegotiation. With respect to new management agreements, the parties should approach the performance test by keeping in mind the mistakes made and lessons learned from the past. This article explains the components of a typical performance test in a management agreement and recommends areas for examination and negotiation.

Components of a Typical Performance Test

A typical performance test negotiated in better economic times probably contains the following elements –

  • Delayed Start Date: Typically, the performance test may not commence until the fourth or fifth full year of management by the Operator. Particularly in the case of a newly constructed hotel, the purpose of the delayed start date was to allow the hotel to reach stabilization.

  • More Than One Year of Failure: The language usually provides that the test must be failed either for two consecutive years or two out of three years for the Owner's termination option to be activated.

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Human Resources: An Era of Transition

Traditionally, the human resource department administers five key areas within a hotel operation - compliance, compensation and benefits, organizational dynamics, selection and retention, and training and development. However, HR professionals are also presently involved in culture-building activities, as well as implementing new employee on-boarding practices and engagement initiatives. As a result, HR professionals have been elevated to senior leadership status, creating value and profit within their organization. Still, they continue to face some intractable issues, including a shrinking talent pool and the need to recruit top-notch employees who are empowered to provide outstanding customer service. In order to attract top-tier talent, one option is to take advantage of recruitment opportunities offered through colleges and universities, especially if they have a hospitality major. This pool of prospective employees is likely to be better educated and more enthusiastic than walk-in hires. Also, once hired, there could be additional training and development opportunities that stem from an association with a college or university. Continuing education courses, business conferences, seminars and online instruction - all can be a valuable source of employee development opportunities. In addition to meeting recruitment demands in the present, HR professionals must also be forward-thinking, anticipating the skills that will be needed in the future to meet guest expectations. One such skill that is becoming increasingly valued is “resilience”, the ability to “go with the flow” and not become overwhelmed by the disruptive influences  of change and reinvention. In an era of transition—new technologies, expanding markets, consolidation of brands and businesses, and modifications in people's values and lifestyles - the capacity to remain flexible, nimble and resilient is a valuable skill to possess. The March Hotel Business Review will examine some of the strategies that HR professionals are employing to ensure that their hotel operations continue to thrive.