Why so technical? Technical Services for Hotel Developments

The Dilemma

Developers develop, and hotel operators operate. So why do operators want to become so involved in the design and development stage of a hotel?  Shouldn’t the operators let the developers build their asset how they want, and worry about operations post the opening of the hotel?

When developers select an operator, they generally make their decision having regard to factors such as:

-Operational expertise;

-A fees vs value of service analysis;

-The ability to access sale distribution networks;

-Participation in corporate travel contracts; and

-The brand suitability for the product being delivered for the location and target market.

To ensure the product being developed aligns with the operator’s brand standards (including size and layout of guest rooms, facilities to be offered, the provision of required standards of fittings, fixtures and equipment (FF&E), façade and materials to be used in construction), the operator must have the ability to have input (and approval) during the design and build process. The relationship between the parties during this phase of design and development is governed by a Technical Services Agreement (TSA), which may be either presented as a separate agreement, or as a schedule to a Hotel Management Agreement.

Key issues arising under a Technical Services Agreement

There are a number of key issues that often arise that must be negotiated and resolved between the parties prior to design commencing. As a number of these issues can lead to disputes between the parties in relation to the design, construction and ultimate opening of the hotel, it is important when negotiating a TSA to carefully consider the terms of the agreement and the long term legal and commercial impacts that they may have.  Although not by any means an exhaustive list, the following items generally arise as issues for negotiation:

Provision of design guidelines and brand standards – With interest costs on financing often driving developers to want to progress design and development as quickly as possible, developers will often ask for early access to design guidelines and brand standards even in the negotiation phase so as to assess the likely cost implications of the operator’s requirements.  However, operators will be reluctant to provide these documents without the owner contractually committed, and with the payment of a fee.  In exceptional circumstances, operators may provide certain technical services in exchange for a fee, and pursuant to the terms of an Interim Technical Services Agreement entered into between the parties, to allow designs to progress whilst negotiations are being finalized.

Owner’s engagement of consultants – While the owner will engage all consultants for design and construction, the operator will retain approval rights over those professionals.  The operator will require that owner engages only those consultants and contractors that have experience delivering hotel projects.  Ideally, major consultants will be pre-approved and set out in schedule.

Non-performing consultants – if consultants are not performing to standards required by the operator, there may be provision in the TSA for the operator to require their replacement.  As this will have obvious time and cost implications for the hotel, it is important that both owner and operator work together to ensure that duly qualified (and committed) consultants are chosen at the outset.

Submission of items for approval – timelines for submission of design documents, and the operator’s required response times must be carefully adhered to in order to ensure that project timelines are not extended unnecessarily.  Operators should be required to either approve or give feedback (requiring variations to design documents) within a reasonable time.  It is unlikely that operators will agree to ‘deemed consent’ mechanics in the TSA in circumstances where feedback is not provided within the required timeframes.

The mock-up room – before finally fitting out all guest rooms, developers will be required to seek approval of the final fit-out of a test room to ensure it complies with all approved design documents and the operator’s required standards. Once the test room is approved, the developer will be required to ensure that all rooms are fitted out to the required standard of finish.  Given that this process occurs closer to the final stages of construction, any delays in sign-off of the test room has the potential to impact timelines under the construction contract, which could have the potential to trigger extension of time claims.

Defect rectification prior to opening – minor defects may be overlooked in non-hotel development projects, however operators will want to ensure that the hotel does not open before most defects are rectified so that their brand reputation is not impacted by guests visiting after the opening date who may leave poor guest reviews – damaging both the hotel and the operator’s reputation.  It is imperative that the developer and operator agree a stringent regime for swift rectification of defects, and consideration must be given to what item of defect would qualify as requiring rectification before opening.

Payment for services – from the commencement of technical services to opening of the hotel, the operator will require payment for its technical team.  Care should be taken to ensure that payments are made against completion milestones, and not simply against a certain timeline.  As with all construction projects, the originally envisaged timeline for approvals and construction progress may be delayed, and it is therefore sensible to only agree to pay as and when services are actually rendered.

 Overarching concerns

The interests of the developer and operator are aligned – neither receives revenue from the hotel unless it is open and receiving paying guests.  The key priority must be ensuring that, upon completion of the new-build hotel, the brand standards have been complied with and the hotel is operationally efficient to ensure the best chance for operational excellence, while the parties work together amicably throughout the process to ensure timelines are met in the planning, design and construction of the hotel, without compromising on compliance with the operator’s required brand standards.