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Hotel Management Agreements under German Law – Potential Surprises for Asian Investors and Operators

7 October 2014
Mayer Brown Article

Hotel management agreements have become more popular in Germany in recent years. It is therefore worth examining in some detail the regime for such agreements under German law. This article highlights certain unusual provisions applicable to hotel management agreements under German law that may come as a surprise to international investors and operators experienced in other countries.

How Do Hotel Management Agreements Work?

The source of German law is the codes, the most important of which being the German Civil Code (Bürgerliches Gesetzbuch). While the German Civil Code covers several kinds of codified agreement, it does not include hotel management agreements. These are regarded as hybrid agreements and fall partly under the regulations covering agency agreements (Geschäftsbesorgungsvertrag) and partly under those applicable to service agreements (Dienstleistungsvertrag). If the manager is required to meet certain targets (e.g., certain turnover or performance targets), some regulations of the contract for work and labour (Werkvertrag) may also apply.

The various applicable regulations include certain restrictions concerning what may be agreed in a hotel management agreement and other areas of German law may also apply. More details are provided below.

Special termination rights

According to section 627 of the German Civil Code, any service agreement under which the service provider does not receive fixed remunerations and enjoys a position of trust may be terminated by either party at any time.

Therefore, a hotel management agreement under German law that is drafted as a service agreement – e.g., without any obligation on the part of the manager to achieve certain performance targets, and without any fixed remunerations in favour of the manager – carries the risk of being terminated by either party at any time.

It is not certain that section 627 would apply to hotel management agreements. However to avoid any such risk, this special termination right should be explicitly excluded from (all) German law hotel management agreements.

Furthermore, the German Federal Supreme Court holds that if the performance of the manager is so poor that the owner does not receive a minimum return on its investment over a long period of time, this may result in a special termination right in favour of the owner.

Unfortunately, it is unclear as to what exactly is meant by a poor return over a certain period of time, so there is some uncertainty as to when this special termination right may become effective.

In order to mitigate such risk, it is advisable to agree, and to specify in detail in the hotel management agreement, the circumstances under which the owner may be entitled to terminate the hotel management agreement due to poor performance of the manager.

Implications of German labour law

Usually in hotel management agreements, all employees are employed by the owner and not by the manager. However, daily hotel operations often create an impression which is in contrast to what is stated in the hotel management agreement, e.g., the payroll is managed by the hotel manager; the benefit scheme of the hotel manager is used; the labour agreements are based on patterns set by the manager, etc.

These and other operational aspects could lead some to the conclusion that, under German labour law, the hotel manager has (with respect to the managed hotel) its own business; therefore responsibility for the employees could be shifted from the owner to the hotel manager in accordance with section 613a German Civil Code.

To mitigate this risk, the manager is advised to have certain provisions included in the hotel management agreement to ensure that the employees remain the responsibility of the owner.

Duration

Usually hotel management agreements are fairly long-term and the more up-scale the category, the longer the term. The German Federal Supreme Court has, however, limited the possible duration of hotel management agreements in Germany (the so-called “Holiday Inn” decision).

This decision related to a hotel management agreement, with a 20 year term, with three options of 10 years, each in favour of the manager. The German Federal Supreme Court argued that a duration of 50 years would unduly limit the flexibility of the owner. The owner would, according to the regulations of the hotel management agreement, be unable to influence the management of the hotel; furthermore, the owner would be unable to anticipate or plan for the changes in the general economic circumstances which may occur over such a long period of time. The German Federal Supreme Court concluded that having such restrictions imposed on the owner was not in line with German law. The German Federal Supreme Court held that, while a duration of 20 years would raise no legal concerns, any duration exceeding 20 years would be considered excessively disadvantageous to the owner and is therefore not permissible under German law.

Therefore, any hotel management agreement which binds the owner for more than 20 years carries the risk of being illegal with respect to the term. Of course, there are ways round this, but these need to be specifically adopted for each agreement.

Conditions for validity of hotel management agreements

As a hotel management agreement may be considered to be an agreement between business enterprises, according to section 291 of the German Stock Corporation Act (Aktiengesetz), the conclusion of a hotel management agreement may be subject to certain conditions in order for it to be considered valid.

In particular, where a hotel management agreement is regarded as a contract between business enterprises, such agreement needs to be entered into the Commercial Register in case the owner is organised as an incorporated enterprise. If it is not entered into the Commercial Register, such agreement will be null and void.

International investors should be aware of these provisions when embarking on any hotel project in Germany and if in any doubt, take local legal advice to ensure their interests are protected.

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