Introduction to Franchise and Management Agreements in the Hotel Industry: Spotlight on Egypt and the UAE

Legal Considerations in Franchise and Management Agreements for Hotels: A Global Perspective

Management contracts and franchise agreements are the two main types of variations of these agreements. Within the hotel industry, they are transferred 3 to 1.5 percent of the total number of hotel accommodations worldwide. The increasing importance of franchise and management agreements in the context of the hotel industry is a global phenomenon and is driven by a range of factors. One of the key elements of how these agreements function in practice is the relationship between franchisor and franchisee or managing operator and impacts upon this, such as macroeconomic trends in mature and emerging hotel markets, shifting focus from ownership to operations, sensory marketing, the impacts of social media, and the control of experiences. The rise in shareholder activism to enforce change and the global economic downturn all influence how these agreements operate in practice. In addition to this, while significant amounts of control may be exerted by private parties, some degree of control might equally be under the control of public actors through the use of hard and soft law frameworks. Thus, legal agreements are key to their success.

The nature and operation of each of the different legal standards in hard and soft law comprise, inter alia, the key themes of this paper. This is done through the lens of a global perspective, paying particular reference to recent innovations in the market in Asia, the Middle East, and the United States of America. The process of managing hotel premises, including rights to acquire the operating business of an individual hotel or portfolio of hotels—either by buying shares in the company or through an asset or business transfer—is dependent on the nature and content of formal written legal agreements and also local legal presumptions. Where the parties to the arrangement are disparate, such as in a franchisor/franchisee relationship or where a hotel operator is engaged specifically as a manager rather than a deposit holder, a formal agreement or series of agreements will, from the outset, need to be in place, setting out the parties' respective rights and obligations. Provided that the franchisee or equity investor can demonstrate possession of nearly all the personnel, technical, and financial resources to meet these various obligations and to underwrite or guarantee any relevant financial commitments, there is likely to be flexibility in the drafting decisions open to the parties and equally a very considerable symmetry between the contents of a franchise agreement and those of a hotel management contract.

The Difference between Franchise and Management Agreements

Franchise agreements and management agreements are the two options generally available to a hotel owner seeking to engage a third party to manage its hotel. Although sometimes used interchangeably, the terms "franchise agreement" and "management agreement" have distinct meanings. Franchise agreements typically involve a license of the brand's name and operating systems to the franchisee, who is responsible for independently operating and managing the hotel. Franchisees typically agree to operate the hotel in accordance with the licensor's brand standards. In return, the licensee typically has a right to inspect the hotel from time to time, has a right to receive a license payment calculated as a percentage of the hotel's revenues, and is typically indemnified by the franchisee for any claims relating to the condition of the hotel or the services the franchisee provides. On the other hand, management agreements generally involve the appointment of the manager as the owner's agent, responsible for operating the hotel, in return for, at a basic level, an annual management fee calculated as a percentage of the hotel's revenues and possibly a share of profits.

Operationally, the main difference is this: a franchising company is selling the right to use its logo and directly pays a percentage of revenue and sales for buying the goods and services. The premises can even give up the brand and operate independently. In contrast, a hotel management operator manages or regulates a hotel. They are not hotel operators. The company takes a percentage of revenue or earnings that changes every year according to the hotel's performance. This is just an average level of management contracts.

Franchises commonly require brand operators to pay royalties based on a percentage of sales or total revenue. In contrast, the usual management contracts require the operator to pay only a small base fee in exchange for the hotel's control and performance. Franchisees are generally required to deduct taxes from their income before paying royalties and use these royalties to pay off loans.

Compliance with Local Laws and Regulations in the United Arab Emirates and Egypt (with examples!)

Licensing agreements for hotels under the brand name and management or franchise of a third-party operator in the hotel industry are required to follow local laws and regulations in the country. Local laws and regulations play a vital role in franchising and management agreements for hotels around the world, affecting the many clauses in the agreement, such as the duration of the contract, the penalties, and the contractual obligations of both parties. This must be conducted properly because there are several penalties or actions if it is null and void for the franchising contract. The United Arab Emirates and Egypt are two Arab countries that are geographically close and provide substantial development in the field of hotels and tourism. Both countries have legal environments that complement each other. This raises a new set of standards for the regulatory regime in the hotel management and franchise business under the federal or local laws of the UAE and Egypt, as the nature of their legal systems and local regulations should be considered.

The hotel industry in the United Arab Emirates is regulated by several different licensing and regulation requirements at the federal and local levels according to the Emirate, such as Dubai. Hotels in Dubai are required to comply with local regulations. In Dubai, the body authorised to regulate all hotel properties is the Department of Tourism and Commerce Marketing (DTCM) and the Department of Economy and Tourism (DET) and its programs that support economic, business, and tourism growth within the Emirate. All hotels have to be starred, and they have to meet the standards set by the DTCM. In the UAE, all employees in hotels, including foreigners or expats, regardless of their position, are covered by the labour law, Federal Decree-Law No. 47 of 2021 Regarding the Unified General Rules of Labour in the UAE.

In Egypt, foreign or economic cooperation with respect to the operation and management of hotels is regulated. The new law No. 8 of 2022 regulating hotels and tourism establishments is issued in Egypt on 6 March 2022 ("Law"). The Law Lawcels and replaces Law No. 1 of 1973, and it regulates the licensing and regulatory compliance requirements for hotels and tourism establishments. The law relies heavily on the executive regulations that should be issued, in addition to the executive decisions to be issued regularly by the Ministry of Tourism ("MOT"). This Law provides the general framework for registering and operating hotels in Egypt, which applies to hotels equipped with a hotel residence for general visitors for a limited period and includes the hotels and accommodations. Every catering service house that is fitted with a hotel unit or more, or if in the same building or vacation village, must have at least one of its units as a hotel. In order to operate a hotel in Egypt, you must get an operating permit to authorise your operating schedule, which is to be issued by the governor-general director of hotel and tourism accommodation.

Intellectual Property Considerations in Hotel Franchise and Management Agreements

Intellectual property considerations are fundamental in franchise and management agreements in the hotel industry. The use of the brand of the hotel operator, which is granted under licensing, will depend on trademarks, trade secrets, confidential information, and copyrights of the hotel operator. The importance of the internet, digital media, and global personal communications makes the strength and wide appeal of brands vital to the marketing and operational strategy of many businesses, including the hotel sector. A key tool in the owner's involvement in hotel management and franchise agreements is the licensing of intellectual property rights to the manager or franchisor.

While the owner/operator model has gained in popularity, the hotel industry continues, for the most part, to be dominated by the franchise model. No matter the model, when two parties from different countries agree, those agreements must comply with not only the local laws but also with transnational laws. Both hotel franchising and management agreements are becoming increasingly sophisticated as consumer needs in the global marketplace grow. Typically, the increasing sophistication is associated with growing risk within the agreement and an improved potential for further brand growth. Within these two types of agreements are several key "real" points that the hotel operator or franchisor, as licensor, must address in each agreement. They include the degree of protection of the licensor's intellectual property rights, the overall brand image, and the licensee's systems as codified in the "manuals" or "standards.". Both of these deal points are supported by and interrelated with intellectual property rights. The primary types of intellectual property rights in the brand are trademarks, service marks, trade names, copyrights, and trade secrets.

Dispute Resolution Mechanisms in Hotel Agreements: 

Typically, litigation, arbitration, and mediation are the most frequently employed dispute resolution mechanisms in hotel and resort agreements. Good hotel agreements typically include arbitration provisions, despite the fact that mediated settlements are generally preferred, as the hotel is a limited-purpose asset and litigation is costly. This is particularly relevant in the global hotel industry, where franchisees and hotel proprietors may be situated in distinct countries. In this situation, foreign state litigation may pose even greater obstacles than domestic state litigation. An additional critical factor is to guarantee that franchise contracts, like the majority of standard contracts, are intended to resolve any disputes in the most cost-effective manner feasible.

In the selection of a dispute resolution method for a hotel management agreement, time and cost are critical factors. Prior negotiation is a prerequisite for any of the more adversarial resolution methods in the most effective hotel contracts. Given that the parties to hotel agreements are unable to afford the months or even years it takes to pursue a remedy for a dispute, negotiated settlements are always preferred. and mediation is particularly promoted as a cost-effective dispute resolution method, as it is typically conducted as soon as feasible after a dispute has arisen. There are numerous mediators who have extensive experience in the hotel industry and can help hotel industry participants resolve disputes in a cost-effective and respectful manner. A system or model of mediation is designed to resolve disputes, contain costs, and preserve or restore relationships. This strategy is comprised of several components. These are most effective when the hotel management agreement is intended to help negative parties become more positive. A dispute resolution clause in a hotel management agreement should strive for an integrated approach, allowing the parties to resolve their disputes at the earliest available opportunity and at a later stage.

Clearly, the selection of a dispute resolution mechanism will be influenced by a variety of other factors, such as the nature of the dispute, the relationship between the parties, and any applicable international policy. Nevertheless, it is imperative to verify that the country of the contract with which this litigation is associated functions effectively and that litigated judgments can be enforced, as a lawsuit can be a particularly challenging and protracted process. The significance of the hotel to the hotel operator will always influence the dispute resolution mechanism for a hotel contract. There has been a recent trend in hotel contract restrictions on dispute resolution mechanisms, which is a growing acknowledgment that, in a commercially reasonable operation, mediated settlements are generally the most advantageous for the hospitality industry.