Hotel Management and Operating Contracts: The Terms Owners Must Understand

The management and operating contract is the document that determines who decides what in your hotel, who bears each type of risk, how results are measured and how the relationship can be ended. In this model the owner usually retains ownership of the asset and its revenue and costs, while the operator handles day-to-day management in return for fees.

This article explains the main terms and the questions worth discussing with your legal adviser. It is not a contract fit for signing, and it is no substitute for legal review.

What distinguishes a management contract from other models?

In a management contract:

• The revenue belongs to the owner after costs and fees are deducted.
• The operating risk usually sits with the owner; if demand weakens, the owner's income falls.
• The operator is an operating agent that runs the property within powers defined by the contract.

This differs from a lease, in which the owner receives an agreed rent and the operating tenant bears the result of the operation. We compared the models in detail in Management, lease or franchise.

Scope of services: what exactly does the operator handle?

The first term that needs precision is the scope of services. General phrases such as “managing the hotel” are not enough. The contract should preferably set out in detail what the operator handles, such as:

• Reception, supervision of the units, housekeeping and routine maintenance.
• Hiring, training and staff administration.
• Sales, marketing, management of booking channels and pricing.
• Procurement and supplier management.
• Day-to-day accounting and reporting.

It should, in turn, set out what remains in the owner's hands, such as approving the budget, capital expenditure, appointing the auditor, and decisions that require the owner's prior approval.

A question for your adviser

Does the contract set a spending ceiling that the operator can approve on its own? And what happens if it is exceeded?

Licensing: who is the licensee?

This term is specific to the Saudi market and needs clarity from the outset.

• The facility's operating licence: The Tourism Hospitality Facility Regulation (لائحة مرفق الضيافة السياحي), published on 11 September 2026, provides that a tourism hospitality facility may not be operated without a licence (Article 3). It requires the licensee to supervise all units and control their management and operation (Article 16), and prohibits it from enabling others to use the licence in an unlicensed facility (Article 15).
• The operator's licence: The Regulations for the Management of Tourism Hospitality Facilities (لائحة إدارة مرافق الضيافة السياحية), issued by the Ministry of Tourism, require a licence to carry out the activity of managing hospitality facilities.

The contract therefore needs a clear answer: who holds the facility licence? How do the operator's powers fit with the licensee's obligations? And who bears regulatory violations if they arise from the other party's performance?

A question for your adviser

Is the allocation of licensing and responsibilities in the contract consistent with the current text of the two regulations? These rules change, and the reference is the official text in force at the time of signing.

The annual budget and its approval

The operator usually proposes an annual operating budget covering expected revenue, costs and capital expenditure. Terms worth reviewing:

• When the budget is submitted and when it is approved.
• What happens if the budget is not agreed before the start of the year.
• The permitted deviation from the budget without your approval.
• How emergency spending is approved.

Reporting and access rights

Reporting turns the contract from promises into figures that can be tracked. The contract usually sets out:

• Frequency: monthly, quarterly and annual reports.
• Content: occupancy, average daily rate, revenue per available room, revenue by channel, main costs, operating profit, and comparison with the budget.
• Direct access: the owner's right to access the systems and records.
• Audit: the owner's right to appoint an independent auditor, and who bears its cost.

The Regulations for the Management of Tourism Hospitality Facilities require the holder of a management licence to keep copies of the contracts, correspondence and documents relating to the management of the facilities for at least one year. Even so, it is in your interest for the contract to state explicitly how long records are kept and your right to obtain copies of them.

Fees: how are they structured?

Fee structures vary between operators, but they usually revolve around two elements:

• A base fee calculated on an agreed basis, often total revenue.
• An incentive fee linked to performance, often to operating profit or to exceeding a set target.

The percentages and bases are negotiated between the parties, and there is no single correct figure for every property. So it is advisable that:

• The contract defines precisely the figure on which the fees are calculated.
• All costs charged to the property outside the fees are listed, such as central marketing, systems and training.
• It is made clear when the incentive fee becomes due and how it is calculated in weak years.

A hypothetical example for illustration

This is a hypothetical example to explain the idea only; it does not represent the prices or terms of any operator. Two offers: the first with a lower base fee and a higher incentive, the second with a higher base fee and no incentive. In a weak year the first offer may cost the owner less, and in a strong year the reverse may be true. So ask each operator for a schedule calculating what you would pay under three performance scenarios, and compare the net amount left to you.

Term, renewal and the performance test

• The initial term: the longer it is, the less able you are to make changes, so tie it to performance guarantees.
• Renewal: is it automatic, or by agreement of both parties?
• The performance test: a term that allows you to end the contract if the operator does not achieve set targets within an agreed period. Agree on the measurement method, the data source and the benchmark comparison.

Termination and handover

The termination clause is one of the most important terms, because it determines the cost of exit. Discuss with your adviser:

• The termination events for each party: breach, weak performance, sale of the asset, and force majeure.
• The notice period and any compensation due.
• The handover plan: transfer of data, accounts, the guest database and booking-platform accounts, the position of staff, and supplier contracts.

Staff

Set out in the contract:

• Who contracts with the staff: the owner or the operator.
• Who bears end-of-service benefits.
• Your right to approve or object to the appointment of the property's manager.

Ownership of data, the brand and channels

• Who owns the guest database, the website and the booking-platform accounts?
• If the property operates under the operator's brand, what happens to the name, signage and accounts when the contract ends?

A checklist before meeting your adviser

Term	What to confirm	The question to ask
Scope of services	A detailed list of what the operator handles and what remains with you	Are there services that will be charged as an extra cost outside the fees?
Licensing	Who holds the facility licence, and the operator's licence for the management activity	Who bears a violation if one occurs?
Budget	Submission and approval dates, and permitted deviation	What happens if we do not agree on the budget?
Reporting	Frequency, content, access rights and audit	Do the definitions in the reports match the definitions in the contract?
Fees	The basis on which each fee is calculated, and how the incentive is calculated	What do I pay in a weak year?
Performance test	The indicator, the data source and the period	Can it be measured independently?
Term and renewal	The initial term and the renewal mechanism	Is renewal automatic?
Termination	The events, notice periods and compensation	What does termination cost in each case?
Handover	Data, accounts, staff and suppliers	What is the handover timetable?
Staff	The contracting party and end-of-service benefits	Who bears them when the contract ends?
Data and channels	Ownership of the guest database, the website and the accounts	Do they pass to me in full at the end?

Common mistakes

• Settling for the fee percentage without defining the figure it is calculated on.
• No performance test, or one worded around an indicator that cannot be verified.
• Not specifying who holds the facility licence.
• Neglecting the handover plan and data ownership.
• Signing before legal review.

Frequently asked questions

Is there a standard form of hotel management contract in Saudi Arabia?

We did not find an official standard form for hotel management contracts; these contracts are drafted through negotiation between the parties. The sections above in this article can serve as a checklist to discuss with your legal adviser, but they are not contractual text.

Who bears operating losses under a management contract?

Usually the owner, because the revenue and costs are on the owner's books. That is why the budget, reporting and the performance test carry particular importance.

Can I end the contract if performance is weak?

That depends on how the contract is worded. If it does not include a clear performance test, it may be difficult to terminate without cost.

What is the difference between the management fee and the incentive fee?

The base fee is usually paid regardless of profit, whereas the incentive fee is linked to achieving an agreed level of performance.

Do I need a legal adviser if the operator is a well-known company?

Yes. An operator's reputation is no substitute for reviewing the terms that will govern the relationship for years.

Next step

If you are reviewing an operating offer for your property and would like to discuss the available options, you can contact the Mirada team.