Legal Advice Competition

Relevant facts
Rimini Marina Grand Hotel is a luxury hotel built at the beginning of the 19th century and
then fully renovated at the end of 2016. With 127 rooms, it offers many utilities to its customers
such as two swimming pools and two SPAs both in the hotel and at the private beach. In order to
grant the best stay and satisfy all their clients’ needs, they offer meals at three different
restaurants, called Riccione, San Marino, and Beach Lagula. Furthermore, they have a large
congress centre capable to hold up to 640 people.

Issues
The hotel has been performing really well and for the future 10-20 years it will have a
steady growth rate of at least 2%. However, managing the hotel and relative leisure facilities will
give rise to different commercial and legal issues. Therefore, the owner Falco Fund (FF) does not
want to manage it directly and has to decide whether to give the hotel to rent or to hire a manager
chain. The rental agreement will be signed with International Hotel Group and will last 20 years,
while through the management service agreement they will hire Serpentine Hotel Experience
(SHE).

Brief answer
The owner should opt for the second choice and hire an operator. However, it is
fundamental to negotiate the terms of the agreement and make sure that the contract will grant
Falco Fund rights and remedies in case the hotel faces business or financial concerns.

Discussion
From Falco Fund’s perspective, the lease agreement will act as the most suitable option
available.
From a reward point of view the operator will prefer to choose the leasing scenario, since it
should be able to keep most of the income, while the owner will favour the management
agreement.
Looking further into details we can see that with HMA the final value that the owner will
keep is given by the net operating income after the management fees have been deducted. In this
case, Falco Fund (FF) will receive a higher percentage of returns compared to the operating
results that it would obtain with the lease agreement, but at the same time they will also have to
bear the operating risk. As the economic situation in Italy (and Europe in general) seems to be
getting better, it is important to evaluate (realistically) the chance that the hotel will perform better
than expected. Extra profit should be given more importance over a steady flow of monthly income.

Andrade R. Luca, Hofer Alexandra, Jung Jiwon, Li Yuan Qing, Schroffenegger Julian
 In contrast, if FF opts for the lease agreement, [generally] the only amount it will receive is
the fixed monthly payment. This will not be true only in the case the hotel manages to overperform
expectations in contrast to the HMA where the owner always receives a large share of revenues. In
order to increase the profits FF could also establish to receive a fixed base lease plus a turnover
rent that depends on other factors, such as rooms occupied, etc.
With this choice, the owner will have a certain and less risky income stream since it will not
have to manage the hotel directly but this income will be much lower than in the case of a HMA.
Compared to the case of a lease in which a monthly rent payment is guaranteed, HMAs are
accompanied by a high downside risk. The hotel’s owner has the opportunity of much larger
returns. In order to limit risk and encourage better performance, both parties should institute an
incentive fee based on profits that exceed expectations.
This sort of incentive is common on hotel management agreements. It is, however,
impossible to incentivize the lessee to obtain higher profits (which includes a “fair” share for FF).
However good the incentive may be, it too comes with its cons. SHE may become interested in
investing its money in order to “update” features of the estate that it deems necessary to exceed
profit expectations. Hence, the dissolution of the contract would become more complicated and
[possibly] undoable. Thus, SHE should be barred from investing any money in the hotel (apart from
expenses regarding maintenance of the hotel to an acceptable standard).
We also advise that the initial design of the hotel should be overseen by an architect from
SHE, given that they are more likely to know the design particularities that an upper-level hotel
requires. The design should also reflect local culture and not some cost-cutting standard from the
managing firm. It is important for the estate to be associated with high local standards, given the
fact that if the management underperforms, it will be replaced but a complete rebranding includes
extensive costs.
Moreover, by entering the HMA with SHE, FF has the possibility to completely oversee and
control the quality, management and recognition of Rimini Marina Grand Hotel. This means that FF
has the right to influence major management decisions and thus is able to play a major role
regarding the quality of the management, as well as adapting the overall management direction in
order to stay aligned with the prior luxurious and high-quality customer service.
In the case of entering a leasing contract the lessor has extremely limited possibility to
control and supervise the reputation of the property itself. The task of removing the lessee
forcefully may include extensive costs and a lengthy legal battle (without any guarantees of
success).
As a means of guidance, we believe there are a few points that should be reinforced as
drafted in the contract. Particular attention should be given to the use of English law (and not
Italian, as one would assume).
In a normal HMA, the owner has limited operational control compared to the lease
agreement, since the main choices will be taken by SHE. In this case, in order to grant FF control

Andrade R. Luca, Hofer Alexandra, Jung Jiwon, Li Yuan Qing, Schroffenegger Julian
over the hotel, both parties should agree on finding a resolution for the main operational decisions
together. A possible solution is giving the operator the liberty to run the everyday errands and
guaranteeing FF a “veto right” with regards to the major choices that will concern the hotel and the
appointing of a director.
Considering the fact that FF has just limited influence in the management process and its
decisions, SHE must agree to letting FF influence major decisions as well as granting them the
majority of shares of votes in order to influence decisions apart from those belonging to the day-to-
day activities of the hotel which are fully under the control of SHE.
Additionally, as vaguely stated previously, SHE should be barred from investing any money
in the hotel, in order to make things easier in case the owner wants to discharge the operator. This
would certainly make things easier in case of dissolution of contract, since SHE does not have any
of its money invested. The operator should not be allowed to ask for compensations in case it
underperforms below the 80% level of its similar competitors in the same area.
Furthermore, by entering the HMA with SHE, FF should have the possibility to sell the hotel
to a third party after eight years, granting SHE a pre-emptive right to buy it. Thus, FF is able to
increase the chances of being able to sell it or to sell it at a higher price, because the third party will
always be competing for the hotel with SHE if both of them show interest in buying it.  
Due to the fact that FF has limited influence in the decision making of every-day life in the
hotel, it should be exempted from any liability, both civil and tortious. This could mean that FF is
able to save money that can be reinvested into the property at a later point in time, given that won’t
spend it on lawyers etc.
The average operator’s fee in the market for a case like this is 3-5%. Hence, FF should propose a
fee of 4% of total yearly revenues. As the managing company expects to receive its steady flow of
cash [to a certain extent] regardless of performance, it may be in a position to simply reach the
minimum level of performance required by Falco’s Funds (FF). This would mean that the FF would
be stuck with some sort of underperforming, inefficient manager. In order to reduce the risk of the
aforementioned happening, FF and SHE should institute a clause that benefits SHE in case profits
exceed expectations. This incentive is to be calculated on a fixed percentage of excess net profits.
In order to assure that none of SHE’s hotels competes with Rimini Marina Grand Hotel,
SHE should sign a non-compete that makes it unable to manage another hotel at the same price-
point in the surrounding area.
For the sake of transparent communication between the two parties regarding the financial
situation, SHE must provide all financial data to FF in its full extent. This will allow FF to asses
whether SHE is performing above the threshold instituted (of 80%) compared to its local
competitors in the same market. This will also allow FF to make expectations about future
performance and therefore allow the operator to receive its fair bonus.
A period of time of 20 years should be used as a base for the HMA agreement to make it
comparable to the leasing contract. After this period, SHE and FF should have the possibility to

Andrade R. Luca, Hofer Alexandra, Jung Jiwon, Li Yuan Qing, Schroffenegger Julian
adapt to the current market situation and to modify the contract. SHE has the possibility to exit the
contract if it is not satisfied with the collaboration of the two parties. Nevertheless, FF still retains
the right to discharge SHE from the contract.
Naturally, since SHE is barred from investing any of its money in the hotel, the owner will
have to cover all costs and future investments in the property. This becomes a particularly large
issue due to the fact that hotels need regular renovations in order to stay up-to-date. Such
renovations tend to cost (on average) 4% of yearly operating profit, which should be set aside in
case needed. Generally, the 4% figure does not cover all costs for renovation, hence, FF would
have to spend extra money (reducing profits).
In case of breach of contract, it should be dissolved with immediate effect, all
(merchandise/records/keys/etc.) should be returned to Falco Fund immediately at the time of
termination of contract. In addition, a penalty fee, that is to be agreed on by the two parties, should
be charged for breach of contract and early termination.
The two parties agree on compensating for any losses, harm or liability that may arise from
the contract. FF has to protect SHE against any claims made against SHE arising from supervision
or operation of the hotel, except for those arising from the gross negligence, wrongful willful acts,
acts or omissions which are outside of the scope of authority established by the agreement
between them and FF, misapplication of funds or fraud.
In conclusion, we strongly advise FF to choose the management option, due to its ability to
generate higher income. The contract terms (those deemed most important) have been drafted
and are listed below, so that both parties can read them and decide whether to accept them.

Andrade R. Luca, Hofer Alexandra, Jung Jiwon, Li Yuan Qing, Schroffenegger Julian
Contract terms
This agreement is between Falco’s Fund, henceforth known as "Owner," and Serpentine Hotel
Experience, henceforth known as "Manager," who will be taking over as the manager of the
property “Rimini Marina Grand Hotel”.

Owner and Manager agree to the following provisions as conditions of this contract:

1. FF has a veto right over Serpentine Hotel Experience in all decisions concerning the Hotel
and the management of the property.
2. FF is allowed to influence major decisions regarding the management of the hotel, and has
therefore the main share of votes in all management decisions not belonging to day-to-day
activities.
3. FF is allowed to discharge the management agreement any time, if Serpentine Hotel
Experience’s actions do not confirm with the points stated in this contract or it is not
capable of managing the hotel to the satisfaction of Falco’s Fund.
4. After 8 years FF is allowed to sell the hotel to a third party at a price agreed on by the two
parties, but is willing to grant Serpentine Hotel Experience a pre-emptive right in buying the
Hotel.
5. FF is exempted from any liabilities concerning the management of the hotel.
6. Falco’s Fund will pay an operator’s fee of 4% of total yearly revenues to Serpentine Hotel
Experience for managing the hotel. In addition to that, Falco Fund is willing to pay another
4% of profits that exceed expectations in order to incentivise Serpentine Hotel Experience
to perform at the highest possible level.
7. Serpentine Hotel Experience has to agree to a non-compete clause that prohibits the
company in managing any other hotel in the area of the Hotel owned by FF. The parties
agree that FF has the right to decide case by case if Serpentine Hotel Experience is
allowed to manage another hotel in the Rimini area or not.  
8. Serpentine Hotel Experience has to report all data regarding financial information of the
management of this hotel to Falco Fund in full extend and without manipulating them in any
form.
9. After 20 years both parties can agree on renewing the management contract.
10. FF provides Serpentine Hotel Experience with enough working capital in order to be able to
execute all day-to-day activities.
11. In case of breach of contract, the contract will be dissolved with immediate effect, all
(merchandise/records/keys/etc.) must be returned to Falco’s Fund immediately at the time
of termination of contract. In addition, a penalty fee is being charged for breach of contract
and early termination.

Andrade R. Luca, Hofer Alexandra, Jung Jiwon, Li Yuan Qing, Schroffenegger Julian
12. Indemnification clause that protects Serpentine Hotel Experience from any claims made
against them, providing these claims are not part of one of the special cases stated in the
discussion.

Andrade R. Luca, Hofer Alexandra, Jung Jiwon, Li Yuan Qing, Schroffenegger Julian
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Andrade R. Luca, Hofer Alexandra, Jung Jiwon, Li Yuan Qing, Schroffenegger Julian