International hotel brands enter the Mexican market through two primary structures: management agreements and franchise agreements. They sometimes combine. A hotel owner in Canc\u00fan may sign a management agreement with an operator who also licenses a brand to the property under a separate franchise license. Understanding these contracts\u2014what each party controls, what they are paid, and where Mexican law overrides what the agreement says\u2014is essential for any owner or developer entering into one.<\/p>\n\n\n\n
The stakes are high on both sides. A management agreement is typically a 25 to 30-year contract. A franchise agreement runs 15 to 20 years. Both include early termination provisions that favor the operator or franchisor, and both can result in significant liquidated damages if the owner exits before the term ends. Signing without thorough legal review is one of the more expensive decisions a hotel owner can make.<\/p>\n\n\n\n
In a hotel management agreement, the operator assumes responsibility for day-to-day management of the property. The owner retains ownership of the real estate and hotel assets. The operator makes the operational decisions\u2014hiring, marketing, food and beverage programming, pricing strategy, and vendor selection\u2014subject to an approved annual business plan.<\/p>\n\n\n\n
Management agreement fees follow a two-tier structure that is standard across the international hospitality industry:<\/p>\n\n\n\n
Base management fee<\/strong>: Calculated as a percentage of total hotel revenue (typically 2% to 4%). The base fee is paid regardless of whether the hotel is profitable. It compensates the operator for managing the property and is the first line item deducted before calculating the incentive fee base.<\/p>\n\n\n\n Incentive management fee<\/strong>: Calculated as a percentage of GOP (Gross Operating Profit) above a minimum agreed return to the owner (the “owner’s priority return” or “owner’s threshold”). Standard incentive fees run 8% to 12% of GOP above the threshold. The incentive fee structure aligns the operator’s compensation with owner profitability\u2014in theory. In practice, the definition of GOP, the calculation of the threshold, and the deductions taken before the incentive fee is measured are all heavily negotiated and frequently disputed.<\/p>\n\n\n\n The definition of GOP is not standardized across agreements despite the Uniform System of Accounts for the Lodging Industry (USALI) providing a framework. Operators push to include management fees as a deduction before GOP is calculated (reducing the base against which the incentive is measured), while owners push to calculate GOP before management fees (maximizing the incentive base). This distinction can represent millions of pesos annually in large resorts.<\/p>\n\n\n\n Annual business plan approval<\/strong>: Owners typically have the right to review and approve (or reject) the operator’s proposed annual budget and business plan. However, “approval” rights are often limited in practice\u2014the operator has the right to manage, and day-to-day decisions (staffing levels, supplier selection, pricing) fall within management discretion even without specific owner approval.<\/p>\n\n\n\n Performance test and termination rights<\/strong>: Most management agreements include a performance test mechanism that allows the owner to terminate if the operator consistently underperforms. A typical performance test triggers if the hotel fails both of the following for two or three consecutive years:<\/p>\n\n\n\n Performance tests have cure rights\u2014the operator can cure a test failure by paying the owner the amount by which the hotel fell short of the threshold. This effectively shifts the performance risk back to the owner in the first cure year. Properly negotiating the performance test\u2014the metrics, the cure rights, the number of consecutive failures required, and the remedy (termination versus payment)\u2014is one of the most important owner-side items in a management agreement.<\/p>\n\n\n\n Non-disturbance agreement (NDA)<\/strong>: When the owner finances the hotel with a mortgage, the lender will want the operator to acknowledge the lender’s superior rights in a foreclosure scenario. The operator will want a non-disturbance agreement from the lender, promising that the lender will honor the management agreement even if it forecloses. This three-way negotiation between owner, operator, and lender is standard in hotel finance transactions.<\/p>\n\n\n\n FF&E reserve<\/strong>: Most management agreements require the operator to maintain a reserve account funded by a percentage of hotel revenue (typically 3% to 5%) to cover future capital improvements. The operator typically manages the reserve, and large expenditures from it require owner approval. The reserve fund is the owner’s money\u2014but the operator controls how it is spent on capital items that maintain brand standards.<\/p>\n\n\n\n Quiet enjoyment and non-interference<\/strong>: The operator’s core protection is the right to manage without owner interference in day-to-day operations. Owners who circumvent the operator\u2014calling department heads directly, overriding operational decisions, and unilaterally changing suppliers\u2014create contractual disputes and, in some cases, provide grounds for the operator to claim constructive termination.<\/p>\n\n\n\n Long initial term<\/strong>: Management agreements are structured to be difficult to exit. Initial terms of 25 to 30 years, automatic renewal provisions, and limited owner termination rights (outside performance test failures and operator defaults) mean the owner is generally committed for the life of the agreement.<\/p>\n\n\n\n Termination for sale<\/strong>: Most agreements allow the owner to terminate on a sale of the property, subject to a notice period (typically 12 to 18 months) and a termination fee. The termination fee on a sale can be several years of management fees. This creates a meaningful friction cost when hotel owners want to sell a property to a buyer who intends to change operators.<\/p>\n\n\n\n A franchise agreement licenses the use of a hotel brand to an owner who operates the property independently. The owner is responsible for all management decisions, employment, and daily operations. The operator (now the franchisor) provides the brand standards, the reservation system (the “distribution”), sales and marketing programs, training materials, and periodic quality audits.<\/p>\n\n\n\n The franchise royalty is typically expressed as a percentage of rooms’ revenue (not total hotel revenue, unlike the management base fee). Standard royalty rates run 4% to 7% of rooms’ revenue, depending on the brand tier. In addition to the royalty, franchise agreements impose the following:<\/p>\n\n\n\n Total franchise cost\u2014royalty plus all program and system fees\u2014typically runs 10% to 15% of rooms revenue for mid-scale to upper-upscale brands.<\/p>\n\n\n\n Franchise agreements impose detailed brand standards covering physical products (room design, amenities, technology), service delivery (check-in procedures and service recovery policies); food and beverage programming; and sustainability requirements. The franchisor conducts periodic quality assurance inspections. A property that fails a QA inspection receives a remediation plan with deadlines. Repeated failures can result in the franchise being revoked\u2014which means the property must be rebranded under a different flag.<\/p>\n\n\n\n The most consequential provision in a franchise agreement for an owner is the liquidated damages clause for early termination without cause. Most international franchise agreements specify liquidated damages equal to a multiple of the average annual royalty over the remaining term\u2014commonly two to three times the annual royalty multiplied by the number of years remaining. On a 20-year agreement with 10 years remaining, this can represent 20 to 30 times the annual royalty payment. Owners who want to exit a franchise relationship should model this cost carefully before deciding.<\/p>\n\n\n\n International hotel management and franchise agreements are typically drafted under New York or English law. They specify ICC or UNCITRAL arbitration at a neutral seat (Miami, New York, Madrid, or Paris). This governing law choice is generally enforceable in Mexico for the contract provisions themselves.<\/p>\n\n\n\n However, Mexican law cannot be contracted around in several critical areas:<\/p>\n\n\n\n Labor law<\/strong>: LFT obligations apply to all workers in Mexico regardless of any contract provision to the contrary. An international management agreement that assigns IMSS obligations to the operator does not relieve the owner of potential joint employer liability under LFT Article 13.<\/p>\n\n\n\n Consumer protection<\/strong>: Consumer-facing provisions of Mexican law (PROFECO protections for hotel guests, for example) apply regardless of governing law clauses in B2B agreements.<\/p>\n\n\n\n Real estate and property rights<\/strong>: Ownership of Mexican land is always governed by Mexican law. A management agreement provision that purports to affect title or create real property rights is subject to Mexican law analysis regardless of the governing law clause.<\/p>\n\n\n\n Tax obligations<\/strong>: RFC, CFDI invoicing, IVA, ISR, and IMSS contributions on fee payments are all governed by Mexican law and SAT rules, not by the governing law of the management agreement.<\/p>\n\n\n\n LFT Article 13 creates joint and several liability for the beneficiary entity\u2014the company that benefits from work performed under a contractor or service arrangement when certain conditions are met. In the hotel context: when an operator manages a hotel and all workers function effectively under the supervision of and for the benefit of the property owner, Mexican courts and IMSS may determine that the owner has joint employer status regardless of what the management agreement says.<\/p>\n\n\n\n This is particularly relevant when:<\/p>\n\n\n\n Structuring the management relationship to minimize this exposure\u2014clear delineation of the operator’s direct employer status, appropriate indemnification provisions, and labor liability insurance\u2014requires specific attention in management agreement negotiations for Mexican properties.<\/p>\n\n\n\n Most international brand relationships begin before the management or franchise agreement is signed. The pre-opening phase\u2014design review, brand standards compliance, system configuration, pre-opening sales and marketing\u2014is governed by a Technical Services Agreement (TSA).<\/p>\n\n\n\n The TSA specifies the services the operator\/brand will provide during design and construction; the fees for those services (typically a monthly retainer plus reimbursable expenses); the design review process and approval rights (a source of significant tension when the operator requires design changes that increase construction costs); and what happens if the management or franchise agreement is not ultimately signed.<\/p>\n\n\n\n The TSA is often treated as a formality\u2014a preliminary document before the “real” agreement. In practice, TSA provisions that affect design decisions can bind the owner to significant cost commitments before the main agreement is negotiated. Entering a TSA with an international operator without legal review of its provisions is an unnecessary risk.<\/p>\n\n\n\n For guidance on reviewing, negotiating, or structuring a hotel management or franchise agreement in Mexico, speak with our hospitality legal team<\/a>.<\/p>\n\n\n\nOwner’s rights and protections<\/strong><\/h3>\n\n\n\n
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Operator protections<\/strong><\/h3>\n\n\n\n
The franchise agreement<\/strong><\/h2>\n\n\n\n
Royalty structure<\/strong><\/h3>\n\n\n\n
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Owner’s operational obligations<\/strong><\/h3>\n\n\n\n
Early termination and liquidated damages<\/strong><\/h3>\n\n\n\n
How Mexican contract law governs these agreements<\/strong><\/h2>\n\n\n\n
The owner’s labor exposure under LFT Article 13<\/strong><\/h3>\n\n\n\n
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Pre-opening agreements and technical services agreements<\/strong><\/h2>\n\n\n\n
Frequently asked questions<\/strong><\/h2>\n\n\n\n