In our last article, we traced the hospitality industry’s migration from Conrad Hilton’s “soap, water and elbow grease” model, in which brands owned and operated their hotels, to today’s “asset-light” paradigm, in which brands license their names, systems and know-how to independent owners who bear the real estate, labor and capital risk. We closed by observing the central tension of that paradigm: owners care about bottom-line profit, while brands are paid on top-line performance.

In this article, the second in a series on emerging hospitality issues with a lens toward the future of the industry, we examine how that tension is embedded in the contracts themselves: how brands are paid and how standard clauses have shifted over time to provide brands significant rights to modify their systems and pass related costs on to owners. We conclude by considering how industry stakeholders can continue working to find common ground in this new era.

Fees and More Fees?

Base fees under management and franchise agreements are calculated as a percentage of gross revenue. Industry research places branded operator base fees at roughly 2.0% to 3.5% of revenue, with franchise royalty fees typically ranging from 3.0% to 5.0% of rooms revenue. A revenue-based fee has a clear logic: revenue is objective, readily audited and reflects the brand’s core contribution to demand, especially in the predominant franchise agreement structure.

But it also means the brand is paid whether or not the hotel is profitable, and therefore has comparatively little economic incentive to control operating costs, which fall entirely on the owner. Along with operating costs, management and franchise agreements often include broad indemnities making owners responsible for all other costs, claims or expenses with minor carveouts, such as for the manager or brand’s gross negligence or willful misconduct.

The practical fallout of some of these risk-shifting mechanisms will be a focus of articles in this series. This includes incentive fees, which were conceived as a way to bridge the gap by keeping brand operators (under management agreements) focused on the bottom line by rewarding them with a share of profit above the owner’s priority return (often tied to the owner’s investment in the hotel).

While intended to encourage efficient operation, in practice an incentive fee generally fails to alter how operators manage expenses because the threshold to earn such a share of profits is rarely met. Brands and owners alike view the incentive fee as window dressing, a relic that offers no real ‘incentive’ to the operator. Franchise agreements typically do not contain such a provision.

Another innovation as brands moved further towards an asset-light model is an effort to allocate costs for upkeeping and promoting the brand ‘system.’ Management and franchise agreements began to provide brands the authority to change existing fees or impose new ones to fund infrastructure and initiatives which, the brand would argue, no individual owner could replicate: global reservation and revenue management platforms, digital marketing, distribution relationships, cybersecurity, data analytics and brand-level sales teams, all culminating in increased demand generation.

As a result, beyond base fees and royalties, owners today pay a growing roster of system charges: marketing or program fees, reservation and distribution fees, technology fees, loyalty program assessments, training charges and others.

A recent industry survey found that initial and continuing franchise costs average roughly 10.8% of rooms revenue, with some upscale brands exceeding 13%. This does not include the capital demands of brand-mandated property improvement plans, which can run to tens of millions of dollars, justified as required to maintain the brand standards without any required showing of return to the owner.

Each of these advancements has, at times, caused friction between brands and owners. When disputes arise, the question is not whether these brand charges and requirements are legitimate in principle—which depends on the terms of the specific management or franchise agreement—but what legal obligations, if any, accompany the brand’s imposition of them. The starting place is the nature of the relationship.

Checks and Balances: Common Law Agency and Fiduciary Duties

Most jurisdictions in the United States recognize that hotel management agreements create an agency relationship between the owner (the principal) and operator (the agent). Agency relationships generally impose fiduciary obligations on the operator, including a duty of loyalty, requiring it to act at all times in the principal’s best interest in matters within the agency, along with duties of candor, full disclosure, accounting and avoidance of self-dealing. These duties exist independent of the written contract, and their breach gives rise to liability beyond ordinary contract damages.

Agency also carries a structural consequence: because the principal must remain master of its own business, it retains the power (even if not the legal right) to revoke the agency. Historically, management agreements expressly established the agency relationship, and the combination of extracontractual duties and the threat of at-will termination gave owners significant protection against operator discretion.

After a series of successful efforts by owners to enforce these rights, the industry responded. Modern management agreements commonly provide that the operator is an independent contractor; that nothing in the agreement creates a partnership, joint venture or agency; and that the operator owes no fiduciary duties to the owner.

Many also contain express waivers of the owner’s power to terminate other than as the contract provides, coupled with liquidated damages provisions. Although most jurisdictions disregard these clauses and uphold the existence of an agency relationship and the resultant implied duties, brands continue to look for ways to limit these common law rights, including through legislative lobbying efforts.

The type of relationship is more than semantic. An agent bound by a duty of loyalty must put the owner’s interests first, may not profit at the owner’s expense without disclosure and consent, and must account for the owner’s money.

An independent contractor need only do what the agreement requires, measured by standards such as “commercially reasonable efforts” or operating “in accordance with brand standards,” and may prioritize its own interests, including those of its broader system, its other owners in the same market and its own fee streams over the owner with whom it is in contract.

This evolution represents another consequence of the asset-light transformation we described in our first article. As brands sold their real estate, management and franchise contracts became the brand’s principal asset, and protecting them against termination and fiduciary claims became a core business priority.

The resulting waivers, to the extent enforceable, allowed brands to retain operational control over hotels they do not own or fund while shedding the duties that traditionally accompany control over another’s property.

Franchise agreements go further still. The franchisor does not operate the hotel; it licenses its marks and systems. Franchise agreements typically disclaim any obligation to deliver business to the hotel, any guarantee of results and any fiduciary relationship, and characterize the parties as independent contractors.

Marketing and reservation fund provisions commonly state that the franchisor administers those funds in its discretion for the benefit of the system as a whole, with no obligation to spend amounts in proportion to any given hotel’s contribution. The franchisee pays for access to a system, not for any particular outcome.

Modern franchise and license agreements also often reserve to the brand broad rights to modify the system itself: to change brand standards, introduce or revise programs and services, adjust or add system fees, reconfigure the loyalty program and its reimbursement methodology, and enter into system-wide commercial arrangements with third parties.

Brands have pushed to expand these reserved rights, and owners—typically with little bargaining power—often accept them, concluding that the benefits of affiliation, including access to the brand’s demand engine, financing credibility, operational platforms, and customer base, outweigh the costs. But these reserved rights have become a major source of disagreement, especially as these agreements often last decades, leaving room for the brand system to change in unforeseen ways.

Growing the System: At What Cost?

In this asset-light era, a brand’s value to its shareholders is driven by net unit growth and fee revenue, and its tools for growth are largely system-level: more hotels, more brands, more members and more commercial partnerships. This too leads to tension between the stakeholders. While a larger footprint can strengthen the brand’s presence and capture group and corporate business, the way growth is pursued may also work against existing hotels.

In major metropolitan markets, dozens of hotels affiliated with the same parent are often within a short distance of one another; each new hotel adds fees to the system but may draw demand from existing hotels in the same family.

To appease owners in response to such growth, brands may grant area of protection clauses, albeit limited in time and often by brand (or brand class), or establish committees to evaluate the adverse impact of adding additional branded hotels to a given market. The practical benefit of such measures is questionable, and they have done little to stem owner discontent.

Stakeholder Considerations

Owners choose brand affiliation precisely because the brand delivers valuable demand, credibility with lenders and investors, and operational systems that enhance value. At the same time, brands must protect a system-wide reputation that is their principal asset, and they bear meaningful risk of their own, including the exposure operators faced during the COVID-19 pandemic when single-purpose owners failed to fund operations.

The industry is working to find common ground to address this fundamental divergence of interests, and the contractual architecture matters. When a brand is paid on revenue, insulated from fiduciary duties and empowered to modify its system, add fees and impose capital requirements in its discretion, the structural incentives are misaligned with the owner’s profitability goals.

Owners negotiating new agreements should focus on negotiating fee streams and expenses, including strengthening of incentive fees as compared to base fees; caps or approval rights over new system charges; transparency and audit rights with respect to system charges assessed to the hotel; reasonable limitations on PIP obligations; the scope of indemnification clauses and any carveouts to indemnification liability; and careful drafting regarding the scope of any agency and fiduciary disclaimers.

Owners should also negotiate area of protection clauses to limit direct competition from the same brand family. Brands that offer greater transparency and accountability may find that doing so strengthens owner relationships and supports the very growth they seek, while maintaining discretion to continue system-wide initiatives and brand growth.

In our next article, we will examine the legal constraints that flow from these structures in practice, including decades-long terms, the lack of objective performance measures, restrictions on transfer and termination, and the damages brands seek when the relationship ends.

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This article first appeared in the November 3, 2026, edition of the “New York Law Journal” © 2026 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.