Conflicts and Hostilities: Navigating Damage and Destruction Clauses in Middle East HMAs

Conflicts and Hostilities: Navigating Damage and Destruction Clauses in Middle East HMAs

When a hotel suffers significant damage, whether this occurs due to hostilities, war, a natural disaster, fire, security event, or other unforeseen circumstance, the management agreement becomes the critical document governing what happens next. For owners, operators, lenders, and their advisers, damage and destruction clauses have often been buried in the back pages of HMAs, treated as boilerplate rather than the risk allocation mechanisms they truly are. Yet when triggered, these provisions determine who bears the financial burden, who decides whether to rebuild, and whether the parties' commercial relationship survives.

This article examines how these provisions typically operate, where the negotiating pressure points lie, and what stakeholders should consider when structuring or reviewing agreements to ensure they are prepared for the unexpected.

The Anatomy of Damage and Destruction Provisions

Hotel management agreements universally contain clauses addressing what happens when a property suffers physical damage. However, the detail and balance of these provisions vary considerably across operators, and within the same operator's portfolio, between jurisdictions and deal-specific negotiations.

At their core, damage and destruction clauses address four key questions: who decides whether to rebuild; what happens to management fees while the hotel is closed; when can either party walk away; and what rights survive termination if the owner later rebuilds?

"These clauses were historically drafted with fires, floods, and earthquakes in mind," notes Bilal Ambikapathy of Wisefields. "The current environment forces us to consider whether they adequately address unforeseen events beyond traditional casualties like fire or flood—and in many cases, the answer is that they do not.“

Termination Rights: The Critical Threshold

The threshold at which termination rights crystallise is one of the most heavily negotiated aspects of any damage clause. Operators vary considerably in their approach to termination thresholds.

Some implement objective percentage-based tests, permitting termination where the cost of repair exceeds a defined proportion of the hotel's replacement cost.

Others adopt more subjective formulations, allowing termination where rebuilding is determined not to be "economically feasible" or where the property is "seriously damaged" to the point that continued operation is impracticable.

This divergence highlights the importance of understanding, during the drafting phase, what actually qualifies as meeting these thresholds and where the rights sit. Does the clause operate unilaterally, permitting one party to trigger termination, or bilaterally, requiring mutual agreement or giving both parties parallel rights? The procedural mechanics matter too: some agreements impose tight windows within which elections must be made, while others are more flexible.

For owners, securing termination rights at lower thresholds provides flexibility to exit uneconomic rebuilds. For operators, higher thresholds protect the long-term revenue stream and brand presence in the market. The right answer depends heavily on the asset, the insurance structure, and the parties' respective risk appetites.

Fee Treatment During Closure: Who Bears the Loss?

When a hotel closes for repairs, the question of fee treatment becomes critical. Most HMAs provide that the operating term is suspended during the closure period, but this does not mean the operator receives nothing.

Most operator agreements require owners to maintain business interruption insurance covering an extended period of lost profits, including management fees, royalties, and other operator entitlements. However, the treatment of the operating term during closure varies. Some agreements suspend the term entirely from the date of the casualty until reopening, while others extend the term by the length of the closure period. In either case, the operator typically remains entitled to compensation from business interruption proceeds, though the quantum and methodology differ.

Certain agreements entitle the operator to monthly payments calculated by reference to the corresponding month in the prior operating year, ensuring a predictable income stream during restoration. Others take a more limited approach, providing only a proportionate share of insurance proceeds if the owner elects not to rebuild, a meaningful distinction that can significantly affect the operator's recovery.

"The interaction between the HMA and the insurance programme is where many negotiations become most technical," observes Bilal Ambikapathy of Wisefields. "Owners should ensure that the definition of covered perils, the indemnity period, and the named insured provisions in their policies align precisely with their HMA obligations. Gaps in coverage can leave owners personally liable for fees that continue to accrue during closure."

The Reinstatement Right: Protecting the Operator's Long-Term Interest

Perhaps the most operator-favourable provision in modern HMAs is the reinstatement right. Most major operators include some form of this mechanism, which grants the operator the right to manage any replacement hotel built on the site within a defined period following a casualty-driven termination.

The scope and duration of reinstatement rights vary. Some agreements provide lengthy windows during which the operator can reclaim its position if the owner takes steps to rebuild or reuse the site. Others impose shorter periods or condition reinstatement on there being a minimum number of years remaining on the original term, a meaningful limitation for agreements approaching expiry.

The mechanics also differ: some require the operator to exercise the right within a defined period of receiving notice of the owner's intention to rebuild, while others are triggered automatically.

For owners, these provisions can feel restrictive, particularly where the casualty presents an opportunity to rebrand or reposition the asset. Negotiating carve-outs, such as permitting termination without reinstatement rights in exchange for a negotiated break fee, or limiting the reinstatement period, can provide meaningful flexibility.

Force Majeure and Extraordinary Events: The Broader Context

Damage and destruction clauses do not sit in isolation. Most HMAs also contain force majeure or "extraordinary event" provisions, and the two regimes interact in ways that can catch parties off guard.

Force majeure definitions tend to be broad. They usually cover the obvious scenarios, but some go further, capturing anything that leads to a "general disinclination to travel" or has a "material adverse effect on the hospitality industry in the city or region." That kind of language can bite even when the hotel itself is physically untouched.

Here is the key point: force majeure clauses typically excuse performance failures, but they do not usually suspend the operator's fee entitlements.

Fees keep accruing. If insurance does not cover them, the owner pays out of pocket. The operator may also have the right to close the hotel temporarily during a force majeure event if continuing operations is not reasonable.

The distinction matters. Force majeure excuses performance; damage and destruction clauses trigger repair obligations or termination rights. A serious incident could invoke both at once. Getting the drafting right on each, and understanding how they work together, is essential.

Practical Negotiating Considerations

So, what should parties actually focus on when negotiating these clauses?

For Owners:

Think about the termination threshold in the context of the specific asset. Standard operator templates tend to set thresholds high. In some locations, that may not reflect the real risk profile, and pushing for a lower threshold is worth the negotiating capital.

Look carefully at the insurance requirements. Many standard property and business interruption policies exclude war, terrorism, and malicious damage. If those perils are not covered, the owner may end up personally exposed. Separate terrorism or political violence coverage is often necessary.

Try to negotiate shorter reinstatement periods. Seek carve-outs for situations where the owner wants to change the asset's use, or where government orders make rebuilding impossible.

For Operators:

Be specific about business interruption coverage. Make sure the HMA requires adequate cover for an appropriate indemnity period, and that the policy terms will actually deliver the protection assumed.

Draft reinstatement rights broadly. They should capture not just rebuilding on the original site, but also any replacement hotel developed by the owner or its affiliates.

Pin down the owner's restoration obligations. Vague language leads to disputes. Clear timeframes for commencing and completing works, with real consequences for failure, give the operator meaningful protection.

For Lenders and Insurers:

Non-disturbance provisions matter here too. Lenders should ensure they can step in and cure owner defaults, including failures to start or finish restoration.

Insurers should review policy terms alongside the HMA to avoid gaps between what the agreement requires and what the policy actually covers.

Conclusion

Damage and destruction clauses deserve the same attention as performance tests, fee structures, and termination rights. They are not boilerplate. They are risk allocation mechanisms, and when they get triggered, the financial consequences can be significant.

Whether you are advising an owner who wants flexibility to walk away from an uneconomic rebuild, an operator protecting its brand and revenue stream, or a lender managing security over a damaged asset, the work is the same: understand how these clauses operate on their own, how they interact with force majeure provisions, and whether the insurance programme actually does what everyone assumes it does.

"Parties who treat these clauses as standard form can end up locked into outcomes nobody wanted," concludes Moustafa Said of Wisefields.

"A more considered approach during negotiation pays dividends if things ever go wrong."

About Wisefields

Wisefields is a highly regarded legal firm known for its specialised expertise in real estate and hospitality law. Our accomplished team of lawyers combines in-depth industry knowledge with extensive experience, consistently delivering legal solutions that address the unique complexities of these sectors. Wisefields and our individual lawyers have garnered numerous awards, establishing a strong reputation for excellence. We are proud to have supported our clients through some of the most significant deals in real estate and hospitality, cementing our status as a trusted leader in these industries.