The HMA says the operator manages the hotel. A governance clause decides whether that’s true.
The contract gives the operator the job — set the budget, run the operation, execute the plan. But the operator and owner will disagree on the annual budget at some point. When they do, a governance clause decides who wins. If that clause sends every deadlock to the owner, the operator’s authority is nominal. It carries accountability for performance without the control to deliver it.
Owner approval over the budget is legitimate. The owner owns the asset and funds the operation; a check on how its capital gets spent is reasonable, and no owner should have to rubber-stamp an operator’s spending. The question isn’t whether the owner gets a say. It’s what happens when the two sides can’t agree — because that tiebreak decides whether the operator manages the hotel or just administers the owner’s decisions.
The operator is tested on GOP margin, RevPAR Index, guest satisfaction, brand standards. All of those depend on spending — staffing, wages, marketing, technology, guest programs. When the tiebreak hands those calls to the owner, the operator is executing someone else’s plan and answering for the results.
Three governance mechanics decide who controls the hotel when agreement fails: the budget-approval deadlock, zero-based budgeting, and the arbitration format. Each looks like process. Each is a control structure. Each is negotiable.
When Disagreement Becomes a Control Question
An HMA grants the operator authority to manage the hotel. That authority is conditional on owner approval at key checkpoints — the annual budget, the capital plan, major spending. The operator proposes. The owner reviews. The owner approves or rejects.
The question is what happens when the owner won’t approve.
The resolution mechanic is everything. It decides whether the operator manages the hotel or executes the owner’s instructions — whether “management authority” means decision rights or nominal title.
Mid-market operators feel this hardest. Individual and small-portfolio owners are hands-on; they fight budgets line by line. A 120-room select-service operator negotiating with a local ownership group has less leverage to resist owner-favorable governance defaults than a global brand operator does with a REIT. The mechanics matter more when the owner is in the weeds — and mid-market owners usually are.
Mechanism 1: The Budget Approval Deadlock
The annual budget requires owner approval — a checkpoint the practitioner literature treats as a core governance provision (DLA Piper; JMBM). The operator proposes a budget: revenue forecast, department expense plan, headcount, capital requests. The owner approves it, rejects it, or proposes changes. What happens if the owner won’t approve?
Three tiebreaks, and they produce very different outcomes.
Flat rollover. Last year’s budget carries forward unchanged. The operator is frozen at last year’s numbers — no room to fund revenue initiatives, raise wages to market, or pay for the programs it’s judged on. Revenue targets stay flat or rise, but the cost budget doesn’t. The margin squeeze is structural.
Owner’s budget controls. If the operator’s budget isn’t approved, the owner’s proposed budget becomes the operating budget. The owner sets spending directly. The operator executes the owner’s plan and answers for the results. It manages nothing; it administers.
Operator-protective default. Last year’s budget carries forward with automatic adjustments — inflation pass-throughs, fixed-cost increases, contractual wage bumps — or disputes go to a neutral expert, not to the owner’s unilateral call. The operator keeps a baseline and a resolution path that doesn’t default to the owner’s position.
Here’s the difference in practice. The operator proposes a $4.2M budget for a 150-room select-service hotel, up 6% to fund market-rate wage increases and add a sales manager. The owner rejects it and proposes $4.0M — wages, but no sales hire.
Under flat rollover, last year’s $3.96M carries forward. No sales hire, no wage adjustment. Housekeeping and front-desk wages stay below market. Turnover rises, service slips, guest scores drop — and the operator is tested on those scores.
Under owner-decides, the $4.0M controls. The operator gets some wage increase but loses the sales position. The owner made the call; the operator executes it.
Under operator-protective rollover, the $3.96M adjusts automatically to $4.12M — a 2% inflation pass-through plus contractual wage increases — and the $80K gap between that and the operator’s $4.2M goes to a neutral expert. The operator has a path to the sales hire that doesn’t require the owner’s yes.
The tiebreak decides who wins the disagreement. Negotiate it. Push for operator-protective defaults — rollover with automatic adjustments, not a flat freeze; neutral-expert resolution, not owner-decides. The single most important governance term in the HMA is what happens when the budget isn’t approved.
Mechanism 2: Zero-Based Budgeting
Some owners impose zero-based budgeting: every line rebuilt and rejustified from zero each year, rather than adjusted from last year’s baseline. The prior year isn’t presumptive; every dollar has to earn its place again.
As a discipline, this is sound. Zero-based budgeting is a legitimate tool — it stops budget creep, forces accountability, and makes every program justify itself. Plenty of well-run operations use it, and an owner asking for it isn’t overreaching. The issue isn’t the tool. It’s the scope.
Applied to everything, it becomes a control lever. It forces the operator to relitigate every dollar annually and hands the owner an approval checkpoint on every line — including spend the operator can’t actually cut: brand-mandated programs, safety obligations, contractual commitments. All of it back on the table each year. The operator spends its time defending baseline spend instead of planning improvements, and the owner can defund a sound initiative simply by rejecting the justification.
Here’s what that looks like. The operator budgets $180K for a guest-services manager. The role has been filled for three years — it drives repeat business, handles guest recovery, coordinates the brand’s loyalty program, keeps review scores up. Under incremental budgeting, the position is baseline; the operator proposes adjustments, not the role itself.
Under zero-based budgeting, the operator has to rejustify the whole $180K from zero. The owner questions the ROI, asks for proof it drives incremental revenue, compares it to competitors that don’t staff the role, and rejects the justification. The position is defunded. Guest scores are still in the performance test. Review management is still a brand-standard requirement. The operator is accountable for outcomes that depended on a role the owner just cut.
The remedy is carve-outs. Protected categories — brand-mandated spend, safety obligations, contractual commitments — should be exempt from annual rejustification. The owner can’t strip funding the operator is contractually required to spend, or defund the positions that deliver brand standards the operator is tested on. Zero-based budgeting can apply to discretionary spend. It shouldn’t apply to the operator’s baseline obligations.
Mechanism 3: The Arbitration Format
When budget disputes can’t be resolved, some HMAs send them to arbitration. The format decides the shape of the outcome.
Baseball arbitration. Each side submits one number. The arbitrator has to pick one or the other — no splitting, no compromise. Whichever offer is more reasonable wins; the extreme position loses entirely. This removes the split-the-difference cushion. It’s double-edged. It protects a disciplined operator against an owner who overreaches — a defensible operator number beats an aggressive owner number outright. But it punishes an operator who anchors high — an inflated operator number loses to a reasonable owner number outright.
Traditional arbitration. The arbitrator can pick any number in the range or craft a compromise. Outcomes land closer to the midpoint. Both sides give something; neither loses entirely.
The difference is all-or-nothing on the more reasonable number versus a compromise midpoint. Whether a given arbitration clause is enforceable, how the procedure runs, and what disputes are arbitrable are questions for counsel. The operator’s work is to understand what each format does to outcomes and choose the format deliberately, not accept the owner’s default.
Here’s the format in practice. The two sides deadlock on a $200K gap: the operator submits $4.2M, the owner $4.0M. Under baseball arbitration, the arbitrator picks the more defensible number. If the operator’s $4.2M is well-documented — wages tied to market data, the sales hire justified by the group pipeline, departments benchmarked to the comp set — and the owner’s $4.0M cuts baseline obligations without justification, the operator wins the whole $4.2M. If the operator’s number is inflated and the owner’s is disciplined, the operator gets $4.0M. All or nothing. Under traditional arbitration, the arbitrator lands near $4.1M — both sides give.
Because final-offer arbitration rewards the defensible number, the operator’s protection is to submit a genuinely reasonable, well-documented budget it can walk the arbitrator through line by line — not to anchor aggressively. Treat baseball arbitration as a tactic and inflate the number, and the operator loses the whole dispute. So choose the format deliberately: where the operator is confident in its budget discipline and documentation, baseball arbitration is protective, because it punishes unreasonable owner cuts. Where the operator expects to be out-resourced in the arbitration itself, traditional arbitration spreads the risk.
What the Governance Mechanics Decide
The fee structure decides what the operator earns. The governance mechanics decide whether the operator actually controls the hotel it’s accountable for.
The operator is tested on GOP margin, on RevPAR Index against the comp set, on guest satisfaction and brand-standards compliance. All of those depend on spending — staffing, wages, marketing, technology, guest programs. When the mechanics hand those decisions to the owner — deadlocks defaulting to the owner’s number, zero-based budgeting relitigating baseline spend, an arbitration format that favors the better-resourced party — the operator carries accountability without control. It’s judged on outcomes the operator can’t steer.
A mid-market operator negotiating with a hands-on individual owner faces governance fights a major brand never sees. The individual owner reviews every line, questions every hire, wants to know why the sales manager costs $80K when the last operator didn’t have one. The mechanics are the leverage point: they decide whether those fights resolve toward operational discipline or owner override.
So negotiate them as hard as the fee terms. The gap between a flat rollover and an inflation-adjusted one is the gap between frozen budgets and operational flexibility. The gap between owner-decides and neutral-expert resolution is the gap between administering someone else’s plan and managing the hotel. The gap between zero-based budgeting with no carve-outs and with protected categories is the gap between relitigating brand-mandated spend every year and protecting the obligations the operator can’t cut anyway.
Who Wins the Tie
Nominal authority isn’t real authority. The HMA can say the operator manages the hotel. The governance mechanics — how deadlocks resolve, whether zero-based budgeting forces annual relitigation, how arbitration is structured — decide who actually controls the decisions.
So on the deal in front of you: when the operator and owner deadlock on the budget, who does the contract hand the decision to — and is the operator being paid to manage a hotel, or to administer someone else’s?
Dash Decisions provides vendor-side financial deal desk services for hotel operators bidding on HMAs.