This article is written by Apekshya Koirala. The article discusses contractual clauses that should be executed between Oyo group of hotel and property owners governing pricing in light of its business model.
- The company which is registered as Oravel Stays Private Limited, more popularly known as OYO rooms is creating buzz in hotel business. It specifically aims in proving standardized quality services to its customer in low budget.
- This company was founded by a young entrepreneur Ritesh Agrawal in 2011, which office is based in Gurgaon, Delhi, India, which initially started from a small one hotel during the period of January in Gurgaon.
- According to its official date provided in OYO website, the hotel network has spread over 230 cities in India, consisting of more than 8500 hotels all over the country.
- Not only that, the business network has expanded to overseas including countries like Nepal, Malaysia, UAE, China and Indonesia.
- The business model adopted by OYO hotel has some similarity with aggregator model of business, but with certain differences associated with this model. However, since December 2017 Oyo rooms has shifted to franchised model which helped OYO hotels to raise its commission by 5% point to around 22% as claimed by the founder of this business.
- Now, the questions come as to how the OYO hotel generates revenue with this kind of business model. For this, OYO room books part of hotel inventory’s, which needs to be upgraded to match the standardized quality which is set as per the agreement laid down by the company.
- Then after that these rooms are offered to customers at OYO rooms through their website and the customers buy these at the predetermined price. Oyo generates revenue through a take up rate.
There are certain contractual clauses that must be executed between OYO and property owner to govern their pricing, in light of the business model adopted by the oyo private limited company.
Termination of an operator based on their performance
This is usually a rare occasion wherein the operator is terminated on their failure to perform their obligations as agreed upon in the agreement. If in case the operator miserably fails to achieve the promised target of profit in the business, then this clause can be inserted in the contract to secure interest of the owner of the property. It is indeed a challenge for the oyo group and the property owners to formulate a measure which allows termination of a hotel management agreement in certain kinds of situations. These circumstances are when the operator virtually lacks the expertise to run the hotel at an acceptable level of profitability.
The operator could prevent the termination from taking place by paying up the loss incurred by the property owner.
Contractual clause related to the choice of law
The owner of the property and oyo hotels private limited should include a clause providing as to how a dispute should be resolved if in case any arises in future. The question as to whether normal litigation process is approached or an arbitration clause is included in the agreement as a dispute resolution mechanism must be clearly addressed in the agreement. With respect to this issue, it would be advisable to include the mode of payment of expenses incurred by both the parties during the entire process in this contractual clause.
Contractual clause with regards to the services offered
Another important clause that shouldn’t be ignored is, as to in what manner, is the distribution of fund is made between oyo company and the property owner with regards to the services provided to the customers.
Clause related to Non-disturbance agreement
When it comes down to Hotel Management Agreement, it imposes an obligation on the owner to Non-Disturbance Agreement from the financier. This agreement is normally understood as a tri-partite agreement between operator, financier and the owner of the property. This type of agreement is brought in to force because it mandates the financier in case of default of payment by the operator or owner to take over in control of the hotel in accordance with the terms and conditions of the hotel management agreement. This agreement also mandates the operator to tender relevant notices to the owners and also permits the financier with the opportunity to indemnify an owner’s default, thereby upholding the principle of hotel management agreement.
Alignment of risk
There needs to be a contractual clause dealing with the liability of the owner of the property and oravel private limited hotels pertaining to the bankruptcy of this business model. The risk coping mechanism must be devised in the agreement in case of loss of business, in order to align the possible risk in future.
Clause on expenses and expenditure incurred
It needs to be clearly clarified in the agreement between the oyo hotel and property owners on the obligation of one of the party to bear the cost, expenses and the expenditure that results out during the operation of the business.
Clause on breach of contract
Whenever there is breach of contract, a proper specific modus operandi must be elaborated and the party whoever is liable for so must abide by the obligation imposed by the clause in the contract. It needs to also specify whether the party breaching will reimburse by paying the fixed deposit or through a medium of installment.
Clause on brand standard
This is one of the very important clause in this kind of a business model which is more of a franchising model. By virtue of its nature of the business, the hotel owners are required to maintain the certain specific precise standardization guidelines as laid down by the oravel hotels private limited company. This places higher importance on the quality of services rendered by that particular hotel which is marketed under the brand value of oyo hotels pvt ltd. This relies huge emphasis on the customer satisfaction which ultimately helps in developing stronger brand value for the company.
Therefore, it becomes imperative to include the obligation on a service provider to abide by the strict guidelines in upholding of the brand standard. If this condition appears to be neglected then under the aegis of this clause compensation of a specific amount needs to be specified in the contract.
Clause on sale of the property
The owner of the property retains his status as an owner in this kind of a business structure. However, certain contingencies might occur in future wherein the owner probably will be required to sale the property under which the oyo hotel is operated. This clause is incorporated with a vision to protect the interest of the oyo company to be compensated within the time limit as set under the agreement. Thus, there needs to be certain kind of provision which provides for the guidelines to be abided by the property owner and determination of total amount of compensation for the party who gets affected by the decision taken by the owner.
Clause on division of profit
Whenever a customer books for a oyo room in a hotel owned by a different person, then in such circumstances, the hotel owner is getting a customer under the brand name of oyoy rooms. Hence, it is the need of the hour for a contractual agreement to include the modes of profit distribution between the owner and the private limited company. The agreement should include a clause determining the amount of profit sharing.
Clause on remuneration of worker
The contractual agreement should include the amount of salary paid to the workers and determination of the total amount paid to each individual working in the hotel.
- The owners of the property realize and acknowledge the value created by Oyo hotel company’s private limited. This encourages independent property owner to partnership with oravel private limited, but, however, the owners get skeptical over three specific genres in relation to the monetary matters.
- The first questionable doubt that bothers the owner of the property is, whether the services that are provided are given in their true marginal cost, secondly the likelihood of the oyo company to impose new and expensive requirements over the term of the contract for those types of programs which are not anticipated during the contract negotiation between the two parties.
- Moreover, the property owners are bewildered about whether the effectiveness of centralized services renders same profitable result from one hotel to another hotel. In backdrop of these questions the contract is entered between the property owner and OYO hotels limited. Hence, the above discussed contractual clauses could be incorporated and executed between oyo and property owners wile deciding upon the price in light of its business model. So, to help to build better contract OYO and Property owners has compiled with these contractual clauses.
- The more precisely contact clauses were defined and parties adhere to those contact clauses there will be more transparency between the parties are going to exist. And the payment procedure has to be specifically mentioned in contractual clauses, because if more preciously the contact will define and adhere to the payments terms.
The more likely it will be paid promptly and it will avoid the future fee related dispute. Such disputes are disagreeable and can even lead to the loss of future work with the same client. In the contractual clause there has to be limitation of liability clause.