Hotel Management Agreement: Definition & Sample

A hotel management agreement is a legal agreement between the owner of a hotel property and the management company. The management company will be overseeing the daily operations of the hotel and the property. This agreement allows the management company to assume responsibility for everything from property maintenance to hiring and training staff.

These agreements are legal contracts and require management companies to provide reports and to bookkeep a certain way. They also require how the company will handle insurance and determine what maintenance and repairs are necessary for upkeep, among other essential provisions.

Common Sections in Hotel Management Agreements

Below is a list of common sections included in Hotel Management Agreements. These sections are linked to the below sample agreement for you to explore.

Hotel Management Agreement Sample

HOTEL MANAGEMENT AGREEMENT

THIS HOTEL MANAGEMENT AGREEMENT (this “Agreement” ) is made as of the day of [ IPO Date ], between SUNSTONE HOTEL TRS, LESSEE, INC. (“ Owner” ), and SUNSTONE HOTEL PROPERTIES, INC. ( “Operator” ), a Colorado corporation company.

A. Owner is the lessee of a hotel (the “Hotel” ) known as the [Name of Hotel] located at [Address of Hotel] .

B. Owner and certain affiliates thereof (collectively, “ Owner Affiliate ”) and Operator have entered into that certain Master Agreement, dated as of [ IPO Date ] (the “ Master Agreement ”) in which the parties have set forth certain agreements that affect all of the hotels (including the Hotel) managed by Operator on behalf of Owner and such Owner Affiliate; and

C. Owner and Operator desire to evidence their agreement with respect to the operation, direction, management, and supervision of the Hotel as more particularly set forth below.

NOW, THEREFORE , for and in consideration of the premises, and other good and valuable consideration, Owner and Operator agree as follows:

1.1. Owner and Operator acknowledge that the Hotel consists of and contains:

2.1. This Agreement shall have a term (the “Operating Term” ) commencing on the effective date of the initial public stock offering of shares of capital stock of Sunstone Hotel Investors, Inc. (“ Sunstone” ) (the “Commencement Date” ) and expiring on the twentieth (20 th ) anniversary of the Commencement Date (the “Initial Term” ), unless sooner terminated in accordance with the provisions of this Agreement or unless extended as provided by the terms of this Agreement or as otherwise provided by the written agreement of Owner and Operator. Owner shall have the right, in its sole discretion, to elect to renew this Agreement for up to two (2) additional renewal terms of five (5) years each (each a “Renewal Term” ) by giving to Operator written notice of such election at least ninety (90) days prior to the end of the Initial Term or the first Renewal Term (as the case may be). Any and all reference contained herein to Term shall be deemed to include the Operating Term, the Initial Term and the Renewal Term(s).

APPOINTMENT AND ENGAGEMENT OF OPERATOR

3.1. Owner hereby engages Operator as the exclusive operator of the Hotel during the Term as agent for and on behalf of Owner, and Operator hereby accepts such engagement.

3.2. Subject to the terms of this Agreement (including without limitation, the limitations of Article XXIII below) and the applicable Budgets, Operator shall have control and discretion in the operation, direction, management and supervision of the Hotel including, without limitation, the determination of credit policies (including entering into agreements with credit card organizations), terms of admittance, charges for rooms, food and beverage policies, employee wage, benefits and severance policies, entertainment and amusement policies, leasing, licensing and granting of concessions for commercial space at the Hotel, and all phases of advertising, promotion and publicity relating to the Hotel.

3.3. Operator shall manage and operate the Hotel and all of its facilities and activities in a manner consistent with past practices of the previous Manager of the Hotel, but in all events in accordance with the standards and specifications set forth in any applicable franchise agreement as directed by Owner, so long as Owner provides sufficient capital to enable Operator to operate the Hotel in good standing under such franchise agreement, and in accordance with the Budgets.

3.4. Operator will be available to consult with and advise Owner, at Owner’s reasonable request, concerning all policies and procedures affecting all phases of the conduct of business at the Hotel. Subject to the terms of the Master Agreement, Operator shall in all events obtain Owner’s prior

written approval before implementing any material changes in policies and procedures relating to the Hotel, such approval not to be unreasonably withheld or delayed.

3.5. Operator shall maintain and make available to Owner upon request invoices or other evidence reasonably acceptable to Owner supporting all Operating Expenses described in Section 10.2A(ix) hereof.

3.6. Operator shall not enter into any “barter” arrangements with respect to any Hotel facilities or services, or enter into equipment leases, whether or not the same would be characterized as a capital lease under the Uniform System, without the prior written approval of Owner.

3.7. Owner shall have the right to close the Hotel from time to time on a temporary basis to perform such renovations or other work in the Hotel as Owner may determine in its sole discretion. During any such period of closure Operator shall provide the services set forth in Section 3.8 below, to the extent applicable during such period and Owner shall, in lieu of any management fee, pay to Operator reasonable compensation for such services as Operator may actually render.

3.8. During the Term, Operator, as agent and for the account of Owner, shall in accordance with the Budgets (as defined in Section 8.4) and the other applicable provisions of this Agreement, and only to the extent Owner has provided sufficient funds therefor, either through Hotel operations or directly from Owner:

3.9. Notwithstanding any other provision of this Agreement to the contrary, Operator’s obligations with respect to any Major Agreement shall be limited to the extent (i) complete and accurate summaries of the relevant provisions thereof have been delivered to Operator sufficiently in advance to allow Operator to perform such obligations and (ii) the provisions thereof and/or compliance with such provisions by Operator (1) are applicable to the day-to-day operation, maintenance and non-capital repair and replacement of the Hotel or any portion thereof, (2) do not require contribution of capital or payments of Operator’s own funds, (3) do not materially increase Operator’s obligations hereunder or materially decrease Operator’s rights hereunder, (4) do not limit or purport to limit any corporate activity or transaction with respect to Operator or any Operator Affiliate or any other activity, transfer, transaction, property or other matter involving Operator or any Operator Affiliate other than at the site of the Hotel, and (5) are otherwise within the scope of

Operator’s duties under this Agreement. Owner acknowledges and agrees, without limiting the foregoing, that any failure of Operator or the Hotel to comply with the provisions of any Major Agreement arising out of (A) the condition of the Hotel, and/or the failure of the Hotel to comply with the provisions of such Major Agreement, prior to Operator’s assuming the day-to-day management thereof, (B) construction activities at the Hotel (except to the extent arising from Operator’s or any Operator Affiliate’s management of same pursuant to Section 3.10 hereof), (C) inherent limitations in the design and/or construction of, location of and/or parking at the Hotel, and/or (D) instructions from Owner to operate the Hotel in a manner inconsistent with the Major Agreements shall not be deemed a breach by Operator of its obligations under this Agreement. Operator shall be entitled to rely on the copies of the franchise agreement provided by Owner.

3.10. On a per project basis and at the written request of Owner from time to time, provided that Owner and Operator have agreed upon an additional construction management fee payable to Operator therefor (which fee shall be reflected in the applicable Capital Budget) and pursuant to a written project management services agreement with respect thereto reasonably acceptable to Operator and Owner, Operator or any Operator Affiliate will provide project management services as Owner’s agent in connection with the making of Major Renovations at the Hotel, which project management services may, at Owner’s request, include without limitation Operator negotiating and entering into third party agreements as agent on behalf of Owner for architectural, engineering, testing, consulting and construction services. Project management services with respect to any matters which are not Major Renovations shall be part of Operator’s services under Article III. In the event Owner does not retain Operator to provide project management services with respect to any Major Renovation, Operator shall cooperate in all reasonable respects with Owner and/or any third party project manager retained by Owner with respect to such Major Renovation.

AGENCY; HOTEL EMPLOYEES

4.1. In the performance of its duties as Operator of the Hotel, Operator shall act solely as agent of Owner in a fiduciary capacity. Nothing in this Agreement shall constitute or be construed to be or create a partnership or joint venture between Owner and Operator or create any interest in, lease of real estate or a lien or security interest of any nature against the Hotel or any portion thereof. Except as otherwise provided in this Agreement, (a) all debts and liabilities to third persons incurred by Operator in the course of its operation and management of the Hotel in accordance with the provisions of this Agreement shall be the debts and liabilities of Owner only and (b) Operator shall not be liable for any such obligations by reason of its management, supervision, direction and operation of the Hotel as agent for Owner. Operator may so inform third parties with whom it deals on behalf of Owner and may take any other reasonable steps to carry out the intent of this paragraph.

4.2. All Hotel Employees at all times from and after the Commencement Date shall be employees of Operator. All compensation (including without limitation all wages, fringe benefits and severance payments) of the Hotel Employees shall be an Operating Expense (as defined in Section 10.2) and shall be borne by Owner and paid or reimbursed to Operator out of the Agency Account (as hereinafter defined) or if the amounts therein are insufficient by Owner upon demand therefor by

Operator. Owner acknowledges and agrees that Operator shall have the right to institute severance payment policies and bonus programs for the Hotel Employees so long as such policies are reasonable, consistent with past practices of the previous manager of the Hotel and in accordance with the Budgets.

4.3. Operator, with Owner’s prior written approval, may enroll the Hotel Employees in retirement, health and welfare employee benefit plans substantially similar to corresponding plans implemented in other hotels with similar service levels managed by Operator or similar hotels in the area of the Hotel, provided that Owner may require such plans to be consistent with past practices of the previous manager of the Hotel. Such plans may, with Owner’s prior written approval, be joint plans for the benefit of employees at more than one hospitality property owned, leased or managed by Operator or any Operator Affiliate. To the extent so approved by Owner, employer contributions to such plans (including any withdrawal liability incurred upon termination of this Agreement) and reasonable administrative fees which Operator may expend in connection therewith shall be the financial responsibility of Owner and shall be an Operating Expense. The administrative expenses of any joint plans shall be set forth in the applicable Operating Budget. Owner hereby acknowledges and agrees that compliance with the provisions of the Worker Adjustment and Retraining Notification Act and/or any similar state or local laws (together with all rules and regulations promulgated thereunder and including without limitation any such state or local laws, the “ WARN Act ”) upon any disposition of the Hotel, upon any termination of this Agreement or upon the occurrence of any other event giving rise to the application of the WARN Act is the responsibility and obligation of Owner if and to the extent Owner fails to provide Operator at least seventy (70) days’ prior written notice of such disposition, termination or occurrence to permit Operator to comply with the WARN Act. In the event Owner fails to give Operator at least seventy (70) days prior written notice, Owner hereby agrees to indemnify, defend and hold Operator harmless from and against any cost, expense, obligation, claim or other liability which Operator may incur arising out of or in connection with any breach or claimed breach of the WARN Act in connection with any such disposition, termination or other occurrence.

4.4. Operator may (i) in its discretion, provide lodging for Operator’s executive employees visiting the Hotel in connection with the performance of Operator’s services and allow them the use of Hotel facilities and (ii) with Owner’s prior written approval, provide the General Manager of the Hotel and other Hotel Employees temporary living quarters within the Hotel and the use of all Hotel facilities, in either case at a discounted price or without charge as the case may be.

4.5. Operator shall not be liable for any failure of the Hotel to comply prior to the Commencement Date with any federal, state, local and foreign statutes, laws, ordinances, regulations, rules, permits, judgments, orders and decrees affecting labor union activities, civil rights or employment in the United States, including, without limitation, the Civil Rights Act of 1870, 42 U.S.C. §1981, the Civil Rights Acts of 1871, 42 U.S.C. §1983 the Fair Labor Standards Act, 29 U.S.C. §201, et seq ., the Civil Rights Act of 1964, 42 U.S.C. §2000e, et seq ., as amended, the Age Discrimination in Employment Act of 1967, 29 U.S.C. §621, et seq ., the Rehabilitation Act, 29 U.S.C. §701, et seq ., the Americans With Disabilities Act of 1990, 29 U.S.C. §706, 42 U.S.C. §12101, et seq ., the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 301, et seq ., the Equal Pay Act, 29 U.S.C. §201, et seq ., the National Labor Relations Act, 29 U.S.C. §151, et seq .,

and any regulations promulgated pursuant to such statutes (collectively, as amended from time to time, and together with any similar laws now or hereafter enacted, the “Employment Laws” ).

4.6. Operator shall from time to time develop and implement policies, procedures and programs for the Hotel (collectively, the “Employment Policies” ) reasonably designed to effect compliance with the Employment Laws.

PROVISION OF FUNDS

5.1. In performing its services under this Agreement, Operator shall act solely as agent and for the account of Owner. Operator shall not be deemed to be in default of its obligations under this Agreement to the extent it is unable to perform any obligation due to the lack of available funds from the operation of the Hotel or as otherwise provided by Owner.

5.2. Operator shall in no event be required (i) to advance any of its funds (whether by waiver or deferral of its management fees or otherwise) for the operation of the Hotel or (ii) to incur any liability unless Owner shall have furnished Operator with funds necessary for the discharge thereof prior to incurring such liability.

CENTRALIZED SERVICES; WIDE AREA NETWORK

6.1. In accordance with the provisions of the Master Agreement, Operator shall provide to the Hotel certain centralized services including accounting, revenue management, sales and marketing, operations supervision and oversight and other similar related services more efficiently provided on a group and centralized basis (collectively, the “Centralized Services” ). In addition, Operator may, subject to the Budgets or other prior written approval of Owner, provide or cause any Operator Affiliate to provide for the Hotel other group benefits and services as are made available generally to similar properties managed by Operator.

6.2. Unless otherwise directed by Owner, Operator will utilize the Owner’s BuyEfficient program to enable the Hotel to participate in certain purchasing or other contracts with respect to the Hotel (collectively, “BuyEfficient Program” ).

6.3. From the Commencement Date through December 31, 2005, Operator shall continue to use the Hotel’s existing wide area network. Thereafter, Owner and Operator shall mutually agree upon whether to continue utilization of the Hotel’s wide area network or to utilize Operator’s wide area network on terms and conditions to be mutually agreed upon by Owner and Operator. Unless otherwise expressly agreed upon, Operator shall continue to use the Hotel’s existing wide area network.

6.4. The fees and reimbursements payable to Operator under this Article VI shall be subject to the terms and conditions of the Master Agreement.

WORKING CAPITAL AND BANK ACCOUNTS

7.1. The following special accounts shall be established in connection with the operation of the Hotel:

7.2. If and to the extent that there are insufficient funds in the Agency Account to pay compensation due to Hotel Employees (including all related payroll and withholding taxes) and if Owner shall fail to deposit such funds in the Agency Account within two (2) business days after written notice from Operator, then Operator may use funds in the Deposit Accounts only to the extent necessary to pay such compensation (not in any event to exceed the amount of such compensation accrued or payable with respect to the two calendar weeks preceding the date of any such draw upon the Deposit Accounts by Operator) and shall immediately advise Owner as to the use of such funds.

7.3. Any security deposit held under a Lease shall be held in a separate account if required by law or the terms of such Lease or if otherwise required by Owner.

7.4. Notwithstanding anything to the contrary set forth in this Article VII, Operator agrees that it will comply with any reasonable requirement or request of the holder of any first mortgage or deed of trust loan encumbering the Hotel to change the manner in which bank and other accounts are held, provided the same does not materially increase Operator’s obligations or liabilities under this Agreement.

BOOKS, RECORDS AND STATEMENTS; BUDGETS

8.1. Utilizing the Hotel’s existing accounting systems, Operator shall keep full and accurate books of account and other records reflecting the results of the operation of the Hotel in accordance with the “Uniform System of Accounts” (Ninth Revised Edition 1996, as further revised from time to time) as adopted by the American Hotel and Motel Association of the United States and Canada (the “Uniform System” ) with such exceptions as may be required by the provisions of this Agreement; provided, however, that Operator may, with prior notice to Owner, make such modifications to the methodology in the Uniform System as are consistent with Operator’s standard practice in accounting for its operations under management contracts generally, so long as such modifications do not affect the determination of Total Revenues, Operating Expenses or Fixed Charges under Article X. Except for the books and records which may be kept in Operator’s home office located in Southern California or such other location approved from time to time by Owner, the books of account and all other records relating to or reflecting the operation of the Hotel shall be kept at the Hotel and shall be available to Owner and its representatives at all reasonable times for examination, audit, inspection and transcription. All of such books and records including, without limitation, books of account, guest records and front office records, shall be the property of Owner. Upon any termination of this Agreement, all of such books and records shall thereafter be available to Operator at all reasonable times for inspection, audit, examination and transcription for a period of three (3) years.

8.2. Operator shall deliver to Owner within ten (10) days after the end of each month or as otherwise indicated below, the following items (collectively, the “Monthly Reports” ):

The Monthly Reports shall be prepared in accordance with the Uniform System to the extent applicable and shall otherwise be prepared in accordance with Operator’s standard financial reporting and budgeting practices, and shall be certified by the Regional Vice President of Operations and the Director of Hotel Accounting with supervisory responsibility for the Hotel. In addition to the Monthly Reports, Operator shall deliver to Owner within thirty (30) days after the end of each calendar quarter a reforecast of revenues and expenses for the remainder of the current Fiscal Year taking into account the actual results of all prior quarters in such Fiscal Year.

8.3. Year-end financial statements for the Hotel (including a balance sheet, income statement and statement of sources and uses of funds) shall be prepared and delivered by Operator to Owner within ten (10) days after the end of such Fiscal Year and certified by the Director of Hotel Accounting with supervisory responsibilities for the preparation of the Hotel’s financial statements. In addition and in the sole discretion of Owner, such year-end financial statements shall be audited and certified by an independent certified public accountant selected by Owner. Such accountant shall address any findings, reports or opinions that concern Operator’s work under this Agreement to both Operator and Owner. Operator shall provide reasonable assistance with such accountant in the preparation of such statements.

8.4. On or before each October 15 th during the Term, Operator shall submit to Owner for the next Fiscal Year the following items (collectively, the “Budgets” ):

The Budgets shall be prepared in accordance with the Uniform System to the extent applicable and shall otherwise be prepared in accordance with Operator’s standard financial reporting and budgeting practices, and shall be in the form attached to this Agreement as Exhibit A . Owner shall notify Operator in writing of its approval or disapproval of the Budgets not later than thirty (30) days after the delivery of the Budgets to Owner and, if Owner disapproves any such Budget, Owner shall state in such notice the reasons therefor with reasonable particularity. In the event Owner fails to notify Operator in writing of its approval or disapproval of any Budget on or before the expiration of such thirty (30) day approval period, then such Budget shall be deemed disapproved by Owner.

Notwithstanding anything to the contrary contained in this Agreement, Operator is not warranting or guaranteeing in any respect that the actual operating results of the Hotel during the period covered by the Budgets will not materially vary from the Budgets. The Budgets are a good faith estimate only and unforeseen circumstances, including but not limited to, cost of labor, material, services and supplies, casualty, law, economic or market conditions may make adherence to the Budgets impracticable.

8.5. Upon approval of the Budgets by Owner, Operator shall use diligent and commercially reasonable efforts to operate the Hotel substantially in accordance with the Budgets. Operator shall not, without Owner’s prior written approval, incur any expense for any departmental line-item in the Operating Budget which causes the aggregate expenditures for such departmental line-item to exceed the budgeted amount by more than five percent (5%) for the applicable Fiscal Year set forth in the Operating Budget, provided that Operator may at Owner’s cost and expense, without Owner’s approval, (x) pay any non-capital expenses (the “Necessary Expenses” ) regardless of amount, which are necessary for the continued operation of the Hotel in accordance with the requirements of any Major Agreement and the operational standards set forth in this Agreement and which are not within the reasonable control of Operator (including, but not limited to, those for insurance, taxes, utility charges and debt service), (y) pay any expenses (the “Emergency Expenses” ) regardless of amount which, in Operator’s good faith judgment, are immediately necessary to protect the physical integrity or lawful operation of Hotel or the health or safety of its occupants, and/or (z) pay any third-party operating expenses which are commercially desirable to be incurred in order to obtain unbudgeted Hotel revenue in the ordinary course of operating the Hotel in accordance with the then current business plan provided that such unbudgeted revenue is sufficient in Operator’s professional judgment to offset such expenses ( “Opportunity Expenses” ) not to exceed Ten Thousand Dollars ($10,000) annually.

8.6. If the Operating Budget (or any component of such Budget) with respect to any Fiscal Year are disapproved by Owner as provided in Section 8.4 then, until approval of the Operating Budget (or such components) by Owner, Operator until the resolution of such dispute shall cause the Hotel to be operated substantially in accordance with most recent approved Operating Budget, except for, or as modified by, (a) those components of such Operating Budget for the applicable Fiscal Year approved by Owner, (b) an adjustment to the disputed Operating Budget so as to increase (but not decrease) disputed expense items by the same percentage as any percentage increase in the Consumer Price Index—All Urban Consumers (U.S. City Average) (1982-1984 =100), or any successor index thereto appropriately adjusted (the “ CPI ”), from the CPI in effect on the first day of the first month of the Fiscal Year applicable to such last approved Budget to the CPI in effect on the first day of the first month of the Fiscal Year applicable to the disputed Operating Budget, (c) Necessary Expenses which shall be paid as required, (d) Emergency Expenses which shall be paid as required and (d) Opportunity Expenses.

8.7. Within ten (10) days after the end of Fiscal Year 2005 and each Fiscal Year thereafter, year-end financial statements for the Hotel (including a balance sheet, income statement and statement of cash flows) shall be certified by the person responsible for accounting and financial reporting for the Portfolio Properties (as defined in the Master Agreement). The year-end statements shall include computations of Total Revenue, Operating Expenses, Fixed Charges and the fees payable to Operator

hereunder. If requested by the Owner, such year-end statements will be audited by an independent certified public accountant selected by Owner. Operator shall cooperate in all respects with such accountant in the preparation of such statements and shall use its diligent efforts to enable such statements to be delivered to Owner on or before the date sixty (60) days after the end of each Fiscal Year. Owner shall bear the cost of any audit prepared pursuant to this Section 8.7 unless Gross Operating Profit for the year in question, as certified by Operator, varies by more than four percent (4.0%) from that determined by such audit, in which event the cost thereof shall be borne by Operator.

8.8. Operator shall at all times during the Operating Term of this Agreement, at no cost or expense to Operator, cooperate with Owner’s accountants and provide them with access to all financial and other information relating to the Hotel, and access to Operator’s accountants, work papers and to otherwise assist in minimizing the cost of the audit, sufficient to enable Owner to prepare audited financial statements in conformity with Regulation S-X of the Securities and Exchange Commission ( “SEC” ) and to enable Owner to satisfy its reporting obligations under the Securities Exchange Act of 1934, as amended, or to prepare a registration statement, report or disclosure statement for filing with the SEC on behalf of Owner and/or any Owner Affiliate or to enable Owner to prepare and file their tax returns and Operator shall execute any representation letters reasonably requested by Owner’s accountants in connection with the foregoing.

AND PAYMENTS TO OPERATOR AND OWNER

9.1. Owner shall pay to Operator, on a monthly basis, for services rendered under this Agreement a management fee (the “Basic Fee” ) equal to: (i) for the period commencing on the Commencement Date and ending on June 30, 2005, [$ ] per month; (ii) for the period commencing on July 1, 2005 and ending on December 31, 2005, [ percent ( %)] of Total Revenues; and (iii) for the period commencing on January 1, 2006 and for the remainder of the Term thereafter, [ percent ( %)] of Total Revenues.

9.2. In addition to the Basic Fee, Owner shall pay to Operator, on a monthly basis, for its centralized accounting services a fee (the “Accounting Fee” ) equal to Ten Dollars ($10) per room per month during the Term and for one (1) month after the termination of this Agreement. During the one (1) month following the termination of this Agreement, Operator shall perform such services as are reasonably necessary to transition the accounting process to the new owner and/or operator and to prepare final accounting reports consistent with the reports described in Article VII hereof. The Accounting Fee shall be increased (but not decreased) annually on each anniversary of the Opening Date by the same percentage as any percentage increase in the CPI from the first day of the calendar month in which the Commencement Date occurs through the first day of the calendar month in which such anniversary of the Commencement Date occurs.

9.3. In each month during the Term, Operator shall be paid out of the Agency Account the Basic Fee and the Accounting Fee for the preceding month, as determined from the monthly income and

expense statement. Such payment shall be due and made within ten (10) days following delivery of the income and expense statement for such month showing the computation of Total Revenues and the Basic Fee for such month.

9.4. On a weekly basis, or on such other basis as may be determined by Owner from time to time upon written notice to Operator in accordance with the provisions of Article VII of this Agreement, after (a) payment of Operating Expenses, Fixed Charges and, to the extent the same are to be paid by Operator under this Agreement, debt service, ground rent, capital costs and other amounts, (b) deposits to the FF&E Reserve Account in accordance with the Budget, (c) any required payment to Operator pursuant to Section 9.5 below and (d) retention of the Working Capital Reserve, all remaining funds in the Agency Account shall be paid to Owner.

9.5. At the end of each Fiscal Year and following receipt by Owner of the annual audit, if requested by Owner, as set forth in Section 8.3, an adjustment will be made, if necessary, based on the audit so that Operator shall have received the accurate Basic Fee for such Fiscal Year. Within thirty (30) days of receipt by Owner and Operator of such audit, Operator shall either (a) place in the Agency Account or remit to Owner, as appropriate, any excess amounts Operator may have received for such fees during such calendar year or (b) be paid out of the Agency Account or by Owner, as appropriate, any deficiency in the amounts due Operator for the Basic Fee.

10.1. A. The term “Total Revenues” shall mean all income, revenue and proceeds resulting from the operation of the Hotel and all of its facilities (net of refunds and credits to guests and other items deemed “Allowances” under the Uniform System) which are properly attributable under the Uniform System to the period in question. Subject to Section 10.1(B), Total Revenues shall include, without limitation, all amounts derived from:

10.2. A. The term “Operating Expenses” shall mean all costs and expenses of maintaining, conducting and supervising the operation of the Hotel and all of its facilities which are properly attributable under the Uniform System to the period in question. Operating Expenses shall include, without limitation:

10.3. “Fixed Charges” shall mean the cost of the following items relating to the Hotel or its facilities which are properly attributable under the Uniform System to the period in question:

10.4. “ Net Operating Income” for any period shall mean the amount, if any, by which Total Revenues for such period exceed the sum of (a) Operating Expenses and (b) Fixed Charges for such period.

10.5. “Fiscal Year” shall mean each twelve (12) consecutive calendar month period or partial twelve (12) consecutive calendar month period within the Term commencing on January 1st (or, with respect to the first year of the Term, the Commencement Date) and ending on December 31 st (or, with respect to the last year of the Term, the expiration or earlier termination of the Term) unless Owner and Operator otherwise agree.

10.6. “ Operating Loss ” shall mean the amount, if any, by which Operating Expenses exceed Total Revenues.

10.7. “Gross Operating Profit” shall mean the amount, if any, by which Total Revenues exceed Operating Expenses.

11.1. If and to the extent directed by Owner, during each Fiscal Year there shall be allocated and paid on a monthly basis to the FF&E Reserve Account from Total Revenues or other funds provided by Owner an amount equal to a minimum of four percent (4%) of Total Revenues for such month.

11.2. All funds in the FF&E Reserve Account, together with any interest earned thereon and the proceeds of any sale of FF&E (which proceeds shall be deposited in the FF&E Reserve Account) shall be used solely for purposes of replacing or refurbishing the FF&E in accordance with the applicable Capital Budget. At Owner’s direction, any funds remaining in the FF&E Reserve Account at the end of a Fiscal Year shall be carried forward to the next Fiscal Year or paid to Owner.

12.1. Except for the insurances described in Sections 12.1(D), (E) and (G) which shall be obtained by Operator (to the extent such insurances are commercially available) in Operator’s name as an Operating Expense, and the insurance described in Section 12.1(C) which may (at Owner’s discretion) be obtained by Operator in Operator’s name as an Operating Expense, the following insurance with respect to the Hotel, to the extent such insurance is commercially available, shall be obtained by Owner (or, at Owner’s Request, Operator) and maintained throughout the Term at Owner’s sole cost and expense in the amounts as set forth on Exhibit B :

12.2. All insurance policies obtained by Operator shall name Operator as the insured party and shall name as additional insureds Owner, [name of fee owner], and such other parties as may be required by the terms of any applicable Major Agreements. as appropriate. Owner understands that coverage afforded the Owner as an additional insured is solely for liability arising out of Operator’s activities performed by Operator by or on behalf of Owner and that it may be necessary for Owner to purchase separate policies to cover Owner activities not performed by or on behalf of Operator. In the event that Owner shall obtain any such insurance other than through the program established by Operator, such insurance policy shall name Operator as an additional insured party All insurance policies obtained by Owner shall name Owner as the insured party and shall name as additional insureds Operator, [name of fee owner] and such other parties as may be required with respect to such insurance by the terms of any applicable Major Agreement.

12.3. All insurance policies shall be in such form and with such companies as shall be reasonably satisfactory to Owner and provided Owner has given Operator detailed written notice of such requirements, shall comply with the requirements of any Major Agreement. Insurance may be provided under blanket or master policies covering one or more other hotels operated by Operator or owned by Owner. The portion of the premium for any blanket or master policy which is allocated to the Hotel as an Operating Expense or Fixed Charge shall be determined in an equitable manner by Operator and, subject to verification by Owner of the method used to determine such allocation, reasonably approved by Owner and paid out of the Agency Account or if the funds therein are insufficient by Owner upon demand therefor by Operator. Such amount shall be determined by a suitable and customary formula applying the specific hotel exposures against appropriate rates to determine the premium allocation for the Hotel.

12.4. All insurance policies shall specify that they cannot be canceled or modified on less than twenty (20) days prior written notice to both Owner and Operator and any additional insureds (or such longer period as may be required under a Major Agreement, provided that Operator has been advised in writing of such period) and shall provide that claims shall be paid notwithstanding any act or negligence of Owner, or Operator unilaterally or on behalf of Owner, including without limitation their respective agents or employees.

12.5. All insurance policies shall provide, to the extent customarily obtainable from the insurance company providing such insurance, that the insurance company will have no right of subrogation against Owner, Operator any party to a Major Agreement or any of their respective agents, employees, partners, members, officers, directors or beneficial owners.

12.6. Owner and Operator hereby release one another from any and all liability, to the extent of the waivers of subrogation obtained under Section 12.5, associated with any damage, loss or liability with respect to which property insurance coverage is provided pursuant to this Article or otherwise.

12.7. The proceeds of any insurance claim (other than proceeds payable to third parties under the terms of the applicable policy) shall be paid into the Owner Account to the extent of Owner’s interest therein unless otherwise required by the terms of a Major Agreement.

12.8. Operator shall have the right to pay for, or reimburse itself for, insurance required under this Article XII out of the Agency Account. Notwithstanding anything to the contrary set forth in this Agreement, Operator shall have no obligation to obtain or maintain any insurance set forth in this Article if funds from Total Revenues or funds otherwise provided by Owner are not made available to Operator to purchase the same.

12.9. Subject to the prior written approval of Owner, Operator may act, directly or indirectly, in a brokerage capacity with respect to the insurance required under this Article or as a direct insurer or reinsurer with respect to the same.

13.1. Unless Owner instructs Operator in writing that Owner will pay the Property Taxes, Operator shall pay all Property Taxes on behalf of Owner not less than ten (10) days prior to the applicable due dates so long as (a) funds from Total Revenues or funds otherwise provided by Owner are available, and (b) Operator has received written notice thereof sufficiently in advance to make such payments. Upon Owner’s request, Operator shall promptly furnish Owner with proof of payment of Property Taxes.

13.2. Upon Owner’s request, Operator shall from time to time advise Owner of the desirability of contesting the validity or amount of any Property Tax (a “Tax Contest” ). Owner may, whether or not Operator so recommends, pursue a Tax Contest, and Operator agrees to cooperate with Owner in a Tax Contest and execute any documents or pleadings required for such purpose, provided that the facts set forth in such documents or pleadings are accurate and that such cooperation or execution does not impose any liability on Operator. All out-of-pocket costs and expenses incurred by Owner and Operator in connection with a Tax Contest shall be Operating Expenses.

REPAIRS AND MAINTENANCE

14.1. Operator shall perform ordinary repairs and maintenance at the Hotel, subject to the Budgets and Owner providing sufficient funding. Ordinary repairs shall include only those which are normally expenses under generally accepted accounting principles. The cost of ordinary repairs shall be paid from Total Revenues and shall be treated as an Operating Expense.

14.2. As part of the annual budgeting process, Operator shall prepare an annual estimate of non-Routine Capital Expenditures to the Hotel, including without limitation the structure, the exterior façade, the mechanical, electrical, heating, ventilating, air conditioning, or plumbing systems.

14.3. After notice to Owner, if practicable, Operator may take appropriate remedial action without Owner consent in the event of: (i) an emergency threatening the health and safety of the Hotel or its guests or employees; or (ii) if the expenditures are necessary to avoid Operator’s exposure to any civil or criminal liability. Operator shall have the right to participate in any decisions that affect any conditions as described in this Section 14.3.

14.4. If Owner directly performs or contracts for repair, maintenance, refurbishing, construction or renovations at the Hotel, Owner shall exercise commercially reasonable efforts to coordinate, and require its contractors and subcontractors to coordinate, with Operator including, but not limited to, exercising commercially reasonable efforts to cause any Owner employees, contractors or subcontractors to comply with safety and security rules of the Hotel and communicate on a regular basis the activities being performed at the Hotel to assure the health, safety and efficient operation of the Hotel and its guests and employees.

OWNER COVENANTS AND REPRESENTATIONS

15.1. Owner represents and warrants that it holds good and marketable either (a) fee title to the Hotel or (b) leasehold interest in the Hotel.

15.2. Owner represents and warrants that neither it, nor any Owner Affiliate (nor any of their respective principals, partners or funding sources but excluding any owner of publicly traded shares of Sunstone, or other interests convertible into such shares, is nor will become (i) a person designated by the U.S. Department of Treasury’s Office of Foreign Asset Control as a “specially designated national or blocked person” or similar status, (ii) a person described in Section 1 of U.S. Executive Order 13224 issued on September 23, 2001; (iii) a person otherwise identified by a government or legal authority as a person with whom Owner or Operator is prohibited from transacting business; (iv) directly or indirectly owned or controlled by the government of any country that is subject to an embargo by the United States government; or (v) a person acting on behalf of a government of any country that is subject to an embargo by the United States government. Owner agrees that it will notify Operator in writing immediately upon the occurrence of any event which would render the foregoing representations and warranties contained in this Section 15.2 incorrect.

DAMAGE OR DESTRUCTION; CONDEMNATION

16.1. If the Hotel is damaged by fire or other casualty, Operator shall promptly notify Owner, but no later than five (5) days following such occurrence. Operator shall cooperate with and assist Owner in evaluating the extent of the damage, filing and pursuing insurance claims, developing plans for the restoration of the Hotel and modifying the applicable Budgets to reflect the effect of the casualty on operations. This Agreement shall remain in full force and effect subsequent to such

casualty provided that either party may terminate this Agreement upon thirty days prior notice to the other party if (a) Owner shall elect to close the Hotel as a result of such casualty (except on a temporary basis for repairs or restoration) or (b) Owner shall determine in good faith not to proceed with the restoration of the Hotel.

16.2. If all or any portion of the Hotel becomes the subject of a condemnation proceeding or if Operator learns that any such proceeding may be commenced, Operator shall promptly notify Owner, but no later than five (5) days following the date Operator learns of such proceeding. Operator shall cooperate with and assist Owner in evaluating the effect of the condemnation, pursuing any negotiation, litigation, administrative action or appeal relating to the condemnation award, developing plans for the restoration of the Hotel and modifying the applicable Budgets to reflect the effect of the condemnation on operations. Either party may terminate this Agreement on thirty (30) days notice to the other party if (a) all or substantially all of the Hotel is taken through condemnation or (b) less than all or substantially all of the Hotel is taken, but, in the reasonable judgment of the party giving the termination notice, the Hotel cannot, after giving effect to any restoration as might be reasonably accomplished through available funds from the condemnation award, be profitably operated in the manner the Hotel is then being operated pursuant to this Agreement.

16.3. Any condemnation award or similar compensation shall be the property of Owner, provided that Operator shall have the right to bring a separate proceeding against the condemning authority for any damages and expenses specifically incurred by Operator as a result of such condemnation.

16.4. Operator shall not be entitled to any Termination Fee or similar compensation by reason of any termination of this Agreement pursuant to this Article XVI; provided, however, if this Agreement terminates pursuant to this Article 16 (i) prior to, or on December 31, 2005, Owner shall pay to Operator an amount equal to the Basic Fee for the first full Fiscal Year hereunder multiplied by one and one-half (1.5) (and if such termination occurs prior to the end of the first full Fiscal Year, the budgeted Basic Fee for the first full Fiscal Year shall be used to calculate the amount due to Operator under this Article 16) or (ii) on or after January 1, 2006 but prior to, or on December 31, 2006, Owner shall pay to Operator an amount equal to the Basic Fee for the first full Fiscal Year of this Agreement.

EVENTS OF DEFAULT AND TERMINATION RIGHTS

17.1. The following shall constitute events of default:

refuse to follow instructions of Owner with respect to the operation of the Hotel (provided such instructions are not materially inconsistent with the provisions of this Agreement, the Major Agreements or applicable law) provided that if such default cannot by its nature reasonably be cured within such thirty (30) day period, an event of default shall not occur if and so long as the defaulting party promptly commences and diligently pursues the curing of such default, unless such default remains uncured for a period of ninety (90) days after receipt of such notice (or, in the event a default of the type set forth in this subsection B shall result in a default under any Major Agreement, such shorter cure period (if any) with respect to such default as shall be provided for therein);

17.2. Unless otherwise stated in Section 17.1 hereof, if any event of default shall occur, the non-defaulting party may terminate this Agreement on five (5) days prior notice to the defaulting party.

17.3. The right of termination set forth in Section 17.2 shall not be in substitution for, but shall be in addition to, any and all rights and remedies for breach of contract available in law or at equity.

17.4. Neither party shall be deemed to be in default of its obligations under this Agreement if and to the extent that such party is unable to perform such obligation as a result of fire or other casualty, act of God, strike or other labor unrest, unavailability of materials, war, terrorist activity, riot or other civil commotion or any other cause beyond the reasonable control of such party (which shall not include the inability of such party to meet its financial obligations), provided that any such occurrence is an extraordinary (as opposed to a routine or cyclical) material event that was not reasonably foreseeable when the then applicable Budget was prepared.

17.5. Each of the parties hereto irrevocably waives any right such party may have against the other party hereto at law, in equity or otherwise to any consequential damages, punitive damages or exemplary damages.

17.6. Notwithstanding anything to the contrary contained in this Agreement, if within thirty (30) days after receiving Operator’s written request Owner fails to approve any changes, repairs, alterations, improvements, renewals or replacements to the Hotel which Operator determines in its

reasonable judgment are necessary (i) to protect the Hotel, Owner and/or Operator from innkeeper liability exposure, (ii) to ensure material compliance with any applicable code requirements pertaining to life safety systems requirements or (iii) to ensure material compliance with any applicable state, local or federal employment law, including without limitation the Americans with Disabilities Act, then Operator may terminate this Agreement upon thirty (30) days’ written notice to Owner delivered at any time after the expiration of Owner’s thirty (30) day approval period. In such event Operator shall not be entitled to receive any Termination Fee or similar compensation; provided, however, if this Agreement is so terminated (i) prior to, or on December 31, 2005, Owner shall pay to Operator an amount equal to the Basic Fee for the first full Fiscal Year hereunder multiplied by one and one-half (1.5) (and if such termination occurs prior to the end of the first full Fiscal Year, the budgeted Basic Fee for the first full Fiscal Year shall be used to calculate the amount due to Operator under this Section 17.6) or (ii) on or after January 1, 2006 but prior to, or on December 31, 2006, Owner shall pay to Operator an amount equal to the Basic Fee for the first full Fiscal Year of this Agreement.

17.7. At any time, Owner may terminate this Agreement, with or without cause, upon thirty (30) days prior written notice so long as (i) all amounts due Operator under this Agreement have been paid in full, (ii) subject to the last sentence of this Section 17.7 or any other provision of this Agreement to the contrary, Owner pays Operator the Termination Fee and (iii) Owner fully and unconditionally indemnifies, holds harmless and defends Operator from any and all claims, damages, costs, expenses (including reasonable attorney’s fees) arising under or relating to the WARN Act to the extent required under Section 4.3. For purposes of this Agreement, the “ Termination Fee ” shall be equal to: (A) if the termination occurs prior to the end of the first full Fiscal Year of the Term, an amount equal to the budgeted Basic Fee for the first full Fiscal Year multiplied by two and one-half (2.5), (B) if the termination occurs in the second full Fiscal Year of the Term, an amount equal to the prior Fiscal Year’s Basic Fee multiplied by two (2.0), (C) if the termination occurs in either of the third or fourth full Fiscal Years of the Term, an amount equal to the prior Fiscal Year’s Basic Fee multiplied by one and one half (1.5), (D) if the termination occurs in the fifth full Fiscal Year of the Term, an amount equal to the prior Fiscal Year’s Basic Fee, (E) if the termination occurs in the sixth full Fiscal Year of the Term, an amount equal to the prior Fiscal Year’s Basic Fee multiplied by one half (.5), and (F) if the termination occurs after the sixth full Fiscal Year of the Term, there shall be no Termination Fee. For purposes of this Section 17.7, the Basic Fee shall be calculated as an amount equal to two percent (2%) of Total Revenues. For the avoidance of doubt, no Termination Fee shall be payable to Operator in connection with Owner’s election to terminate this Agreement pursuant to Sections 17.8, 17.9 (unless such termination occurs on or prior to December 31, 2005 and then only to the extent specifically provided in Section 17.9), 17.10 (except as otherwise set forth in the Master Agreement), 23.2 or pursuant to any other provision allowing Owner to terminate this Agreement upon the occurrence of an Event of Default.

17.7. Beginning with Fiscal Year 2006, if the Hotel fails to achieve in any Fiscal Year (i) the Incentive Fee Threshold for the Hotel for such Fiscal Year, and (ii) ninety-five percent (95%) of the Hotel’s REVPAR Penetration Index (relative to the Hotel’s Competitive Set) achieved during the immediately preceding Fiscal Year (collectively, a “Performance Failure” ), Owner may terminate this Agreement upon thirty (30) days prior written notice to Operator with no termination fee or similar compensation. As an example, if the Hotel’s REVPAR Penetration Index for a Fiscal Year is

one hundred and ten percent (110%), the Hotel must achieve a REVPAR Penetration Index of at least one hundred and four and one half percent (104.5%) during the next succeeding Fiscal Year to satisfy the requirements of Section 17.8(ii) above. For purposes hereof, the Competitive Set shall mean the competitive set for the Hotel as determined by the Hotel’s then current STR Report prepared by Smith Travel Research, or if such report is no longer being prepared, a similar third party report to be mutually agreed to by Owner and Operator (the “STR Report” ). Notwithstanding the foregoing, if Owner notifies Operator that Owner elects to terminate this Agreement for a Performance Failure, Operator shall have a one time right, in its sole discretion, to cure the Performance Failure by making a payment to Owner equal to the amount by which the Incentive Fee Threshold exceeds actual Net Operating Income for such Fiscal Year. Upon the occurrence of a second Performance Failure, Owner shall have the right to terminate this Agreement without the payment of a termination fee upon thirty (30) days prior written notice to Operator so long as (a) Owner has paid Operator all amounts due and owing under this Agreement and (b) Owner fully and unconditionally indemnifies, holds harmless and defends Operator from any and all claims, damages, costs, expenses (including reasonable attorney’s fees) arising under or relating to the WARN Act to the extent required under Section 4.3 hereof. Notwithstanding the foregoing, Owner and Operator will negotiate in good faith each year during the process of approving the Budgets (as described in Article VIII hereof) whether the provisions of this Section 17.8 shall apply in the event that (x) the Hotel will undergo, in whole or in part, a Major Renovation during such Fiscal Year that will affect the Operator’s ability to comply with the provisions of this Section 17.8 or (y) Operator demonstrates that the failure to make capital improvements proposed by Operator to the Hotel will affect the Operator’s ability to comply with the provisions of this Section 17.8.

17.9. In addition, Owner shall have the right to terminate this Agreement without the payment of any termination fee in the event that Operator acquires an equity interest in a hotel which is in the Hotel’s Competitive Set (as defined in Section 17.8 hereof), so long as (i) all amounts due to Operator under this Agreement have been paid in full and (ii) Owner provides to Operator at least thirty (30) days prior written notice of termination at any time after Owner receives notice that Operator has acquired an equity interest in a hotel in the Hotel’s Competitive Set. In addition, Owner shall have the right to terminate this Agreement in the event Operator commences management of a hotel within the Hotel’s Competitive Set, so long as (i) all amounts due to Operator under this Agreement have been paid in full, (ii) Owner provides to Operator at least thirty (30) days prior written notice of termination, (iii) Owner fully and unconditionally indemnifies, holds harmless and defends Operator from any and all claims, damages, costs, expenses (including reasonable attorney’s fees) arising under or relating to the WARN Act to the extent required under Section 4.3 hereof, (iv) if such termination occurs prior to or on December 31, 2005, Owner pays to Operator an amount equal to the Basic Fee for the first full Fiscal Year of this Agreement (and if such termination occurs prior to the end of the first full Fiscal Year, the budgeted Basic Fee for the first full Fiscal Year shall be used to calculate the amount due to Operator under this Section 17.9) and (v) Operator is still continuing to manage such other hotel on the proposed effective date of termination set forth in the Owner’s notice of termination.

17.10. Either party may terminate this Agreement in accordance with the terms of the Master Agreement.

TERMINATION OF AGREEMENT

18.1. Upon termination of this Agreement for any reason, Operator and Owner agree to sign any documents reasonably necessary to effect such termination or change in management for the Hotel.

18.2. Operator and Owner agree that upon termination, there may be certain adjustments to the final accounting for which information may not be available at the time of the final accounting and the parties agree to readjust such amounts and make the required cash adjustments when such information becomes available; provided, however, but subject to the provisions of Article XXII hereof, all accounts shall be deemed final two (2) years after termination of the Agreement.

18.3. Operator shall release to Owner any of Owner’s funds and accounts controlled by Operator, except as stated herein.

18.4. With the exception of employment records to the extent Operator has a legal obligation or duty of confidentiality with respect to such records, Operator shall provide or make available to Owner all books and records with respect to the Hotel upon termination of this Agreement.

18.5. To the extent permitted by applicable laws, Operator shall cooperate with Owner to assign any permits or licenses to Owner or the subsequent manager or owner; provided that (i) Owner give Operator sufficient time to effect such transfers; (ii) Owner shall cooperate and require that the new manager and/or owner to cooperate with Operator with respect to such transfers; (iii) Owner shall pay or reimburse any costs or expenses, including reasonable attorney fees, incurred by Operator in connection with these efforts.

18.6. All software used at the Hotel which is owned or licensed by Operator or any Operator Affiliate shall remain the exclusive property of Operator. Operator shall have the right to remove such software without compensation to Owner.

18.7. In the event this Agreement terminates, the parties agree that, on and after the effective date of such termination, Hotel personnel employed by Operator immediately prior to the effective date of termination will either be employed by Owner, or Owner will take such other action with respect to their employment, which may include at least seventy (70) days’ prior notification by Owner to Operator of the prospective termination of the employment of such personnel, so as, in any case, to ensure that Operator may avoid any liability pursuant to the WARN Act. Owner hereby agrees to defend, indemnify and hold harmless Operator from and against any and all manner of claims, actions, liabilities, costs and expenses (including, without limitation, reasonable attorneys’ fees and disbursements) relating to or arising from Owner’s breach of the foregoing covenant. Further, Owner agrees to assume all severance pay, accrued vacation or personal leave, COBRA and similar liabilities and obligations to the Hotel’s personnel, which Operator shall or may incur in connection with such termination of this Agreement, and Owner hereby agrees to defend, indemnify and hold harmless Operator from and against any and all manner of claims, actions, liabilities, costs and expenses (including, without limitation, reasonable attorneys’ fees and disbursements) relating to or

resulting from Owner’s breach of the foregoing covenant. Upon Owner’s request to Operator, Operator shall take all prudent and proper actions as operator, to notify, advise and cooperate with Owner in order to mitigate any such liability or expense of Owner.