Mastering Hotel Deals in the Kingdom of Saudi Arabia: Approval Rights in Hotel Management Agreements

This article is the third instalment in our Mastering Hotel Deals series, following “Mastering hotel deals in the Kingdom of Saudi Arabia: the performance test” and “Mastering hotel deals in the Kingdom of Saudi Arabia: operator fees”.

Saudi Arabia’s hospitality pipeline is expanding at speed, across giga‑projects, urban regeneration schemes, mixed‑use destinations and branded residential ecosystems. In this environment, the approvals regime in a hotel management agreement (HMA) is no longer a secondary schedule or a defensive drafting exercise. It is a core governance framework: one that determines how quickly a hotel can act, how clearly risk is allocated, and how reliably capital can be deployed without compromising brand standards or performance accountability.

The most effective approval regimes do not seek to maximise owner control or operator freedom in isolation. They are designed to optimise decision cadence: operators can operate at pace and to brand standard, while owners retain focused consent rights over the decisions that genuinely affect asset value, capital exposure and long‑term positioning. Poorly calibrated regimes slow hotel operations down or erode capital discipline. Well-calibrated regimes, however, reduce friction, improve bankability and make performance discussions more objective.

This article maps how the form of sophisticated KSA‑oriented HMAs now approach owner approvals, highlighting drafting techniques drawn from both Saudi‑facing and international precedents that preserve operational momentum while reflecting the practical realities of doing business in Saudi Arabia, without sacrificing international consistency or deal portability.

1. The organising principle: operational autonomy with a clearly defined owner perimeter

Modern HMAs increasingly start from a simple but disciplined allocation:

• the operator has exclusive supervision and discretion over day‑to‑day operations; and
• the owner intervenes only where decisions affect structural risk, capital exposure or long‑term asset value.

This is typically reflected in:

• a broad grant of authority allowing the operator to control rates, revenue strategy, distribution, procurement, payroll, marketing, systems, brand standards and regulatory compliance; and
• an express statement that such authority is “subject to the terms of this Agreement”, where the owner’s reserved approval rights and information rights are clearly enumerated.

International best practice, which has also taken root in KSA precedents, favours clear definitions and objective triggers, for example; defining “Major Contracts”, “Key Personnel” and “FF&E Reserve Expenditure” up front and referencing those terms consistently in the approvals schedule.

In the Saudi context, two nuances matter:

First, authority must be implementable, not theoretical.

Local licensing, employment and regulatory frameworks can mean that hotel staff are formally employed by the owner or a project SPV, even though the operator is expected to manage the hotel as a fully branded asset. Well-drafted HMAs therefore focus less on labels and more on outcomes, by:

• providing for robust Powers of Attorney (PoAs), bank mandates and corporate authorities that, where necessary, allow the operator to act on behalf of the owner;
• imposing express owner covenants to sign and maintain those authorities promptly and without unreasonable conditions;
• acknowledging that the operator must be able to direct, supervise and control hotel operations in practice, not just on paper;
• recognizing that, in KSA, PoAs may be revocable by the principal at will, and accordingly providing that revocation of the relevant PoA without just cause constitutes a material breach by the owner; and
• acknowledging that KSA banks commonly require bank-specific mandate forms, with the owner covenanting to execute these bank-specific forms in addition to the general HMA PoA to ensure robust banking and financial authority.

Second, approval rights only work if non‑interference is enforceable.

Sophisticated HMAs (both in KSA and internationally) therefore hard‑wire:

• non‑interference covenants (no directing staff, no interference with delegated authorities, no restriction of access to systems and records); and
• cooperation obligations requiring the owner to execute resolutions, bank mandates and authorities promptly and without conditions.

Critically, those covenants are backed by defined remedies. Persistent interference is treated as a contractual breach with real consequences, typically including:

• notice and a short cure period;
• the operator’s right to suspend non‑essential obligations to protect the hotel and brand; and
• ultimate termination rights, usually treated as an owner default with associated fee or damages protections.

In Saudi projects, where stakeholder visibility is high and operational disruption has a reputational as well as a commercial cost, this discipline is particularly important and aligns with the expectations of lenders and institutional investors.

2. Major Contracts, space use and disputes: approvals that control exposure, not noise

Approval regimes are most effective when they are objective, proportionate and fast. High‑quality HMAs use financial and temporal thresholds, coupled with clear carve‑outs, rather than vague notions of materiality.

2.1 Major Contracts: thresholds and budget discipline

“Major Contracts” are typically defined by clear financial and duration thresholds, for example:

• contracts above a stated annual or aggregate value; and/or
• contracts with terms exceeding a specified number of years or with onerous termination provisions.

To prevent regulatory drift and to maintain commercial discipline, the definition should also capture a series of related contracts. In practice, this means that a sequence of linked or interdependent contracts, initiated as part of a single program or project phase, constitutes a single “Major Contract” for purposes of owner approval.

Owner approval is then deliberately pulled back where risk is already managed through the budget, system standards or other structural protections. Common carve‑outs, consistent with international precedents, include:

• contracts contemplated in an approved operating or capital budget;
• system‑wide or central procurement arrangements on standard terms;
• ordinary‑course employment and vendor contracts;
• FF&E reserve-funded spend within an approved FF&E plan or estimate; and
• emergency, legal or insurance‑driven commitments.

To preserve cadence, response periods are short, and silence is often deemed approval, provided the request is clearly framed, supported with reasonable information and delivered to agreed contact points. Some agreements add a “second notice” mechanic (a reminder that restarts a final, shorter window) to reinforce fairness and enforceability.

This approach reflects a commercial reality seen repeatedly on Saudi projects and in international practice: delay is often more damaging than a sub‑optimal decision, particularly during ramp‑up or early trading.

In KSA, insurance must often be placed with locally licensed cooperative insurers to be enforceable. Global policies (often preferred by operators for bulk rates) may not satisfy KSA regulatory requirements. As a result, the owner should retain an approval right over the insurance structure to ensure it complies with KSA regulations and avoids issues that could leave the hotel uninsured under KSA law.

2.2 Space leases, licences and concessions: managing tail risk in mixed‑use environments

For third‑party use of hotel space, the focus has shifted away from approving every concession and toward controlling the arrangements that create long‑term legal or economic exposure.

Approvals typically turn on:

• duration (for example, leases longer than two or three years);
• security of tenure or termination constraints under local law (including registration or protected tenancy concepts); and
• footprint and prominence within the hotel (e.g. large, street‑facing or signature F&B spaces).

Short‑term, terminable arrangements that do not survive termination of the HMA, or are terminable without penalty on short notice, are often excluded, allowing operators to activate F&B and lifestyle concepts dynamically without over‑burdening owners with micro‑approvals.

From an owner’s perspective, it is prudent to require that every third‑party lease within the hotel contain a termination clause enabling the owner to terminate the lease in the event of HMA termination, thereby avoiding the unintended assumption of the operator’s third‑party vendors post-management.

In Saudi mixed‑use developments, this category often intersects with wider community governance, shared facilities and branded residential overlays. International best practice is to draft HMA approval regimes with those interfaces in mind, to avoid external governance documents quietly creating veto points that undermine hotel economics or brand delivery. That usually means:

• giving the operator consultation or approval rights over key project governance documents that affect hotel space or access; and
• securing owner voting covenants so the owner supports hotel‑consistent positions in owners’ associations and other governance bodies.

2.3 Litigation and settlements: controlling structural and reputational risk

Operators typically manage ordinary‑course disputes, subject to reporting and consultation. Owner approval is reserved for:

• uninsured settlements above agreed thresholds; and/or
• outcomes involving injunctive or structural relief affecting the asset, shared facilities or brand.

This avoids clogging routine disputes with approvals while ensuring owners retain control where the stakes justify it. International HMAs also increasingly address who leads on regulatory interactions and notifications (for example, data protection or health and safety regulators) and how the owner is consulted and informed in those situations.

3. Budgets: separating visibility from veto

Budget governance is where owner oversight and operator autonomy meet most visibly. The prevailing approach in sophisticated HMAs is not to reduce owner involvement, but to separate clearly:

• items requiring owner approval; and
• items that are operator‑set, with transparency but no veto, because they are performance levers or system‑driven inputs.

3.1 Process discipline and technical escalation

Operators prepare detailed annual operating and capital budgets on fixed timelines, supported by assumptions and narrative. Owners have a defined review period to approve or raise reasoned objections to specific items but not to the budget as a whole in abstract.

Where disagreement persists, technical disputes are increasingly referred to expert determination under compressed timetables. The objective is not to “win” the line item, but to avoid budget disagreement becoming an operational event. This is particularly important in Saudi projects with tight delivery timelines and lender oversight.

Best practice drafting:

• clearly defines which disputes are “technical” (and therefore suitable for experts) versus which are commercial;
• sets out short, realistic timeframes for appointing the expert and for the expert’s decision; and
• states that the expert’s decision is final and binding, save for manifest error.

3.2 Ring‑fenced operator‑set items

To preserve performance integrity, certain budget categories are typically excluded from owner approval, including:

• pricing strategy, revenue assumptions and distribution mix;
• brand and system charges (including loyalty and marketing fees);
• staffing structures and payroll levels, within agreed efficiency and service norms;
• statutory or uncontrollable costs, such as taxes, utilities and mandatory charges; and
• contributions to, and expenditures from, the FF&E reserve within an approved FF&E plan.

This allocation reflects a basic principle: performance tests are only meaningful if the operator controls the levers against which it is measured. Owners receive full visibility and can challenge assumptions through governance committees or expert processes, but do not hold a veto over the core tools the operator is judged on.

3.3 Operate‑on mechanics

Pending resolution of disputed items, HMAs commonly allow operations to continue using:

• undisputed new‑year items as proposed; and
• prior‑year figures (often inflation‑adjusted and normalised for one‑offs) for the disputed lines.

To avoid ambiguity, parties should specify the inflation adjustment rule upfront. In practice, “inflation‑adjusted” should be tied to a clearly defined index, whether the Saudi Consumer Price Index (CPI) or a hospitality‑sector inflation index agreed by the parties. This clarification helps ensure that any inflation adjustments are predictable and fair, reducing debate during disputes.

This operational discipline is a key cadence‑preserving tool in international practice, particularly during early years of operation and in financed projects where budget deadlocks can trigger broader defaults.

4. Capex governance: follow the funding and make change bankable

Where capex is funded from the FF&E reserve, operators typically implement an approved annual plan without further line‑item approvals, subject to agreed tolerances. Emergency and compliance carve‑outs are robust, with notice and normalisation rather than prior consent.

Where capex is owner‑funded, approvals are naturally broader. What has evolved in Saudi practice, in line with international best practice, is the clarity of remedies for non‑funding: self‑help, set‑off and, in persistent cases, termination. This is critical where brand standards, licensing or safety requirements depend on timely works.

Change‑of‑standards clauses increasingly focus on predictability rather than veto, by:

• requiring the operator to implement system‑wide brand changes over reasonable timeframes;
• giving owners a time‑bounded approval right where new standards involve structural changes or materially unbudgeted capex; and
• aligning implementation and amortisation with FF&E cycles, including, in some deals, protections for unamortised investments on early termination.

Internationally, ESG and sustainability considerations are also starting to influence capex approvals, particularly in large‑scale KSA projects aiming for green certifications. Parties increasingly address:

• whether ESG‑driven capex sits within ordinary FF&E planning or needs separate approvals; and
• how savings or incentives (e.g. energy savings, subsidies) are factored into return calculations.

5. Key personnel: influence at the top, discipline below

A pragmatic compromise has emerged around senior leadership. Owners typically interview and approve the general manager and finance lead within short windows, with:

• clear short response periods;
• rejection rights capped (commonly two rejections);
• silence treated as deemed approval; and
• the operator’s right to appoint the third candidate if the cap is reached.

Beyond those roles, staffing remains firmly within the operator’s control, governed by system standards and local law. Owners generally agree not to direct staff or involve themselves in day‑to‑day HR decisions. To address Saudization considerations, the Operator must maintain a Saudization strategy that keeps the project within a defined tier (e.g., High Green or Platinum). Because owners bear fines for falling below statutory levels and faces visa blockages, they should have an approval right over the Saudization plan, even if individual junior hires do not require their approval. Owner’s approval rights do not extend to day‑to‑day staffing decisions, except as necessary to ensure sustained compliance with Saudization obligations. In Saudi projects, this approach balances governance comfort with the need for a clear chain of command, particularly where workforce localisation, compliance and training obligations are in play. It is also heavily aligned with global practice in brand‑managed hotels.

6. Cash control: structural authority, not transactional approvals

Rather than approving payments one by one, sophisticated HMAs embed approvals structurally:

• operator signatory control over operating and reserve accounts;
• mandatory execution and maintenance of powers of attorney and bank mandates; and
• interference treated as an owner default.

Working capital funding is similarly regulated through pre‑agreed timelines and amounts, with automatic consequences for non‑funding (interest, use of reserves, draw on owner’s distribution accounts, in extreme cases termination), rather than ad hoc approvals.

From a financing perspective, this structure preserves hotel trading while allowing lenders to capture value at the owner level, rather than through controls that disrupt operations. It also dovetails with international non‑disturbance and cash‑management frameworks often required by lenders in large hotel financings.

7. Data, technology and cyber: approvals through protocols

As Saudi hospitality assets become more digital, HMAs increasingly regulate data use, system integration, third‑party technology and cyber response. International best practice, now reflected in higher‑end KSA agreements, is to move away from case‑by‑case approvals toward pre‑agreed protocols, which:

• define who controls and can approve changes to core systems (PMS, POS, CRM, payment gateways, loyalty platforms);
• address ownership, access and use of guest and operational data during the term and on termination, in line with Saudi data protection requirements (notably the Personal Data Protection Law and related implementing regulations) and any sector‑specific guidance;
• set out roles and responsibilities in the event of cyber incidents or data breaches, including who leads incident response and who decides on regulatory and guest notifications, with compliance to Saudi regulators and applicable international standards where appropriate.

Approvals in this area are embedded as process rules, rather than individual consent rights, allowing rapid response while preserving owner visibility, regulatory alignment and a defensible audit trail under Saudi data‑protection obligations.

8. The cadence toolkit: timelines, deemed approvals and experts

Across sophisticated HMAs, three tools underpin effective approval regimes:

• short response windows calibrated by decision type;
• deemed approvals for silence, subject to clear request mechanics and targeted carve‑outs; and
• expert determination for technical disputes, supported by ‘operate‑on’ rules.

These tools are not owner‑friendly or operator‑friendly. They are execution‑friendly, an increasingly important distinction on Saudi projects where delay carries outsized commercial and reputational cost.

9. Committees, escalation and pre‑opening rhythm

Formal approvals work best when supported by structured governance. Regular owner–operator committees, forward approval trackers and senior escalation pathways (mechanics visible in many international HMAs) reduce surprises and keep issues from hardening into disputes.

Pre‑opening often requires a tighter approval rhythm, reflecting construction risk, opening deadlines and stakeholder scrutiny. Many HMAs therefore:

• operate a bespoke pre‑opening approvals matrix during development;
• provide more intensive reporting and joint decision‑making on design, OS&E and pre‑opening budgets; and
• then transition into a steadier post‑opening cadence with more standardised approval and reporting cycles.

10. Mixed‑use overlays and performance alignment

In Saudi mixed‑use developments, approvals cannot stop at the HMA. Governance documents for shared facilities, communities and branded residences increasingly need to align with hotel economics and brand standards. Owner voting covenants and operator consultation rights are used to:

• prevent external governance from creating hidden veto points that distort hotel operations or economics; and
• ensure that mixed‑use activities (such as off‑platform short‑term rental of branded residences) are treated consistently in performance tests and default regimes.

Reflecting international best practice, many HMAs now provide that owner‑driven or governance‑driven distortions (for example, competing residential rental pools, restricted access, or downgraded shared services) are considered in performance testing and may preclude termination for performance failure where they materially impact results.

11. Lender interfaces and international bankability

Lenders value decision certainty and operational continuity. KSA HMAs increasingly incorporate features familiar in international precedents:

• non‑disturbance protections that preserve the operator’s position on enforcement, provided the operator is not in default;
• calibration of “mortgagee approvals” so lender action cannot prevent operation to brand and system standard; and
• cash‑control provisions that keep operating and reserve accounts free of disruptive security while allowing lenders to capture value at the owner distribution level.

These elements help ensure that approval regimes are not only workable for owners and operators, but also acceptable to institutional capital; a key consideration in Vision 2030 projects.

12. Closing perspective

Owner approvals in KSA HMAs have evolved from a binary control debate into a question of governance design. The most effective structures do not ask who “wins” an approval. They ask whether decisions can be made on time, by the right party, with the right information and with predictable consequences.

In Saudi Arabia’s long‑term, capital‑intensive hospitality projects, that is the real benchmark of sophisticated drafting, and the difference between hotels that merely open and hotels that perform.