When the performance test is misaligned. Reset the owner clock and cure

Owners do not negotiate performance tests for sport. They negotiate them to protect the investment case when the operating model is not delivering.

The problem is that many performance tests are technically present, but practically unusable at the moment the owner needs them most. By the time the test is live, the asset has already absorbed years of fee drag, repeated budget resets, and value erosion. The owner then discovers that the contract remedy is delayed, diluted, or easily neutralised.

This Insight is about a simple owner-side fix. Reset the owner clock so the test becomes usable. Then require a cure that restores owner economics, not just a contractual metric.

The situation

A performance test is meant to answer one question. If the hotel underperforms for long enough, can the owner force a change?

Misalignment shows up when the answer becomes “not really”. The hotel is off-plan, yet termination is blocked by timing, definitions, exclusions, or procedural hurdles. The operator may still be acting in good faith, but the contract mechanics have stopped being a real governance tool.

Experienced owners recognise this pattern quickly. They see a termination right that looks strong on day one and becomes theoretical on day 1,000.

What misalignment looks like in practice

Misalignment is usually a stack. Here are the patterns that matter.

1) The clock starts too late
The test is only live after a long ramp, or only after multiple full fiscal years. If opening is late in the calendar, “full year” definitions can push the first countable year far out. In underwriting terms, the owner clock is already running. In contract terms, the remedy clock is not.

2) The test can quietly restart
Comp set rules, peer group minimums, data gaps, or re-benchmarking provisions can restart a test period. A restart may be reasonable once, but repeated resets can add years of delay without an explicit owner decision.

3) The metric is not aligned to owner economics
Some tests measure index performance (RevPAR index) and ignore profit quality. Others measure profit against a reference point that is itself negotiable (budget, stabilised assumptions, exclusions). Passing a metric is not the same as protecting Owner Free Cash Flow (OFCF). Owners care about cash yield and cash conversion variability. A test that can be passed while owner cash is weak is misaligned.

4) Exclusions are unbounded
Owners accept carve-outs for extraordinary events, renovations, owner-caused disruption, and genuine force majeure. The issue is when exclusions become the default explanation for underperformance and are not time-bound, quantified, and evidenced. An exclusion that cannot be measured cannot be governed.

5) Procedure defeats substance
Notice windows, reporting finalisation, data determination, and dispute routes can extend timelines further. Two “bad years” is rarely two years. It is two years plus audit finalisation plus data plus notice deadlines. If the owner cannot run the timeline, the owner will miss the right.

6) Cure prevents the remedy without fixing the asset
Cure can be a cash payment, a fee waiver, or a shortfall top-up. Cure can also restart the test period. The owner then gets trapped in a loop: underperformance, cure, restart, repeat. The contract stays alive. The asset does not recover.

Reset the owner clock

Resetting the owner clock is not a philosophical concept. It is a practical alignment exercise between underwriting reality and contract mechanics.

Owners should treat this as a checklist. If any item is unclear, the test is not owner-ready.

Owner checklist: make the test usable

• Define the first live year. Clarify what counts as year one, what “full fiscal year” means, and whether a partial opening year is ignored or pro-rated.

• Control restarts. Limit restart triggers. If a reset is needed (comp set collapse, major repositioning), make it an explicit owner-approved reset with defined parameters, not an automatic restart that wipes out history.

• Lock the data spine. Specify the data source, what happens if peers drop out, and what happens if the peer group becomes too small. Avoid structures where the test is deemed met because the dataset is unusable.

• Bound exclusions. Every exclusion needs three things: a defined cause, a quantified impact, and a clear expiry. “This affected performance” is not an exclusion.

• Protect the notice window. Owners need a timeline tracker. The termination right should not depend on being fast at year-end.

• Separate “events” from “performance”. Extraordinary events can justify an adjustment. They should not permanently convert an operating underperformance into a non-actionable outcome.

If an existing agreement is already signed, the reset work happens through governance. Owners can still create an owner-side shadow tracker, tighten evidence requirements, and remove ambiguity through agreed interpretations and standing protocols.

Cure that actually cures

Cure is only useful if it restores owner economics and forces operational correction.

Owners should define cure as an economic remedy, not a contractual election.

Owner cure principles

• Define the economic target. Cure should restore the owner’s position, measured in cash terms and value terms. If the test is profit-based, translate it to the owner outcome. If the asset is missing the investment case, cure needs to address the cash shortfall, not just a metric.

• Control the destination. A cure that disappears into working capital may stabilise operations but not restore the owner. Owners should specify where cure lands and how it is evidenced.

• Keep cure fee-neutral. Owners should avoid cure structures that increase incentive fees or otherwise reward failure. Cure should not become a fee optimisation mechanism.

• Limit repeatability. One cure can be a bridge. Repeated cures are usually a structural signal. Owners should cap frequency and link cure to a defined corrective plan with dates, owners, and measurable actions.

• Do not cure without a reset. If the test clock is misaligned, cure will only extend misalignment.

A good way to force clarity is to require a short “cure term sheet” as part of governance, even if the contract language exists. Owners should insist on: amount, timing, destination, fee treatment, test period consequences, corrective plan, and escalation triggers.

Owner operating rhythm

Misalignment becomes expensive when it is discovered late.

Owners should run a simple monthly tracker, even if the operator does not volunteer it:

• current year position versus each test leg (index and profit threshold)

• forward trajectory versus the remaining test period

• reporting and notice timeline, including the latest dates that still preserve rights

• an exclusions log with evidence requirements and expiry dates

• a cure log, with cumulative effect and remaining permitted cures

This is not an operational tool. It is owner governance hygiene.

Decision close

When a performance test is misaligned, the owner has three decisions.

• Reset. Make the test usable by aligning clock, data, exclusions, and notice mechanics to the investment reality.

• Cure. Accept cure only if it restores owner economics and is paired with a corrective plan that changes future performance, not just this year’s outcome.

• Convert. If repeated cures are required, the issue is usually structural. That is when owners move to a different structure, different operator, different fee shape, or a different strategy for the asset.

A performance test that cannot be used is not protection. Owners should reset the clock, then demand a cure that actually cures.