Upon Closer Review: How Hotel Management Agreements Are Interpreted - and Enforced

By William A. Brewer III Managing Partner, Bickel & Brewer | April 02, 2010

As we know from experience, the economic pressures affecting the hospitality industry can create contract-related pressures for hotel owners and operators. As an example, disputes frequently arise during economic downturns between hotel owners and operators concerning their rights and duties under their management agreements. The industry's key players need to understand how hotel management agreements are likely to be interpreted and what they can do to protect their rights.

There is no question that we are in the midst of a severe economic downturn. The hospitality industry is no exception. Smith Travel Research reports that the U.S. hotel industry experienced a year-over-year decrease in occupancy, ADR, and RevPAR in December 2008, with the luxury hotel segment being hit hardest. That trend is expected to continue in 2009, as consumers reduce their travel and luxury expenditures. According to Hudson Crossing, "the global hotel industry will manage this downturn better than 2002-2003, but will feel the full brunt of the economy in late 2009." Hotel asset values have also plunged. Lodging Econometrics reports that the average price per room fell to $85,863 in the third quarter of 2008, after reaching a high of $121,282 in 2007. Another industry metric, global hotel transaction volume, dropped 80% in 2008, according to Jones Lang LaSalle Hotels, and is expected to fall ever further in 2009.

While the events leading up to this recession and its impact on the global economy are certainly unique, the hospitality industry has weathered prior downturns. As we know from experience, the economic pressures affecting the hospitality industry can create contract-related pressures for hotel owners and operators.

As an example, disputes frequently arise during economic downturns between hotel owners and operators concerning their rights and duties under their management agreements. The industry's key players need to understand how hotel management agreements are likely to be interpreted and what they can do to protect their rights.

A. Hotel Management Agreements: The Basic Framework

In general, management agreements govern the relationship between hotel owners and operators by setting forth each party's rights and responsibilities for the day-to-day operation and management of a hotel. They define, among other things, the term (i.e., time period) of the agreement, operating fees, operator guarantees, performance measures, owner approvals, capital expenditures, events of default, termination rights (if any), intellectual property rights, territorial rights and/or restrictions, and dispute resolution procedures. Management agreements are, thus, the mechanism for allocating and managing risks between owners and operators. Yet, despite their importance, management agreements are often negotiated, executed, and then put in a file until a dispute arises. All the more reason in these circumstances for owners and operators to audit their rights and responsibilities under their hotel management agreements.

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