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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Social Media: Engagement is Key

There are currently 2.3 billion active users of social media networks and savvy hotel operators have incorporated social media into their marketing mix. There are a few Goliath channels on which one must have a presence (Facebook & Twitter) but there are also several newer upstart channels (Instagram, Snapchat &WeChat, for example) that merit consideration. With its 1.86 billion users, Facebook is a dominant platform where operators can drive brand awareness, facilitate bookings, offer incentives and collect sought-after reviews. Twitter's 284 million users generate 500 million tweets per day, and operators can use its platform for lead generation, building loyalty, and guest interaction. Instagram was originally a small photo-sharing site but it has blown up into a massive photo and video channel. The site can be used to post photos of the hotel property, as well as creating Instagram Stories - personal videos that disappear from the channel after 24 hours. In this regard, Instagram and Snapchat are now in direct competition. WeChat is a Chinese company whose aim is to be the App for Everything - instant messaging, social media, shopping and payment services - all in a single platform. In addition to these channels, blogging continues to be a popular method to establish leadership, enhance reputations, and engage with customers in a direct and personal way. The key to effective use of all social media is to find out where your customers are and then, to the fullest extent possible, engage with them on a personal level. This engagement is what creates a personal connection and sustains brand loyalty. The February Hotel Business Review will explore these issues and examine how some hotels are successfully integrating social media into their operations.