Hotel Management Agreements and Bankruptcy

By Tara K. Gorman Partner, Perkins Coie LLP | April 19, 2009

The First Inquiry: Acceptance or Rejection of the Hotel Management Agreement

When a hotel owner files for bankruptcy, the bankruptcy trustee may reject any contract of the debtor (i.e. the hotel owner), including the hotel management agreement. In simple terms, in bankruptcy, accepting a contract means keeping the contract alive and in full force and effect and rejecting a contract means ending the contract to minimize the financial impact of the contract. There are a few statutory exceptions to this blanket rule. While some hotel management agreements may contain an automatic termination provision in the event either party files for bankruptcy, this type of provision is not always enforceable under bankruptcy law.

Trustees can only reject contracts which are "executory", meaning that both parties to the contract have continuing obligations under the contract. If the services have been rendered by the hotel manager, and the only outstanding obligation is payment by the hotel owner, a contract cannot be rejected because even though the hotel manager has no more obligations the hotel owner continues to have an obligation to pay the hotel manager. Since, however, hotel management agreements are generally long-term contracts and the obligations are of an on-going nature, the applicability of this exception is rare. In fact, it would be nearly impossible to find a situation whereby the hotel management is in full force and effect and there are no continuing obligations by either party. Consequently, hotel management agreements are predominantly accepted by the bankruptcy trustee.

Factors Affecting Whether to Reject the Hotel Management Agreement

Bankruptcy trustees have a fiduciary duty to the estate and, accordingly, should only reject the hotel management agreement if it is in the estate's best interest to reject the hotel management agreement. There are many factors that come into play when making this determination. These factors include anything from the strength or weakness of the hotel flag to an economic downturn to a costly mistake by the hotel manager.

In some cases, it would be beneficial to the estate to keep the hotel management agreement in place, i.e., accept the hotel management agreement. Internationally known hotel flags allow the hotel to attract guests and bring in a steady stream of revenue, and rejecting a hotel management agreement may result in a loss of a loyal customer base. The rationale for keeping a hotel management agreement in place could be as simple as the fact that the hotel manager has been fulfilling its obligations successfully. On the other hand, if a hotel manager has not been living up to the standards set forth in the hotel management agreement, rejecting the hotel management agreement provides an opportunity to place the hotel under new management. In determining whether to keep the hotel management agreement in place, the trustee will look to past performance of both the hotel and the hotel manager to confirm whether keeping the hotel manager is in the estate's best interest. For example, it is important to look to the hotel manager's track record in keeping up with books and records and fulfilling other duties under the hotel management agreement, which will affect the hotel's future profitability.

Hotel Newswire Headlines Feed  

Donald R. Smith
Bob Carr
Shaun  Burchard
Alan  Young
Kelly  McGuire
Drew Rosser
Elaine Oksner
Jacqueline Clarke
Walker Lunn
Brenda Fields
Coming up in February 2018...

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.