Be Aware Of Restrictive Covenants When Assessing Hospitality Agreements
By Steven D. Weber Managing Partner, Stark Weber PLLC | October 13, 2019
Restrictive covenants may arise when negotiating to purchase or sell an interest in the hospitality industry. A restrictive covenant may come in many forms. The form or scope of a restrictive covenant may be the result of the law of the state where the restrictive covenant is used. Many states have their own laws regarding the propriety of restrictive covenants.
Those laws may recognize certain types of restrictions, what restrictions are reasonable, and in what manner those restrictions may be applied. Depending on the applicable laws, restrictive covenants may prevent competition, may prevent uses, may prevent certain hires, and may set forth a number of other restrictions depending on the aims of the parties to the restrictive covenant.
It is advisable to consult with legal counsel prior to agreeing to any restrictive covenant. Similarly, it is advisable to consult with legal counsel in the instance where a hospitality player might assume the obligations imposed by a restrictive covenant previously agreed to by other parties. When multiple state laws are involved, a hospitality player may need to analyze what law applies to the specific situation, as one state's restrictive covenant laws may differ from another.
For example, in Florida, Fla. Stat. 542.335 is entitled "Valid restrains of trade or commerce." Fla. Stat. 542.335 states, among other things, that "enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, so long as such contracts are reasonable in time, area, and line of business, is not prohibited."
In an action concerning enforcement of a restrictive covenant, Fla. Stat. 542.335 requires, among other things, that a restrictive covenant (1) be in writing, (2) be signed by the person against whom enforcement is sought, and (3) that "[t]he person seeking enforcement of a restrictive covenant shall plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant." Fla. Stat. 542.335 further sets forth rebuttable presumptions to apply when determining the reasonableness in time of a post-term restrictive covenant not predicated on the protection of trade secrets.
Failure to abide by the terms of a restrictive covenant may lead to litigation. Recently, a dispute over a non-compete agreement may have stalled construction of certain hotels in Michigan. MLive reported that The Holiday Inn Express and Town Place Suites by Marriot started to rise during summer 2018. MLive reported that a Holiday Inn Express and Town Place Suites by Marriott were expected to open in the fall.