Terminating the Hotel Management Agreement in the Mega-Merger Era

By William A. Brewer Partner, Brewer, Attorneys & Counselors | December 24, 2017

Following the recent wave of large-scale mergers and acquisitions sweeping through the hotel industry, nearly half of all the more than 53,000 hotels operating in the U.S. today are linked to one of six industry titans - Marriott, Hilton Worldwide, InterContinental, Wyndham Worldwide, Choice Hotels, and Best Western Hotels & Resorts.

 One of the consequences we see of the merger activity in today's hospitality market is that many hotel owners are now forced to operate under the same banner as their heretofore fiercest competitor from down the street or even next door.

 The current reality of today's industry landscape is that many hotel owners are now faced with something far more insidious than increased competition from other hotels: an invisible hand directing that those who “manage” this asset “cool” the competition within their own brand umbrella and their decision-making for the purposes to serve the over-reaching interests of the chain, rather than the best interests of the owners of the hotels they manage on their behalf. This “friction” is likely to intensify in the event of a future economic downturn.

As we have seen, periods of low occupancy often spark conflicts between hotel owners and operators over the rights under their management agreements, as owners look to secure their dominance in market share, keeping potential customers coming to their own property, rather than sharing the pool of customers with other competing owners under the same umbrella, and losing out on potential revenue as operators are looking to maximize earnings for themselves, rather than the owners. Some of the new unions which have arisen from the wave of recent mergers may only exacerbate these conflicts.

As never before, the recent wave of mega-mergers makes it increasingly important for hotel owners stuck with a long-term management contract with one of the major operators to understand their rights, if needed, to terminate hotel management agreements when these relationships begin to sour because, among other reasons, owners feel decisions are being made for the brand without regard to the financial well-being of individual owners.

 Even during times of economic prosperity, owners may find that a consequence of the merger is a breach of the duty of loyalty which they are owed by their operator. Willful breaches of the parties' contractual non-competition and territorial exclusivity and procurement provisions, for example, may result in substantial damages awarded to hotel owners pursuant to the laws of most states. This article examines these issues.

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Coming up in March 2018...

Human Resources: Value Creation

Businesses must evolve to stay competitive and this is also true of employment positions within those organizations. In the hotel industry, for example, the role that HR professionals perform continues to broaden and expand. Today, they are generally responsible for five key areas - government compliance; payroll and benefits; employee acquisition and retention; training and development; and organizational structure and culture. In this enlarged capacity, HR professionals are no longer seen as part of an administrative cost center, but rather as a member of the leadership team that creates strategic value within their organization. HR professionals help to define company policies and plans; enact and enforce systems of accountability; and utilize definable metrics to measure and justify outcomes. Of course, there are always new issues for HR professionals to address. Though seemingly safe for the moment, will the Affordable Care Act ultimately be repealed and replaced and, if so, what will the ramifications be? There are issues pertaining to Millennials in the workforce and women in leadership roles, as well as determining the appropriate use of social media within the organization. There are new onboarding processes and e-learning training platforms to evaluate, in addition to keeping abreast of political issues like the minimum wage hike movement, or the re-evaluation of overtime rules. Finally, there are genuine immigration and deportation issues that affect HR professionals, especially if they are located in Dreamer Cities, or employ a workforce that could be adversely impacted by federal government policies. The March Hotel Business Review will take a look at some of the issues, strategies and techniques that HR professionals are employing to create and sustain value in their organization.