The Tale of an Ousted Hotel Manager - Understanding the Mal-Alignment of Interests of Hotel Owners and Hotel Managers
By Michael Sullivan Shareholder, Greenberg Traurig | December 04, 2011
The facts of the Turnberry Case are more like something we'd see in a James Bond movie than in real life. But then again, fact is stranger than fiction. In real life can a hotel manager be ousted from a hotel without notice and cure - even with a carefully crafted hotel management agreement in place?
Despite the view by some that modern hotel management agreements provide hotel managers with "protectable interests coupled to their agencies" that should prevent hotel owners from ejecting the hotel managers from the hotel, the recent opinion of Magistrate Judge Jonathan Goodman in FHR TB, LLC, et al., v. TB Isle Resort, L.P., (i.e., the Turnberry Case), brings us back to legal reality. On August 28, 2011, the owner of Turnberry Isle Resort & Spa evicted the hotel manager, Fairmont Hotels and Resorts, from the Turnberry resort, without notice and the opportunity to cure. In this "surprise takeover" the hotel owner informed Fairmont's senior hotel management team that the hotel owner was de-branding the resort, and demanded that Fairmont leave the hotel property escorted by security.
Shortly thereafter the hotel owner sent Fairmont a letter stating it was terminating the hotel management agreement. The hotel owner further stated that under New York law a hotel owner always has the right to revoke a hotel manager's control of the hotel because a hotel management agreement creates a "revocable" agency relationship. After being kicked out of the hotel, Fairmont stated that the hotel owner acted in bad faith and blatantly violated the hotel management agreement. Fairmont brought its claim to Judge Goodman and requested injunctive relief in order that Fairmont could continue to manage the resort and return to the status quo. While Judge Goodman was sympathetic to Fairmont's predicament, he was simply tasked with determining whether Fairmont's agency relationship was irrevocable and capable of specific performance - i.e., was the hotel owner required to take Fairmont back as the hotel manager?
Judge Goodman's opinion provides a scholarly overview of the law governing hotel management agreements. Judge Goodman concludes (applying New York law) that the hotel management agreement in question between Fairmont and the owner of Turnberry Isle Resort & Spa forms an agency relationship that may be "revoked" by the owner even if doing so constitutes a default on the part of the owner. Despite the fact that the hotel management agreement in the Turnberry Case contained carefully crafted provisions purporting to prevent the owner/principal from terminating the hotel management agreement, Judge Goodman found that the agency relationship may be revoked by the hotel owner.
In his ruling, Judge Goodman painstakingly evaluated each Fairmont claim that its agency relationship should be deemed "coupled with an interest" and therefore irrevocable. If a hotel management agreement is considered "coupled with an interest", the hotel owner would not have the "power" under the law of agency to unilaterally terminate the hotel management agreement unless the hotel manager defaults, fails the performance test or is otherwise subject to termination in accordance with the terms of the hotel management agreement. If an agency is coupled with an interest, an owner can't just evict the hotel manager without cause - and even with cause, the hotel owner must fully comply with the termination provisions of the hotel management agreement.
Included among the indicia that Magistrate Goodman rejected as a basis for forming a "coupled interest" are Fairmont's rights of first offer and first refusal, rights of quiet enjoyment and provisions in the hotel management agreement claiming to provide for a "coupled interest". That just wasn't enough. Magistrate Goodman also concluded that "consideration" for the hotel management agreement alone, was insufficient: "Consideration is necessary to make an agency irrevocable, but an agency coupled with an interest must still be present for consideration to render the agency irrevocable."