Understanding the Rights and Responsibilities of Hotel Owners and Managers Involved in a Hotel Takeover

By William A. Brewer III Managing Partner, Bickel & Brewer | February 17, 2013

The relationship between hotel owner and manager is one of principal (owner) and agent (manager). Hotel managers are deemed to be agents of the owner because they are given the power to act on behalf of, and bind, the principal.
For example, management contracts typically give the manager the discretion to purchase goods and services on behalf of the owner, set the prices for the rooms and other items offered by the hotel, and enter into credit on behalf of the hotel. With one narrow exception (where the agent has an ownership interest in the subject of the agency – aka an agency coupled with an interest), a principal always retains the power to revoke the agency. Thus, a hotel owner has the power to terminate a management agreement and the agency relationship created thereunder at any time. The rules regarding a principal's unfettered power of revocation are grounded in equity: it is contrary to public policy for a principal to have an agent forced upon him against his will. Courts want to avoid the friction which results when parties are forced to remain in a relationship that has failed, especially where the services involve mutual confidence and the exercise of discretionary authority.

So sacrosanct is the owner's unfettered power to revoke an agency that courts will not enforce contractual provisions that attempt to limit that power of revocation. Thus, at no time is an owner's power to terminate a manager subject to prior judicial or arbitral approval, and any provision in an agreement limiting the principal's power to so terminate is unenforceable.

On the other hand, courts draw a distinction between an owner's power to terminate a management agreement and an owner's right to do so. Therefore, while an owner always retains the power to terminate the management agreement, the owner may still be liable to the manager for money damages if it does not have the right to terminate pursuant to the terms of the agreement.

The Takeover: What Are The Parties' Rights and Responsibilities?

So, what are the rights and responsibilities of owners and managers in the wake of a hotel "takeover"?
First and foremost, a manager should abide by the owner's instructions to vacate the hotel. Fighting or litigating to remain manager will likely be expensive and futile. Instead, managers should focus their resources on seeking compensation from the owner for breach of the management agreement. Such damages may be the present value of the management fees for the remaining term under the management agreement. On the other hand, the owner should also consider filing suit against the manager to recover damages for the manager's failure to properly manage the hotel.

Second, although the owner has the right to take over the hotel, it does not have the right to retain or use the manager's intellectual property. Thus, managers should promptly demand the return of their intellectual property after a takeover and owners should make every effort stop the use of the manager's marks and to return to the manager its intellectual property. Examples of the manager's intellectual property include the manager's proprietary training books, human resource files, any hotel signs with the manager's name, or any labels printed with the manager's name or logo used in the hotel. The owner should comply with the manager's request in this regard to avoid liability.

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