Hospitality Litigation: Asset Managers, Hotel Operators and Franchisors
By Richard Barrett-Cuetara Managing Member, Barrett-Cuetara, PLLC | December 2014
In the hotel industry, the myriad of complex business relationships also creates legal land-mines for the unwary. In that regard, hotel asset managers, hotel operators and franchisors should be extremely mindful of their legal obligations to their client, the owner of the hotel. Even if the hotel is a single asset, there are potentially four groups that, for a better term, have their fingers in the pie – the owner, hotel asset manager, hotel operator and franchisor. But at the end of the day, each of these relationships confer legal rights for the benefit of the owner and potentially, to the detriment of the asset manager, hotel operator and franchisor.
Hotel Asset Managers
In this day and age, it is very common for an owner of multiple hotels (whether it be individual owners, investors, and lenders) to hire an asset management company to oversee the hotel operator's day-to-day management of the hotel. For instance, the hotel asset manager will have oversight of operations and the physical asset (the hotel), which includes monitoring ongoing financial performance, the competitive set, the hotel asset, provide support and review of the budgeting process and advise ownership as to management issues.
The hotel asset manager will also manage the hotel by advising the ownership as to optimum investment strategies, the investment community, select and oversee operators, franchise affiliations and consultants, negotiate and administer contracts and approve/monitor capital expenditures. In addition, the hotel asset manager should oversee the actions of the franchisor as well. Regardless of what role the hotel asset manager has undertaken, it will review and analyze daily-reports, financial statements, and other hotel reports prepared by the hotel operator. Even though the hotel asset manager is one step-removed from the hotel operator, the owner is relying on the hotel asset manager to be its "eyes and ears" for the hotel owner. Simply said, the hotel asset manager is the agent for the hotel owner.
Hotel Asset Managers Bound by Agency Law Principles
Historically, the Bible of Liability in the hospitality industry has been the RESTATEMENT (SECOND) OF AGENCY. It has served as the basis for seminal legal changes in the hospitality industry that now generally govern the conduct of hotel operators, and is relied upon extensively in hotel management disputes and is equally applicable to hotel asset managers. Under agency law principles, the hotel asset manager is the agent for the owner, its principal and is legally bound to disclose anything and everything to the owner, its principal. Generally speaking, the failure to disclose such information would constitute a breach of fiduciary duties. The elements of a claim for breach of fiduciary duty are: (1) existence of a fiduciary duty; (2) breach of that duty; and (3) damage caused by the breach.