Hotel Management Agreements and Bankruptcy

By Tara K. Gorman Partner, Perkins Coie LLP | April 19, 2009

The First Inquiry: Acceptance or Rejection of the Hotel Management Agreement

When a hotel owner files for bankruptcy, the bankruptcy trustee may reject any contract of the debtor (i.e. the hotel owner), including the hotel management agreement. In simple terms, in bankruptcy, accepting a contract means keeping the contract alive and in full force and effect and rejecting a contract means ending the contract to minimize the financial impact of the contract. There are a few statutory exceptions to this blanket rule. While some hotel management agreements may contain an automatic termination provision in the event either party files for bankruptcy, this type of provision is not always enforceable under bankruptcy law.

Trustees can only reject contracts which are "executory", meaning that both parties to the contract have continuing obligations under the contract. If the services have been rendered by the hotel manager, and the only outstanding obligation is payment by the hotel owner, a contract cannot be rejected because even though the hotel manager has no more obligations the hotel owner continues to have an obligation to pay the hotel manager. Since, however, hotel management agreements are generally long-term contracts and the obligations are of an on-going nature, the applicability of this exception is rare. In fact, it would be nearly impossible to find a situation whereby the hotel management is in full force and effect and there are no continuing obligations by either party. Consequently, hotel management agreements are predominantly accepted by the bankruptcy trustee.

Factors Affecting Whether to Reject the Hotel Management Agreement

Bankruptcy trustees have a fiduciary duty to the estate and, accordingly, should only reject the hotel management agreement if it is in the estate's best interest to reject the hotel management agreement. There are many factors that come into play when making this determination. These factors include anything from the strength or weakness of the hotel flag to an economic downturn to a costly mistake by the hotel manager.

In some cases, it would be beneficial to the estate to keep the hotel management agreement in place, i.e., accept the hotel management agreement. Internationally known hotel flags allow the hotel to attract guests and bring in a steady stream of revenue, and rejecting a hotel management agreement may result in a loss of a loyal customer base. The rationale for keeping a hotel management agreement in place could be as simple as the fact that the hotel manager has been fulfilling its obligations successfully. On the other hand, if a hotel manager has not been living up to the standards set forth in the hotel management agreement, rejecting the hotel management agreement provides an opportunity to place the hotel under new management. In determining whether to keep the hotel management agreement in place, the trustee will look to past performance of both the hotel and the hotel manager to confirm whether keeping the hotel manager is in the estate's best interest. For example, it is important to look to the hotel manager's track record in keeping up with books and records and fulfilling other duties under the hotel management agreement, which will affect the hotel's future profitability.

Choose a Social Network!

The social network you are looking for is not available.


Hotel Newswire Headlines Feed  

Michelle Wohl
Jerry Tarasofsky
Nicole Perrotta
Nelson Migdal
Arthur Weissman
Janine Roberts
Jennifer Dunphy
Robert Gilbert
Felicia Hyde
Brenda Sandoval Valdes
Coming up in June 2019...

Sales & Marketing: Selling Experiences

There are innumerable strategies that Hotel Sales and Marketing Directors employ to find, engage and entice guests to their property, and those strategies are constantly evolving. A breakthrough technology, pioneering platform, or even a simple algorithm update can cause new trends to emerge and upend the best laid plans. Sales and marketing departments must remain agile so they can adapt to the ever changing digital landscape. As an example, the popularity of virtual reality is on the rise, as 360 interactive technologies become more mainstream. Chatbots and artificial intelligence are also poised to become the next big things, as they take guest personalization to a whole new level. But one sales and marketing trend that is currently resulting in major benefits for hotels is experiential marketing - the effort to deliver an experience to potential guests. Mainly this is accomplished through the creative use of video and images, and by utilizing what has become known as User Generated Content. By sharing actual personal content (videos and pictures) from satisfied guests who have experienced the delights of a property, prospective guests can more easily imagine themselves having the same experience. Similarly, Hotel Generated Content is equally important. Hotels are more than beds and effective video presentations can tell a compelling story - a story about what makes the hotel appealing and unique. A video walk-through of rooms is essential, as are video tours in different areas of a hotel. The goal is to highlight what makes the property exceptional, but also to show real people having real fun - an experience that prospective guests can have too. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.