The Meat and Potatoes of Third Party Food and Beverage in Hotels
By Stephen Barth Founder, HospitalityLawyer.com | August 12, 2012
Co-authored by Ryan McFarland, Partner, Hospitality, Travel and Tourism Group, Garvey Schubert Barer
Bringing in an operator, restaurateur or celebrity chef to provide food and beverage service in a hotel can provide immediate and significant benefits for a hotel and its guests. Hotel owners and operators use the experience, vision and creativity of third party food and beverage providers to generate attention, energy and business for hotel properties. Further, while hotels brand their properties and earn their reputations over decades, pockets of a hotel property can be made available to third party food and beverage providers to create a more immediate change in brand direction or environment. Despite the lure, however, chemistry and contract details are important. To avoid being left with a bad taste, owners and executives should consider a number of important contracting details while evaluating or courting a third party food and beverage provider.
Big Picture Goal. Although not necessarily a legal consideration, experience indicates that use of third party food and beverage in hotels often works best when the hotel owner and, if applicable the hotel operator or manager, have a clearly defined goal and have analyzed, on a specific level, the manner in which third party food and beverage will be used to achieve the goal.
Existing Contract Parties. The existing organizational structure within the hotel is important when considering third party food and beverage. Is the hotel operated by the owner or by an operator? Does the operator currently provide food and beverage service? From both a contractual consent perspective and with regard to the parties' business relationship, will an operator embrace use of a third party food and beverage provider? Along those lines, will the operator try to jettison the less attractive aspects of food and beverage (i.e. room service) while attempting to keep the high margin aspects (i.e. the lobby bar). Existing operators will likely be somewhat concerned about the effect of a third party provider on matters such as brand standards, finances, insurance, shared use and day-to-day operational matters.
Scope. Assuming the hotel's existing legal structure allows for inclusion of a third party food and beverage provider, the owner or hotel operator should consider the appropriate scope of the undertaking. By scope, we mean the level of services provided and the physical property that will be made available for that purpose. Is the hotel bringing in a third party to operate just a restaurant? Is there also an expectation that room service and catering will be handled by the third party? Food and beverage providers in hotels often service ancillary facilities within the hotel but outside the main restaurant, such as: lobby, pool and rooftop bars, breakfast areas, dining terraces and patios. As restaurant operations increasingly blend into other hotel facilities, greater attention should be paid to legal complications such as shared services, staffing, insurance, indemnity, and maintenance and repair.
Economics. Hotel owners and operators will consider the economics of the deal. Specifically, how will the third party food and beverage provider make money? Will the third party provider pay lease rent and keep the remaining revenue? Will revenue flow directly to the hotel pursuant to an operating agreement with a percentage paid to the third party provider? In an operating agreement context, will there be performance bonuses for successful outcomes and termination provisions for failure to hit benchmarks?