Management Agreement Termination
By Nelson Migdal Shareholder & Co-Chair Hospitality Practice, Greenberg Traurig LLP | December 10, 2017
Co-authored by Nicholas N. Palmer, Associate, Greenberg Traurig
Don't do it! At least not without some serious thought to be sure there is simply no other way to go. With some very high profile cases of a hotel owner removing the hotel manager founded on common law principles of agency that give a hotel owner the power to revoke the agency, hotel owners and hotel managers might be tempted to rely on agency law as a "Plan B" if the owner-manager relationship sours despite what is in the hotel management agreement. Consider that this might not be the best laid plan as between an owner and manager.
In fact, a negotiated exit between the parties is often a better strategy than a unilateral termination by a hotel owner. Remarkably, the cases on the subject have actually been very consistent since the earliest cases about 30 years ago.
So how did we get here? The principal-agent relationship is grounded in English common law, and has always been an aspect of the owner-manager relationship. In very general terms, an agency is a fiduciary relationship between a principal and an agent where the agent acts on behalf of and for the benefit of the principal and is theoretically subject to the control of the principal. It is the theory that the hotel manager is acting in place of the hotel owner and subject to the hotel owner's control that leads a hotel owner to be legally responsible for the acts of the manager undertaken within the scope of the agency. This notion of control in the agency relationship is interesting in the context of hotel management agreements because those agreements often grant the manager wide discretion in the management and operation of the hotel while significantly limiting owner's approval rights over certain actions.
Bear in mind that when the owner-manager relationship is being examined by a mediator, arbitrator or judge, the characterization of the relationship as an agency relationship is not dependent on how the parties characterize their relationship, or on the form of the agreement, but on the substance of the relationship and whether it meets the basic agency requirements. Moreover, and this is the essential component of the agency relationship, the principal (i.e., the hotel owner) always retains the power to terminate the agency, unless the agency is coupled with an interest, which we will discuss below. The hotel owner entrusts day to day management of the hotel to a third party that is not an owner of the hotel. Putting aside unique market driven and negotiated provisions such as sliver equity or key money, the hotel manager, be it branded or unbranded, large or small, does not own the hotel asset that it is managing.
This unique relationship, no matter what it may be called in the management agreement itself, will more often than not be characterized as an agency relationship, or as some jurisdictions conceptualize it right now, a contract for personal services. This means that the hotel owner, as the principal, always has the power to terminate the relationship and tell the hotel manager, as the agent, to get out of the hotel. In addition, as a contract for personal services, it is not enforceable by injunction, so the hotel manager/agent is obligated to turn the Hotel over to the owner. Because the principal has the power to terminate the agency, but not necessarily the right, the agent has the right to proceed against the owner of the hotel and demand money damages but it cannot remain in possession of the hotel. Depending upon the term of the hotel management agreement, among many other factors, that demand for damages can be a very significant amount of money.