Terminating the Hotel Management Agreement in the Mega-Merger Era

By William A. Brewer Founding Partner, Brewer, Attorneys & Counselors | December 24, 2017

Following the recent wave of large-scale mergers and acquisitions sweeping through the hotel industry, nearly half of all the more than 53,000 hotels operating in the U.S. today are linked to one of six industry titans - Marriott, Hilton Worldwide, InterContinental, Wyndham Worldwide, Choice Hotels, and Best Western Hotels & Resorts.

 One of the consequences we see of the merger activity in today's hospitality market is that many hotel owners are now forced to operate under the same banner as their heretofore fiercest competitor from down the street or even next door.

 The current reality of today's industry landscape is that many hotel owners are now faced with something far more insidious than increased competition from other hotels: an invisible hand directing that those who "manage" this asset "cool" the competition within their own brand umbrella and their decision-making for the purposes to serve the over-reaching interests of the chain, rather than the best interests of the owners of the hotels they manage on their behalf. This "friction" is likely to intensify in the event of a future economic downturn.

As we have seen, periods of low occupancy often spark conflicts between hotel owners and operators over the rights under their management agreements, as owners look to secure their dominance in market share, keeping potential customers coming to their own property, rather than sharing the pool of customers with other competing owners under the same umbrella, and losing out on potential revenue as operators are looking to maximize earnings for themselves, rather than the owners. Some of the new unions which have arisen from the wave of recent mergers may only exacerbate these conflicts.

As never before, the recent wave of mega-mergers makes it increasingly important for hotel owners stuck with a long-term management contract with one of the major operators to understand their rights, if needed, to terminate hotel management agreements when these relationships begin to sour because, among other reasons, owners feel decisions are being made for the brand without regard to the financial well-being of individual owners.

 Even during times of economic prosperity, owners may find that a consequence of the merger is a breach of the duty of loyalty which they are owed by their operator. Willful breaches of the parties' contractual non-competition and territorial exclusivity and procurement provisions, for example, may result in substantial damages awarded to hotel owners pursuant to the laws of most states. This article examines these issues.

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Coming up in December 2018...

Hotel Law: New Administration - New Policies

In a business as large as a hotel and in a field as broad as the law, there are innumerable legal issues which affect every area of a hotel's operation. For a hotel, the primary legal focus includes their restaurant, bar, meeting, convention and spa areas of their business, as well as employee relations. Hotels are also expected to protect their guests from criminal harm and to ensure the confidentiality of their personal identity information. These are a few of the daily legal matters hotels are concerned with, but on a national scale, there are also a number of pressing issues that the industry at large must address. For example, with a new presidential administration, there could be new policies on minimum wage and overtime rules, and a revised standard for determining joint employer status. There could also be legal issues surrounding new immigration policies like the H-2B guest-worker program (used by some hotels and resorts for seasonal staffing), as well as the uncertain legal status of some employees who fall under the DACA program. There are also major legal implications surrounding the online gaming industry. With the growing popularity of internet gambling and daily fantasy sports betting, more traditional resort casinos are also seeking the legal right to offer online gambling. Finally, the legal status of home-sharing companies like Airbnb continues to make news. Local jurisdictions are still trying to determine how to regulate the short-term apartment rental market, and the outcome will have consequences for the hotel industry. The December issue of Hotel Business Review will examine these and other critical issues pertaining to hotel law and how some companies are adapting to them.