Broken Hotel Management Contracts Can, and Do, End Up in Court, says Cornell Report
Ithaca, NY - September 10, 2014 - When the world financial crisis hit, many hotel management contracts were terminated, often without the managers' prior knowledge or consent. However, now the bill is coming due-and it can run to millions of dollars. A report from the Cornell Center for Hospitality Research (CHR) explains how courts calculate the damages that result when a hotel management agreement is terminated without the manager's consent. The report, "Calculating Damage Awards in Hotel Management Agreement Terminations," by Jan A. deRoos and Scott D. Berman, is available at no charge from the CHR and also from the Cornell Center for Real Estate and Finance.
"Although most owners and management firms have settled their contract issues amicably, we have seen some highly visible disputes go to court-and the damage judgments have been large," explained Berman, who is the industry leader for the hospitality and leisure sector for PwC. "We have seen damage awards in some cases exceeding $20 million. The reason for the size of these damage awards is that the courts calculate all the lost fees for what would have been the contract term, and that usually includes many years, if not decades. This means that the owner may have to pay out several million dollars in lost revenue to the management company."
"Based on the calculations accepted by the courts, we have developed a way to make a fairly solid calculation of the damages that would result from the involuntary termination of a hotel management agreement," added deRoos, who is the HVS Professor at the Cornell School of Hotel Administration. "I want to emphasize that the damage claims have to be solid, because the courts do not accept general averages and estimates. We also give a numerical example that demonstrates that the actual damage amount is at least twice and potentially five times the amount of a typical termination fee. In summary, once again we see proof that it's better to negotiate your differences than to go to court."
About The Center for Hospitality Research
http://www.chr.cornell.edu/A unit of the Cornell School of Hotel Administration, The Center for Hospitality Research (CHR) sponsors research designed to improve practices in the hospitality industry. Under the lead of the center's corporate affiliates, experienced scholars work closely with business executives to discover new insights into strategic, managerial and operating practices. To learn more about the center and its projects, visit www.chr.cornell.edu.
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