As the lodging industry’s recession drags on, many meeting planners will become all too familiar with issues surrounding bankruptcy, foreclosure, and receivership in the next several months.
Even after aggressive expense cutting at the property level by many major hotel companies, a growing number of hotel buildings are “under water,” with owners being unable to meet mortgage payments on their properties, which are frequently worth less than the outstanding loan balance.
A loan default can have repercussions not only for hotel management, but for groups with outstanding meeting. These contracts often provide that, in the case of a bankruptcy, either party has the right to terminate the agreement without liability. That’s not exactly accurate, however, since federal bankruptcy law takes precedence over provisions, and federal law only permits the entity in bankruptcy to terminate contracts without liability.
What To Do?
Your first course of action is to be sure you list the true identity of the other party on the meeting contract. Most contracts are written in the “flag” name of the hotel (e.g., the Hotel Imperial), but that’s only the name over the property’s front door. It’s not necessarily the true name of the other party.
Hotel buildings are typically owned by one legal entity—often a limited partnership or limited liability company (LLC)—and operated by another entity, often unrelated to the owner. If the property is franchised, there may be a third party involved (i.e., the national chain that is letting its name be used by the management company).
Thus, a contract should not state that the party is the “Hotel Imperial,” but rather should be written as “Hotel Owner, LLC, doing business as (dba) Hotel Imperial.” This clarifies that you are actually doing business with the owner, who will typically be the party facing financial distress.
If the contract is with the management company itself (and not a management company acting as an agent for the owner), the owner’s bankruptcy, foreclosure, or receivership may not provide adequate legal grounds for contract termination without liability.
Bankruptcy, foreclosure, and receivership are different terms for essentially the same situation (i.e., the inability of an owner to meet financial obligations, especially payment on a building mortgage). Bankruptcy is an action taken by a debtor to do one of two things: close down a business (Chapter 7) or reorganize operations and pay creditors some portion of what they are owed (Chapter 11)—the usual option taken by a hotel owner.
Bankruptcy usually keeps the hotel owner in control and reorganizes payment and amount of debt. As indicated, a debtor in bankruptcy can terminate contracts, but the other party to a contract (e.g., a meeting planner) is not given the same latitude, notwithstanding contract language to the contrary.
In a foreclosure, the hotel’s lender essentially cancels the loan and takes over ownership of the building. In a receivership, the lender typically asks a court to put someone other than the building owner in charge of the property. Since neither situation is a bankruptcy, you cannot terminate your obligations unless their contracts specifically provide for termination without liability in such cases. In today’s economy, that’s good contract language to consider.
Whether the hotel’s management company—and the expected level of servce—remain in place during a financial crisis is usually dependent on the terms of the management agreement with the hotel owner. In a couple of recent high-profile cases, owners of luxury properties not in bankruptcy, foreclosure, or receivership have sought to oust management companies for allegedly not living up to expected financial performance.
Thus, you should also consider adding language permitting termination without liability in the event of a change in management companies or brand (i.e., “flag”) affiliation, since either situation could make for a vastly different experience than what was anticipated when the agreement was signed.
Finally, always add language requiring prompt notification by the other party of the occurrence of any of these dire situations.