We basked for so long in the glow of an ever-expanding economy and a strong meeting market that planners and hoteliers may have forgotten what a buyer's market is like. And many haven't forgotten — they never knew. Anybody who has been in the industry less than, say, 10 years, has seen things only one way — that is, until recently. The market is shifting from being strongly in the seller's favor to one in which buyers have some clout. And the effect has been felt immediately in the attrition and cancellation clauses to which planners are agreeing.
Lest the old-timers forget, and to help inform those newer to the industry, there was a time when contracts didn't include attrition clauses. Hotels would reserve space merely on the promise that a group would try to fill it, and there were no consequences if it didn't. As soon as the seller's market took off, attrition clauses (whereby a group provides some minimum guarantee on sleeping rooms, meeting rooms, and food and beverage) became the norm. And they weren't very negotiable.
Well, they are more negotiable now. At a minimum, planners have more opportunity to negotiate the percentage shortfall at which attrition kicks in, the formula for calculating the charges for attrition, and the degree to which attrition charges can be offset by other receipts collected by the hotel. In fact, depending on buying power and trade-offs with other contract issues, it may even be possible to eliminate attrition charges.
The basic principle behind attrition fees is that they are an agreed-to formula for calculating damages in the event of a breach of the contract. The attrition provision defines the breach (e.g., failure to fill a certain percentage of the room block), and then explains how the damages are determined. Under general contract law principles, the nonbreaching party is entitled to compensatory damages (never punitive damages) and has a common-law obligation to mitigate its damages by, say, reselling space. With attrition provisions, the parties typically simply agree to a predetermined formula for calculating the damages owed to the hotel, which also typically has no obligation to mitigate those damages. However, it is important to note that those formulas, if not carefully reviewed, can actually enrich the hotel, not just make it whole.
So one area in which meeting planners should focus their clout is in negotiating the formula for calculating attrition fees. For example, many attrition clauses refer to “lost revenue” in calculation formulas. However, paying hotels for their lost revenue may result in the hotel being overcompensated. A better formula is to look at lost profits, not lost revenues. In addition, a good formula includes an obligation to mitigate damages.
Similarly, cancellation provisions are more negotiable than ever. It is not unusual to sign a contract several years in advance of a meeting and have some period of time within which to cancel penalty-free. That wasn't so less than a year ago. Not only that, planners are negotiating cancellation provisions that result in smaller fees, obligate the hotel to mitigate the fees by reselling sleeping rooms, and, as with attrition fees, are not based on lost revenue.
In addition, it is much more likely today to be able to negotiate a cancellation provision (and the formula for calculating fees) that applies to both parties. In other words, cancellation fees can also apply to the hotel if it cancels. Moreover, given the volatility in the hotel industry, planners are successfully negotiating the “penalty-free” right to cancel the contract if hotel management changes.
Jed R. Mandel is a partner in the Chicago-based law firm of Neal, Gerber & Eisenberg, where he heads the trade and professional association practice.