REPORT FROM THE U.S.—As the hotel industry emerges from the downturn and continues with recovery efforts, brands and owners are demanding more from each other.
Just as brands are clamping down on standards by requiring owners to invest capital in keeping their properties relevant, hotel owners are attempting to keep brands and management partners accountable by assuring their fees are being used appropriately and owners are being treated fairly.
Experts say the increased pressure from both sides during this part of a recovery cycle often leads to an amplified amount of disputes. Many disputes are resolved by the parties without any legal action. However, a record number of disputes have advanced into arbitration or litigation with the filing of a complaint, said Jim Butler, hotel attorney with California-based Jeffer Mangels Butler & Mitchell. 2011 saw a number of high-profile hospitality-related complaints filed in courts across the United States, and most of those lawsuits will carry over into 2012 before they are settled.
“The number of disputes between hotel owners and hotel operators has risen dramatically over the past few years. Many are resolved at the bargaining table, but record numbers of these disputes have erupted into lawsuits and arbitrations,” Butler said.
Steve Belmonte founded Hospitality Solutions, a company that offers services to help hospitality-industry entrepreneurs effectively negotiate with hotel franchise and management companies. Belmonte said the increase in lawsuits is evident across most industries as a result of “tough times.”
“People are struggling in business. Often times they feel they’re in a corner and a lawsuit may be their only way out,” he said. “More people are becoming more litigious. I can’t help but feel that’s a direct result of a tough economy and the pressure that places on companies.”
Regarding management and franchise contracts, Belmonte said there’s “no question” they are typically one-sided. Franchise contracts, he said, are written by competent attorneys and favor the franchise company. He said they are rarely negotiated and performance guarantees are hardly ever included.
“Not all attorneys are cognizant of franchise law and often times they end up learning on the hotel owner’s dime,” he said.
And in today’s environment, it seems as if the hotel owner only has a few dimes left.
“In times like these, owners may find themselves dipping heavily into other funds to meet negative operating cash flows or mortgage payments. Many face foreclosure—and loss of their entire investment—with the operator’s sub-par performance,” Butler said. “They feel cheated when operators continue to take all their money ‘off the top’ (from gross revenues) and the operators won't cooperate to improve the situation.
"Operators don't want to give up their lucrative management agreements and many of them can’t or won’t change their actions to satisfy owners who bear all the financial risk of the hotel investment.”
Marriott in the hot seat
Marriott International was a common target in 2011. The Bethesda, Maryland-based hotel operator and franchisor was sued in a New York court over claims of broken promises and fraud underlying the alleged poor performance surrounding the opening of Edition Waikiki. And, in December, Marriott was hit with a lawsuit alleging profits of the brand were prioritized over fiduciary duty to maximize profitability at the hotel level when Marriott rolled out its Sales Force One strategy in late 2008 (salesforceone_lawsuit.pdf in FFW).
William Brewer, partner with the Dallas-based Bickel & Brewer law firm, is representing the plaintiff in both cases against Marriott. He says it’s no coincidence Marriott is the target of two high-profile cases, claiming Marriott has “gotten too large” and is “more concerned about its own bottom line than the profitability of its hotels.”
“I have owners—more than one or two–who believe they are significantly affected by Marriott in that the company doesn’t maximize the profitability of their hotels,” Brewer said. “If any firm gets too large and becomes more concerned about its own bottom line than its clients’, that company has lost its mission.”
In the case of MG-Carlyle Hotel v. Residence Inn by Marriott and Marriott International filed in December 2011, the owner of a 3-year-old Residence Inn in Alexandria, Virginia, said sales slumped because of Marriott’s decision to move sales functions to a regional sales office rather than keeping the duties at property level, an initiative Marriott dubbed Sales Force One.
“Sales Force One has resulted in a significant amount of stress for many owners,” Brewer said. “Marriott actually knew it would be difficult for many owners to absorb this program but made the calculated decision that it would be better for themselves. That’s an amazing thing if you’re an owner and you’ve got tens of millions in an asset lying with a company whose undertaking should be to do the very best they can do to make that asset profitable. Instead, it’s in the hands of a manager less concerned with driving maximum profitability on your asset and more concerned with maximum profitability at the brand level.”
Brewer said the Residence Inn owner sought assistance from Marriott, but when they weren’t satisfied they decided to take legal action.
In a response to the claims, a spokesman for Marriott said in a statement: “The facts belie the claims of plaintiff and plaintiff’s counsel, which are without merit and which we’ll contest vigorously. Our new field sales structure is reaching more customers and aggressively pursuing market share from the competition and generating more business for all of our hotel owners.”
JMBM’s Butler said cases in the hotel industry regarding fiduciary responsibility are common. (See sidebar.)
Hospitality Solutions’ Belmonte said it’s probable the Sales Force One case will be settled before hitting a court room and the terms of settlement will be confidential.
“Any time a major change is made within an organization there is always going to be a little lull, initially,” he said. “My guess is there was a lull associated with (the Sales Force One) process and a ramp-up will follow shortly thereafter. Maybe this problem can eliminate itself.”
