How the pandemic is affecting hotel deals, contracts
 
How the pandemic is affecting hotel deals, contracts
18 JUNE 2020 8:41 AM

A panel of attorneys during a recent webinar hosted by the International Society of Hospitality Consultants and the Castell Project explain how the coronavirus pandemic is affecting owners as they try to make deals and work with lenders and operators.

REPORT FROM THE U.S.—The health crisis created by the coronavirus pandemic has significantly reduced hotel demand around the world, and the resulting uncertainty about a recovery has disrupted numerous deals and contracts.

During an online legal forum presented by the International Society of Hospitality Consultants and the Castell Project, four hospitality attorneys spoke about how the pandemic has affected the lending environment, hotel transactions and management agreements.

The lending environment
How borrowers are approaching loan modification depends on the location and the type of the hotel, said Cecilia Gordon, director at Goulston & Storrs. Some hotels have benefited from significant increases in occupancy if they’re in drive-to and leisure locations or they are select-service properties, she said.

For hotels that have not seen an increase in occupancy as the phased reopenings are starting, they are focused on a longer-term look with their lenders, she said. The 90-day extensions were a bit of a breather, but now they are going to their lenders and explaining how they have more visibility into what is going to happen.

“For many people, there’s also somewhat more positivity than they thought there would be come June,” she said. “Our focus (is) on what are you going to do for six months? What are you going to do to get to the end of 2020, in the hopes of 2021? There is much more visibility into things like vaccine development.”

The question is are lenders going to want to take troubled hotels back and what kind of flexibility is there because of that, said Meghan Cocci, co-chair of the hospitality, gaming and leisure industry group at Latham & Watkins. It depends on where the hotel is and how quickly business is going to return, she said.

While lenders want to be paid back for their loans, there are a number of complexities anytime a lender is foreclosing on a hotel and takes back the keys, she said. The pandemic has not made that situation any simpler.

“I suspect there is still going to be significant push-pull in obtaining further extensions and modifications and heavy negotiations,” she said.

It’s not simply a matter of simply needing another 90 days, said Samantha Ahuja, shareholder at Greenberg Traurig. For lenders, it’s going to depend on the type of loan as well as a full analysis of the hotel itself. Lenders will need to analyze the guest demographic, the hotel’s location and the owners themselves, she said.

“It’s a real analysis on the on the property itself,” Ahuja said.

Hotel transactions
Cocci said she has been surprised to see hotel transactions coming back. While she has been involved in a few of them, they aren’t public yet so she could not share too many details. Speaking in general terms, there has been a significant focus during negotiations on making sure the deals are closed and there aren’t carve-outs for material-adverse conditions or force majeure effects, she said.

They’re seeing what they’re calling “COVID clauses” included on purchase and sale agreements pop up in the handful of deals they’re working on to make sure both parties fully acknowledge that they’re purchasing and/or selling a hotel in the middle of a pandemic, she said. The parties are waiving their rights to use that as an excuse to back out of the transaction, she added.

“I suspect we will see those going forward popping up in not only purchase and sale (agreements) but other types of agreements,” Cocci said.

Another factor in these transactions is protections the sellers are willing to give the buyer, Cocci said. Before the pandemic, it was normal for the seller to continue to operate the hotel in the ordinary course of business through the due diligence phase and through the closing of the transaction, she said. There’s been a lot of discussion of that and what that means if the hotel is fully closed or partially closed with a skeleton staff running it.

Some of the deals that were put on hold at the start of the pandemic have started to come back, Ahuja said. In some respects, people have caught their breath and are ready to look at the properties again, she said. Other than the COVID clauses, they are taking price adjustments, lower occupancies and operational status into consideration.

“It’ll be interesting to see as some of these little modification dates start to hit and what happens in the next 90 days,” she said.

Management agreements
For hotel management agreements in North America, force majeure is most commonly a permitted reason for extending or delaying performance, and it has various obligations, Gordon said.

“It is not a wholesale excuse for performance for every obligation under the contract,” she said. “It’s not an excuse for failure to pay management fees or payment of monies. It’s not a reason to terminate the contract.”

The force majeure discussions that have a lot more play in the news have been in mergers-and-acquisitions deals and leases, the latter of which is not as common a structure at least in North America for hotels, she said.

In the early days of the pandemic, Accor looked at how force majeure could apply to its agreements, said Rhonda Hare, general counsel, Asia/Pacific, at Accor. Executives had to consider whether COVID-19 prevented them from doing something such as providing a reservation system or marketing services.

The company also had to take into consideration the different legal systems around the world, Hare said. There are commonwealth jurisdictions, such as the U.S., but there are civil law jurisdictions and hybrid ones as well.

“We’ve spent a lot of time trying to understand the different legal environments as well as the different contractual terms,” she said.

From a contract perspective, force majeure has always “just been one of those clauses,” like the general clause at the back of every contract, Hare said. Contracts will start to become more focused as people look at what the definition of force majeure in hotel management agreements is and will try to add or remove things, she said.

“It’s good to remind people that it’s a mutual clause,” she said.

The pandemic in general is causing people to look at all kinds of provisions in contracts that no one has paid much attention to, Gordon said. Force majeure clauses are a section that attorneys often fight to get people to pay attention to. The notice provision is another section that has become more important as most people are working away from their offices, she said.

“They just don’t sound very interesting, but they’re very meaningful when you’re actually dealing with the situation,” she said.

The dispute resolution process is another area worth a deeper look, Cocci said. As hotels faced the possibility of shutdown, owners were losing money, operators faced risk with their employees and employee salaries, disputes “are rearing their ugly head,” she said.

“I can’t tell you how many times we’ve been dusting off contracts with the client saying, ‘Well, what do we do next?’ and looking at the resolution provision and it just doesn’t necessarily work well for the process,” she said.

Owners are starting to ask questions about things that are normally outside of an owner’s purview, such as who decides when furloughs happen versus layoffs, Ahuja said. Owners want to know who gets to make the decisions that will ultimately cost the owner money.

“That’s something that’s going to be a discussion over the course of time, and owners are always concerned about writing checks, so they want to have these discussions and understand where their rights may be,” she said.

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