When hotels transition to new management companies, complexities and legal issues arise. Make sure you cover all bases before entering into a new contract.
Management changes have become a popular vehicle for hotel owners trying to unlock value from underperforming assets during the past few years.
But hotel management transitions are very complicated affairs, which take weeks to plan and large teams of people to implement. Most management companies have well-oiled operations teams that specialize in transitions. These “ops teams” handle everything from interviewing and training hotel employees to switching over computer hardware and software to assessing supplies in inventory. Some members of the ops team take up residence at the hotel in advance of the transition, dedicating their days and nights to ensuring a smooth transition that is (near) invisible to guests.
While ops teams have the operational details in hand, there are a number of legal issues involved in a hotel transition that management companies must consider. In assuming management of a hotel, a management company is stepping into control of an operating business, with all attendant operational and legal complexities. Some of these complexities arise from the various legal relationships between the hotel and third parties, which include the following:
- Labor: Perhaps the most important issue a management company must address is the labor situation. Many hotels in San Francisco, Chicago, New York and other large cities have union employees. If the management company is going to serve as employer of the hotel employees, it is generally required to become a party to the union agreement, which might have implications for other hotels that it operates. In addition, union contracts generally specify work rules for union employees (e.g., how many rooms a housekeeper is required to clean per shift), which must be followed. Union contracts also involve health and welfare and pension obligations and liabilities that the management company needs to understand. Management companies are well-advised to engage labor counsel experienced in negotiating with the local union.
- Title: The management company should review the title policy for the hotel. First, the title policy will confirm the legal entity that is the owner of the hotel (and that should be the counter-party to the management agreement). In addition, the title policy will identify any agreements that bind (or “run with”) the land on which the hotel is located, such as covenants, conditions and restrictions, and easements. The management company should familiarize itself (and the hotel employees) with the requirements of these documents, which might affect the operation of the hotel.
- Liquor license: Liquor license requirements vary significantly across states. In some states, the management company is required to be listed on the liquor license. In other states, the management company might hold the license. The management company should work with the owner to confirm the licensing requirements in the applicable state and ensure the liquor license is held by the correct entity. It can take weeks or sometimes months for liquor licenses to be processed, so the management company should focus on these requirements as soon as possible.
- Parking: Sufficient—and accessible—parking is critical to the success of almost all hotels. While suburban and resort hotels often have ample space for parking facilities, many city hotels rely upon agreements with parking lot owners or operators to manage the hotel’s parking requirements. These arrangements might include the hotel’s right to use off-site parking during certain hours or an agreement that a parking operator will handle valet parking for the hotel. The parking arrangements also might come with costs to the hotel, which the management company should reflect in its financial analysis.
- Leases/concession agreements: A hotel restaurant or gift shop might be operated by a third party under a lease or concession agreement. Because it is usually the hotel manager’s responsibility to administer the agreement, the hotel manager should understand the terms of any lease or concession agreement relating to the hotel. For example, does the landlord have the right (or obligation) to make repairs to the leased space? When is rent due and how it is collected? Who is required to maintain insurance? A significant lease or concession agreement might alter the economics of the deal for the management company.
Equally (if not more) important than these diligence items, the hotel management company must first negotiate its management agreement with the owner, a process that can take weeks under the best of circumstances. A hotel management company must carefully assess how many resources to deploy or time to spend before a definitive management agreement is signed. For example, a management company should avoid moving its personnel to the property until adequate insurance and indemnification protections are in place.
Given the number of hotel brands competing for market share—and the numerous brands under development—hotel management transitions seem certain to continue. Legal considerations might impact both operational and financial aspects of a management company’s assumption of management of a hotel and accordingly require careful attention.
Teresa K. Goebel is a partner in the San Francisco office of Goodwin Procter LLP. She focuses her practice on the representation of hotel operators and investors in a variety of matters relating to the acquisition, development, financing, management and sale of hotel, resort and fractional ownership properties around the world.
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