The latest webinar from ILHA Europe looked at the legal environment hotels are operating in as they come out of the pandemic and shore up their positions while finances remain rocky.
Within a relatively small sector such as hotels, this meant having strong relationships between owners and operators, supported by confidentiality clauses to save blushes over time.
Tim Dodd, Senior Associate at Katten Muchin Rosenman, said: “Hotel Management Agreements tend to be long-term, 20, 30-year relationships. And like all good relationships that are profitable and stable, a doctrine of regular communication between the stakeholders is absolutely key and paramount.
“Of course there are frequent common battlegrounds within all management agreements, borne out of the nature of the relationship between the owner and the operator: you have the owner that owns the hotel or has title to the land and funds refurbishments and so on and feels they should have the right to advise or have some approval rights over the expenditures of the business.
“Then you have the operator wanting to say: ‘we’re experienced in this, we do this globally, can you leave us to it, and we’ll provide you the most efficient and profitable operation’.”
In the case of established operators, it was harder for the owner to make their voice heard but, Dodd said: “For those operating in the more budget end, or with new entrants to the market, then they’re likely to be able to get more favourable terms.
“In those instances, the owner will be taking a bit of a risk, and it will want these approval rights over the expenditures over contracts being entered into, it will want a bit more of a priority in order to make sure that it’s getting its money back. And it will want the ability to actually terminate operations.”
To be able to act effectively when the relationship went sour, Ioana Knoll-Tudor, partner, Jeantet, said: “Make sure that there is a dispute resolution clause in your contract. I know this may seem rather obvious, but trust me, it’s not. You also need an arbitration clause and it’s really important that the arbitration clause is operable.
“And then you have the escalation clauses because of course, you could go to war, and we are always ready for that. But it’s always in the best interest of the client to try to find a settlement, a solution which is out of court.”
Knoll-Tudor advised against going straight to arbitration in the case of a conflict, commenting that going through the process allowed both parties to either find a solution or give them the time to build a considered case.
She added: “There is no solution that fits all cases. There are advantages to arbitration, there are advantages to litigation.
“One point to consider when you make your choice is that in a sector, which is rather limited as the hospitality sector is, confidentiality is extremely important because the number of actors interacting in this market is rather limited and people know each other, they may be working together. If not now, then in five years from now.
“The other point is the cost of arbitration, which we all know, is rather high. So of course, if the amount in dispute is not very important, it doesn’t really make sense to go for arbitration.”
Representing the creditors’ perspective, Kumar Tewari, Partner, Head of Banking EMEA – Katten Muchin Rosenman UK, underscored the importance of strong relationships, particularly in the current period of limited cash flow.
He said: “A well-advised creditor is one that will take a deep dive into the due diligence on these agreements because ultimately, debt is the spine that runs through the successful delivery of these schemes.”
He added: “Occupancy rates have been hit really badly. And there’s been a steady, but very slow return to the sector, so it’s been difficult to test covenants, it’s been difficult for borrowers.
“And one of the first things for any borrower that’s in default is to be realistic, to talk to your creditors, to strike a new deal with your lenders to figure out whether there is the ability within the documentation within the credit appetite to relax those covenants.
“What will it take for the lender to increase its loan to value? Do you need a different type of lender involved in the debt capital stack? Can you talk to your lenders, can you restructure your facility, can you relax your covenants?”
He advised: “If the owner doesn’t already have it, teaming up with a strong operator may provide that sort of level of credit appetite that a new lender would consider would potentially bring an asset back to life.”
Safety in brands? Don’t forget to read the small print.
View the webinar here
About the author
Katherine worked as a journalist with 20 years of experience in the hotel sector, working for publications including the FT, Business 2.0 and the leading hotel B2B titles as well as writing her book, Checking Out – What the Rise of the Sharing Economy Means for the Future of the Hotel Industry, published by Bloomsbury. In 2021 she co-launched NewDog PR.