Hotel Owners Perceive Operators Are
Breaching a Sacred Trust
We caught up with Jim Butler, Chairman of JMBM's Global Hospitality Group®, to find out what this is all about.
GHG Advisor: Jim, you and JMBM's Global Hospitality Group® are internationally recognized for your expertise in representing owners on hotel management agreements - both in terms of negotiating new ones and terminating existing ones. Why are we seeing so much litigation now between owners and operators?
Jim Butler: More disputes are going to litigation, and they involve high profile players and landmark properties. Strategic Hotel Capital's suit against Marriott is just the latest in a series of disputes involving Marriott, Ritz-Carlton, Hyatt, Hilton, ITT Sheraton and others.
The fundamental problem is that owners perceive that operators have breached a sacred trust in taking rebates and kickbacks, competing with owners, using confidential information and intellectual property, and charging the cost of corporate functions and programs to hotels at an ever-increasing pace. But besides lousy performance and increasing system costs, perhaps the biggest aggravation is the operator's perceived arrogance, refusal to provide meaningful information and disclosure, and seeming indifference to maximizing owners' returns. Some fed-up owners find that their operators insist on strictly enforcing expensive brand standards at managed hotels that the same operators overlook at their owned properties. Other owners report that operators require capital expenditures and participation in expensive programs that have a clear benefit to the brand but only questionable value to the hotels paying for them. There is a growing cynicism about operators maximizing gross income, but ignoring distributable cash that owners need for debt service and return on investment.
GHG Advisor: Some people say that this is just owners' sour grapes because the economy is down.
Jim Butler: Operators may get a free pass in the good times, but when times are bad, owners look harder to find and fix problems. They may see a 30- or 50-year management contract as sucking all the value and profit from their hotel, and they are frustrated when the operator seems to display a lack of interest, concern or response.
Some high profile cases are showing owners that legal relief may now be available from perceived abuses of operators. In fact, so-called long-term, "no-cut" contracts may be terminable, and operators may owe owners big damages for breach of fiduciary duty!
GHG Advisor: How can a long-term, "no-cut" contract be terminable?
Jim Butler: The details are complex. But the basics are simple.
The express terms of a management agreement are only the starting points for a legal analysis. No matter what the words in an agreement say, agency law principles will override the terms of a management agreement in appropriate circumstances. The law creates duties, rights and remedies that are extrinsic to or outside of the management agreement. For example:
Jim Butler: That's what we do here at JMBM's Global Hospitality Group®. We have a long history of successfully representing owners in these issues. But the key for an owner is to start with counsel knowledgeable about the hospitality industry, fiduciary duty and litigation.
Owners should not act rashly to terminate existing agreements. Owners
should neither assume that their long-term, "no-cut" contracts are invulnerable
any longer, nor should they assume that such agreements can or should be
GHG Advisor: Why start with counsel?
Jim Butler: You want counsel to hire the consultants, so that critical communications with the consultants and client are protected by the attorney-client privilege. Knowledgeable hotel counsel can also assist you in getting the "right" consultants.
Good counsel will also help owners avoid costly missteps.
Although overriding agency principles will almost certainly give owners the power to terminate management agreements, owners will be liable for damages unless they also have the right to terminate, which may be confirmed or established by the Management Agreement Audit™.
GHG Advisor: So, it is really that easy? Launch a Management Agreement Audit™ and terminate?
Jim Butler: No. No. No. It is not easy at all! The legal principles are solid and almost universally found throughout the U.S. and common law countries. In our experience, most civil law countries also have similar principles. Establishing the facts usually takes a lot of work and in many cases there may not be sufficient justification for termination.
But more importantly, even if an owner can terminate without liability, it may not be wise to do so. Perhaps the owner should merely seek appropriate compensation for damages, renegotiate the agreement in some regards, and move on. Good advice should be practical and take into account all the realities of a situation.
And in any event, it is hard to find expert hotel lawyers and consultants who are not co-opted by work for the operators. Plus, the branded operators have historically made these disputes as difficult and expensive as possible, perhaps as a deterrent. Many owners simply have not had the resources or incentive-up to now-for this kind of expensive and protracted battle. This may be about to change. The outcome may make a huge difference in the value of the property.
GHG Advisor: Bottom line?
Jim Butler: The current litigation
is just the symptom of a deeper problem-the failure of hotel operators
to understand that they are fiduciaries charged with the duty of maximizing
the profit of owners!
Jim Butler has advised Fortune 500 companies as well as closely held businesses on fiduciary duty issues for more than 25 years and has been at the cutting edge of applying these principles to the hotel industry.Jim is one of the few hotel lawyers in the U.S.expert in management and operational issues and specializing in representing owners. He has written extensively on this subject,and advised many owners on their legal rights and business strategies concerning hotel management agreements.
For further information on a Management Agreement Audit TM or related articles and background materials, contact Jim Butler at email@example.com or 310-201-3526.
The Global Hospitality Group® is a registered trademark of Jeffer, Mangels, Butler & Marmaro LLP
©2002 Jeffer, Mangels, Butler & Marmaro LLP
Jeffer, Mangels, Butler & Marmaro LLP
web site: http://www.jmbm.com
Email Jim Butler at firstname.lastname@example.org
Jim Butler at the Firm
Jeffer, Mangels, Butler & Marmaro LLP
1900 Avenue of the Stars
Los Angeles, CA 90067
The premier hospitality practice
in a full-service law firm
|Also See:||Settlement Procedure Available to California Hotels Plagued by Prop 65 Cases - The Global Hospitality Advisor / April 2002|
|Top Ten Investment Challenges Facing the Lodging Industry / Lodging Industry Investment Council / April 2002|
|Decertifying a Union? The Employer’s Bill of Rights / The Global Hospitality Advisor / JMBM / April 2002|
|Outlook 2002: A Roundtable Discussion / Bruce Baltin, Bjorn Hanson, Randy Smith, Jack Westergom - The Global Hospitality Advisor / January 2002|
|New Rules for Hotel Workouts: REMICs for Dummies / The Global Hospitality Advisor / JMBM / December 2001|
|Living in the Wake: Predictions & Practical Implications / The Global Hospitality Advisor / JMBM / December 2001|
|Avoiding Liability for Lay-Offs / The Global Hospitality Advisor / December 2001|
|The Worker Adustment and Retraining Notification Act: Impact on the Hotel Industry / JMBM|
|When is an Apartment a Hotel ... and Who Cares? / The Global Hospitality Advisor / JMBM / September 2001|
|The 'Perfect Storm' / The Global Hospitality Advisor / JMBM / September 2001|
|Richard Kessler's Grand Theme Hotels - Interview with GHG Chairman Jim Butler / March 2001|
|Stephen Rushmore's Industry Trends / Top Markets, Predictions & Opportunities / Jan 2001|
|Outlook 2001: A Roundtable Discussion The Global Hospitality Advisor / Jan 2001|
|Perspectives on Hotel Financing in 2001; Jim Butler, JMBM's Global Hospitality Group Chairman, Interviews Two Active Players in Hotel Finance / Jan 2001|
|Robert J. Morse: Millennium’s New President / Interview with GHG Chairman Jim Butler / Nov 2000|
|Special Reports / Jeffer, Mangels, Butler & Marmaro LLP|