Hotel Online  Special Report
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The Global Hospitality Advisor

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"I'm Mad as Hell, and I'm Not
Going to Take it Anymore!"



Hotel Owners Perceive Operators Are
Breaching a Sacred Trust 
October  2002


Metaphorically speaking, many angry hotel owners have been playing the role of Howard Beale in the movie "Network," shouting from the windows (to unresponsive hotel operators), "I'm mad as hell, and I'm not going to take it anymore!"

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:

  • Virtually all hotel operators are "agents" of the owners.
  • As agents, operators can be terminated by their principals (or owners) except in rare cases-even when the agreement says that it cannot be terminated.
  • If the termination of the agency relationship is legally justified, it will be "free." Wrongful termination can result in substantial damages against the owner.
  • Agents are fiduciaries. 
  • Fiduciaries owe special duties to owners and are not free to deal with them at arms length.
  • Remedies for breach of fiduciary duties include damages, punitive damages, and justifiable (free) termination of the management contract, despite provisions in the agreement to the contrary.
GHG Advisor: How does an owner determine its rights?

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 terminated. 
Instead, under guidance from a skilled hotel lawyer, owners should conduct a Management Agreement Audit™-a technique which the Global Hospitality Group® pioneered and perfected. Properly used, the Management Agreement Audit™ is a critical diagnostic tool applied in a thorough and fair fashion to evaluate the practicalities of a specific situation.

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! 



 
The Management Agreement
Audit™

What is a Management Agreement Audit™? It is a complete legal analysis of a hotel management agreement and related documents, as well as an operational review of the hotel. It is performed by a team of experienced hotel lawyers and consultants who approach the examination in a thorough and fair fashion to advise their client. First, the lawyers review all the legal documents and factual circumstances of the hotel, management agreement, and operator to evaluate the legal requirements of the management agreement, standards of the industry, fiduciary duties and other express or implied legal duties. Coordinating with the lawyers-and engaged by them for attorney-client privilege issues-the consultants then conduct a thorough review of the hotel's operations.

The Management Agreement Audit™ helps an owner determine if the operator is doing a good job, if there are any areas for improvement, and what rights the owner might have.

Breach of express provisions. The Management Agreement Audit(tm) may uncover one or more material breaches of express provisions of the management agreement which entitle the owner to terminate the contract, renegotiate its terms or get damages for the breaches. 

Implied duties and fiduciary duties. Often the most important considerations are outside the express provisions of the management agreement-provisions implied by law or fiduciary duties created by law. If the operator is an "agent" of the owner, then it is a fiduciary. A fiduciary has some of the highest standards of care known to the law. A fiduciary cannot prefer itself over its principal, cannot compete with its principal and must make full disclosure about self dealing. Any waiver of these fiduciary duties must be a knowing and intelligent one grounded on full disclosure.

A few troubling questions. Who do all those expensive programs benefit? The brand or the hotel? What corporate overhead is being charged to the hotels? Is the operator selling that information for its own benefit or using hotel guest information for timeshare or senior living facility sales? How about advertising revenues derived from advertising in the hotel and materials placed in the hotel? How is the purchasing being done? What markups and secret rebates are being charged? These are only representative of many troubling issues now being explored.

Where justified, owners can terminate or renegotiate management agreements. Serious breaches of contract or duty by the operator agreements will likely entitle the owner to damages and a free termination of the management agreement. That requires a breach, which goes to the very essence of the contract or relationship. But even a "small breach" of  honesty or trust may suffice, given the importance of integrity in a fiduciary relationship.


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 jbutler@jmbm.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

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For more information:
Jeffer, Mangels, Butler & Marmaro LLP
web site: http://www.jmbm.com
Email Jim Butler at jbutler@jmbm.com
Or contact 
Jim Butler at the Firm
 Jeffer, Mangels, Butler & Marmaro LLP
  1900 Avenue of the Stars
 Los Angeles, CA 90067
     Phone: 310-201-3526 
The premier hospitality practice
in a full-service law firm
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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

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