News for the Hospitality Executive
Terminating Hotel Management Agreements Without Liability
|By Jim Butler, April 2008
How do you terminate a long-term hotel management agreement(HMA)?
It's no secret. The right management agreement can add a lot of value to a property. But in times like these, a long-term, no cut, hotel management agreement can be a big "encumbrance" on value. In fact, we have seen a number of real-life situations where hotel is worth up to TWICE as much without the branded hotel management agreement.
Doubling the value of the hotel by terminating the management agreement?
Not every hotel will double in value by terminating its branded management agreement, but some will. One reason is that over the past 25 years, more than 80 percent of the buyers for hotels costing more than $10 million are either competing hotel companies or a joint ventures of a hotel company and a capital source. If the branded management agreement cannot be terminated, then the seller loses 80 percent of the potential buyers of the property.
The SNDA or Subordination, Non Disturbance and Attornment
No wonder that owners and lenders alike want to understand more about termination options for long-term hotel management agreements (or HMAs). Of course, most of the branded HMAs came along with Subordination, Non Disturbance and Attornment Agreements (SNDAs). These are the troublesome agreements which bind lenders to honor the terms of the branded management agreement if the lender should ever become the owner of the property, or property should be sold by or through the lender, whether by foreclosure, deed-in-lieu of foreclosure, bankruptcy, or otherwise.
So here are some answers to the most common questions being asked today.
Hotel management agreements can
Q: Is it true that you guys got into the hospitality business by breaking long-term, no cut, management agreements?
"Yes. In the late 1980s, we combined an extensive banking, securities, and real estate expertise with the street knowledge of a hotel partner who had done more than 200 hotel deals. All the brands already had their lawyers. We were primarily representing lenders and owners suffering great pain in the late 1980s and early 1990s.Q: But let's cut to the chase. Most branded hotel management agreements typically run for 20, 30, 50 years or more, with unilateral options by the brand to extend for additional 10- or 20- year terms. Are you saying that you have terminated these agreements?
"Yes. "Q: Even when there is an SNDA -- a Subordination Non-Disturbance and Attornment agreement?
"Yes. "Q: How do you terminate a branded hotel management agreement, with an SNDA, without liability to owner or lender?
"First, termination is not always the right answer. Often, simple discussions or renegotiation of the management agreement are more appropriate. Who wants to re-brand, unless it's really necessary?Q: Okay. But sometimes termination will be the answer. How do you do it?
"There are at least three ways to terminate a long-term, no cut, hotel management agreement -- other than pursuant to express terms (e.g. by expiration of term, termination on sale, termination windows or options, and the like).Q: So it's really that simple? A borrower rejects a hotel management agreement in bankruptcy and sheds the management agreement for free?
"That is an oversimplification, but it is the basic approach. There can be a lot of complications and questions, and you need someone who's been through this before to run the traps for you, or you can get tangled up.Q: In other words, the borrower and the lender recover substantial value for the hotel asset that has otherwise been sucked out of the asset by the operator through the long-term, no cut, management agreement?
"Yes. I am sure that operators would like to put it another way, but much of the suppressed value is recovered by the borrower (and, indirectly, the lender) when a long-term hotel management agreement is terminated. "
"As I said, termination is not the right answer in every case. It is always preferable to discuss the options and problems with the hotel operator to see if a business solution can be reached. But it is important to know your options. Hotel operators can be tough and don't usually tell you what your other options are.As economic pain in the hospitality industry drives deeper and deeper, more owners and lenders will look to parties to share their pain. An obvious party that usually is "above the fray" is a branded hotel operator, hotel brand, or union. All are susceptible to rejection of their executory contracts in bankruptcy along the lines discussed above.
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|Also See:||A Jury Verdict Rules Marriott/Ritz-Carlton Breached Contractual and Fiduciary Duties with Owner of the The Ritz-Carlton Bali / February 2008|