News for the Hospitality Executive |
Hotel Lawyer on Hotel Management Agreements:
By Jim
Butler
and the Global Hospitality Group®,
Author of www.HotelLawBlog.com February 25, 2011 Important
message about liability to hotel investors acquiring hotel assets and
hotel
owners renegotiating agreements with their operators: Your hotel
operator has most likely included indemnification provisions in the
Hotel
Management Agreement (HMA) designed to limit their liability for
operating your
hotel. On your operator's draft of the HMA, it's a good bet that a
provision
limiting YOUR liability does not exist in the agreement. Don't
you think the liability limitations should be mutual? Here's how to do
it: the
""exculpation clause." Exculpation
Clauses -
Protecting the Owner's Assets Robert E. Braun
| Hotel Lawyer, JMBM Global Hospitality
Group® This
article briefly reviews the need for hotel owners to include a
provision in
hotel management agreements limiting the liability of the owner to its
interest
in the hotel property. This kind of provision is commonly referred to
as an
"exculpation clause," because it exonerates someone from blame or
liability. While this is, in many ways, basic "blocking and
tackling," it is important to remember as acquisitions in the hotel
sector
increase and as owners renegotiate agreements with brands and
independent
managers. And if
you like the idea of belt and suspenders in any part of your financial
dealings
or business life, please note that you will never see an exculpation
clause in
a draft hotel management agreement (HMA) from a hotel management
company. In
fact we have not seen them in very many HMAs drafted by others. Why
take a chance? Limiting
the hotel owner's liabilities under the HMA Most
hotels are owned in a special purpose limited liability company or
other entity
designed to facilitate financing, but also to limit liability to the
assets of
the hotel and its related business. Sometimes operators will seek
personal
guarantees of individual owners or investors to stand behind the
corporate
ownership entity's promises in the HMA, but most owners won't consider
that.
And if there is any kind of reasonable equity investment in the
project, and
appropriate insurance, personal guarantees should be out of the
question. Limitations
on liability in hotel management agreements Over
the past several years, many hotel managers have gotten more aggressive
in
limiting their liability for operating hotels. These limitations
include the
indemnification provisions that typically require the owner to
indemnify the
operator for all losses or damages arising out of the hotel, unless it
was
caused by the operator's gross negligence, willful misconduct, or
criminal
acts. In other words, they are indemnified for their negligence. Some
brands have also added limitations on claims to a fixed amount (such as
half
the basic management fee), or "actual damages," preventing the owner
from making any claim for punitive damages or other "extraordinary"
remedies. These
clauses are designed to protect operators, but rarely does the
operator's draft
of the HMA contain any protections for owner. We have almost always
been
successful in making the limitations mutual, and, in addition, we have
successfully demanded protection for our owner clients from unwarranted
liabilities through an Exculpation Clause. What
does the Owner's Exculpation Clause look like? While
each situation is different, a typical exculpation clause looks like
this: Notwithstanding any other provision of
this Agreement to
the contrary, the liability of Owner arising out of or in connection
with this
Agreement and the transactions and obligations contemplated hereby
shall at all
times be limited to the interest of Owner in the Hotel, and in any
litigation
or any other dispute, neither Manager nor any other party shall seek or
have
recourse to any other asset of Owner or to Owner's partners, members,
associates, agents, executives or Affiliates. Without limiting the
foregoing,
neither Owner nor any party associated with Owner shall have any
liability in
excess of Owner's interest in the Hotel for any act by Owner, including
liability for the gross negligence, willful misconduct (either prior to
or
during term of or after the expiration or earlier termination of this
Agreement) or breach of this Agreement by Owner. What
does the Exculpation Clause Do? The
purpose of the exculpation clause is to ensure that the owner's
liability to
the Manager and any other entity making a claim under the management
agreement
is limited to the owner's interest in the hotel property itself. The
clause
extends this protection not just to the owner, but to its principals
and
affiliates, and covers not just direct claims under the management
agreement,
but any claim arising out of the management of the hotel. The
limitation is
important and meaningful - owners build or buy an expensive asset and
invest
significant sums in its equity. A manager should be satisfied that the
substantial equity investment is adequate to secure performance by the
owner. Why
an Exculpation Clause? It is
generally possible to negotiate with a manager so that the limitations
on
damages are mutual - that is, both the owner and the manager are
limited in
their claims. Moreover, hotels are typically held in single purpose
entities,
which limits their liability. Why is it preferable to include an
exculpation
clause? While there
are several answers, the key issue is that holding an asset in a
single-purpose
entity, and limiting damages and causes of action, does not prevent a
manager
or another party from "piercing the corporate veil" and pursuing
claims against the principals of the owner. This is particularly the
case
because the clause should include not just contract actions, but other
claims
which are more easily brought against the principals of the owner. Owners
should also be aware that the asymmetry of the owner-manager
relationship
militates toward ensuring, through all possible means, that the owner
is
protected. The owner should not lose sight of the fact that claims by
an owner
against a manager may be difficult to prove. They often depend on
subjective
measurements of quality, and often relate to matters where the manager
has more
leverage. The manager, on the other hand, typically seeks monetary
damages
based on fee calculations, which are transparent (particularly where
the
manager has been keeping the books)! Strictly defining the owner's
potential
liability is, therefore, key to helping balance the relationship. This
is Jim Butler, author of www.HotelLawBlog.com
and hotel lawyer, signing off. We've done more than $60 billion of
hotel
transactions and have developed innovative solutions to unlock value
from
troubled hotel transactions. Who's your hotel lawyer?
Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at [email protected] or 310.201.3526. Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why. JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE® program".) Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. |
Contact:
Jim Butler
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