Coronavirus: Hotel owners should be reviewing management agreements to minimise disruption

The coronavirus epidemic is having huge consequences for hotel owners and operators. Hotels’ average rates are declining, along with their occupancy levels. The travel restrictions implemented by the Government have seen the cancellation of trips by a growing number of hotel guests. Hotels may be subject to heightened scrutiny over their compliance with health and safety and reporting obligations as health authorities try to curb the spread of the virus — not to mention the negative effect of having a reported case of the virus in the hotel.

Hotel management agreements (“HMAs”) include a variety of clauses which are hotly discussed during negotiations but largely overlooked when business is healthy. These regulations, however, become very important during tough times (such as the current outbreak) when hotel performance suffers. Owners and operators must be aware of them and their possible consequences for the continuing relationship between the parties.

Many HMAs include performance assessments that allow the owner to terminate the HMA early if the operator fails to reach certain financial goals during a period. They can also provide performance assurances where a previously negotiated return to the owner is underwritten by the operator. Usually such provisions provide opt-outs for external factors influencing the efficiency of the hotel that are beyond the control of the operator. Unless the operator can show that all of these external factors occur during a period, the operator can theoretically escape early termination for a failure of a performance check. Quality monitoring and quality assurance clauses differ but a virus outbreak can fall into one of those carve-outs. A common carve-out, for example, is regulatory intervention, which may include implementation of travel restrictions and additional safety standards.

Expect to see operators using such carve-outs, where possible, to justify any errors in performance monitoring or performance assurance shortfalls, not just during the outbreak but also during subsequent monitoring cycles when the implications of the outbreak are still being felt.

Hotel workers are typically all employed by the owner. The operator must, however, have complete control over the staff and work policies of the hotel. This is arguably justified, because the operator runs the hotel and needs day-to-day control over the staff, but leaves the owner bearing all responsibility for the costs of jobs without any influence over the staff or the policies followed by the operator. In the current outbreak this may become a problem for the owner. Declining occupancy, for example, could cause the operator to reduce staffing rates that incur redundancy costs and other job responsibilities that the owner would have to bear, but would have little to no impact.

Given the decline in hotel bookings, we are seeing suggestions that hotels could play a vital part in the virus outbreak by becoming temporary isolation hospitals or being used as accommodation for those such as NHS staff. Best Western Hotels has said it is “willing to take unprecedented steps to support the national effort” and is considering using some of its hotels to assist the NHS. Football club owner Roman Abramovich and former Manchester United player Gary Neville have also closed hotels to the public, freeing hundreds of beds for NHS and other medical staff who would otherwise need to make long commutes. Hotels already have the facilities to allow self-isolation and have previously been used by one public body, such as at the London 2012 Olympics, so there is no reason why similar actions cannot be taken now.

If you would like to discuss and review the impact coronavirus is having on your business and/or hotel management agreement, please get in touch.