July 17, 2020
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Franchise and management disputes in the Covid era
By the time you read this, you are almost certain to be in the hospitality industry and most likely in financial and emotional distress. In difficult times, hotel owners rely more than ever on their brands and managers – the professionals who hire owners to protect the multi-million dollar investments they have made in building, maintaining and modernizing real estate. Owners rely on brands to increase occupancy and sales, and managers to use this revenue most effectively and efficiently to increase the revenue that enables owners, debt service, insurance and others Covering expenses and generating a return – without which no thinking investor would finance a hotel.
At the same time, the Covid 19 pandemic has brought hotel occupancy and rates to levels previously unimaginable. Brands and managers are not responsible for the pandemic, but this is the time they have to get up and work with owners to preserve their wealth and prepare for the eventual – and lengthy – return to normal, however that may be Normalcy may be.
Unfortunately, brands and managers have not always mastered the challenge in many cases. Many brands and managers have simply filed decrees about closing or reducing business areas, asking for funds, and reducing responsiveness without explanation. Hotel companies across the board have taken leave or fired large sections of their workforce, making it difficult to get the guidance and support that owners need.
What should owners do?
Take the first step. Owners can't and shouldn't wait for their brands and managers to offer solutions. Under the current circumstances, owners may be more aware of the status of their projects, their strengths and weaknesses than their managers and brands. Owners should take a close look at their properties and figure out how best to proceed, whether to eliminate some operations (in many areas this decision is made by local or national authorities), cut staff, or even close them down (to understand that the closure of a hotel and maintaining a closed hotel is an expensive proposition).
Be the squeaky wheel. Instead of waiting for management to submit a working capital request, updated cash flow and cash forecasting needs to be made and used as a tool to make changes in operations. Many, if not most, management agreements require an owner to provide working capital 10 days in advance (less in some cases). These requirements may not be met for an owner, which delays the owner and gives managers and brands additional influence.
Read your agreements. Much has been said about the effectiveness or lack of force majeure clauses. However, this is not the only provision that affects the obligations of a manager or a brand and the rights of an owner. A thorough review of a franchise or management agreement is required to create a game plan. The devil may be in the details, but also possibilities and alternatives.
Create a game plan. Now is the time to consider changing the owner-manager-brand relationship. This can consist of changes in fees (not just management or license fees, but also marketing and other incidental costs), operating standards and plans to improve real estate, but also a reassessment of whether the brand is the right brand or the manager is the one real manager. Some brand-managed properties would benefit from third-party management, and in some cases, the brand would fit poorly from the start, and the pandemic has exposed major sources of error.
Team up. Regardless of what decisions an owner may make, they cannot implement them in collaboration with everyone involved, including lenders, investors, sellers, government agencies, and workers. An owner who creates a united front with all parties that depend on the survival and ultimate success of the property has a better chance of achieving that success and getting out of this crisis and being strong and ready to benefit from a recovery.
Be brave. Sir Winston Churchill is credited with the first saying: "Never let a good crisis end." This is a crisis like no other, and owners shouldn't be shy about how to improve their position. As difficult as these times are, we should remember that they will ultimately become a memory and not a reality, and we should prepare for the following reality.
During this crisis, Jeffer Mangels Butler & Mitchell LLP's Global Hospitality Group is working with property owners and others in the hospitality industry to provide effective and meaningful solutions to persistent problems.
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Bob Braun is a senior member of JMBM's Global Hospitality Group® and co-chair of the company's Cybersecurity & Privacy Group. Bob has over 20 years of experience representing hotel owners and developers in their contracts, relationships, and disputes with hotel managers, licensors, franchisors, and brands, and has negotiated hundreds of hotel management and franchise contracts. His practice includes experience with virtually every major hotel brand and manager. Bob also advises clients on condominium securities and many transaction matters, including business creation, financing, and joint ventures, and works with companies on data technology, privacy, and security issues. These include software licensing, cloud computing, e-commerce, data processing and outsourcing agreements for the hotel industry.
In addition, Bob is a frequent lecturer as an expert on technology, privacy, and data security issues and one of only two lawyers on the 2015 SuperLawyers list recognized for their expertise in information technology. Bob is a member of the Advisory Board of the Information Systems Security Association, Chapter Los Angeles, and a member of the International Association of Privacy Professionals. Contact Bob Braun at 310.785.5331 or email@example.com.
This is Jim Butler, Author of www.HotelLawBlog.com and founding partner of JMBM and JMBM's Global Hospitality Group®. We provide business and legal advice to business owners, developers, independent operators and investors. This advice covers critical hotel questions such as: B. Purchase, sale, development, financing, franchise, management, ADA and intellectual property of hotels. We also have strong experience in hotel disputes, union avoidance and negotiation, cyber security and data protection.
JMBM's Global Hospitality Group® has been involved in more than $ 87 billion in hotel transactions and more than 3,900 hotel properties around the world. Contact me at + 1-310-201-3526 or firstname.lastname@example.org to discuss how we can help.
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