Law Conference: Legal issues linger for hotel industry
Law Conference: Legal issues linger for hotel industry
25 APRIL 2017 8:47 AM

Hospitality Law Conference panelists shared their observations on recent legal issues such as mergers and acquisitions, owner and management liabilities, and regulations on alternative accommodations and what they mean for the hotel industry today.

HOUSTON—The hotel industry encountered multiple legal and regulatory challenges in 2016, including mergers and acquisitions, liability lawsuits and an ongoing battle to put short-term rental companies on a level playing field.

The 2017 Hospitality Law Conference opened with a general session, “Cause and effect: Noteworthy developments of 2016 and what they mean for hospitality owners and operators going forward,” which touched on several issues that have ongoing implications for hoteliers.

Post Marriott-Starwood
The hotel industry learned a lesson following Marriott International’s acquisition of Starwood Hotels & Resorts International: Set back money in anticipation of litigation, said Chuck Bedsole, managing director and global leader of hospitality and leisure at Alvarez & Marsal. The “saber rattling” started before the deal closed, he said, referring to Starwood stockholders who sued, but things have quieted a bit since then. Whether Marriott moves quietly to settle or mitigate these issues remains to be seen, he said.

Typically negotiated contracts have a merger exception to territorial restrictions, said Cliff Risman, partner at Gardere Wynn Sewell. The amount depends on what is specifically negotiated, he said, and it’s not unusual to see exceptions for eight to 10 hotels.

“Marriott-Starwood dwarfs all that,” he said.

New agreements are being negotiated now as a result of what has transpired, he said, and some owners are taking a different look at their management and franchise contracts. However, he said, he believes franchise agreements are less negotiable than management agreements are.

Asset management companies are becoming more pervasive, Bedsole said, and he thinks that’s a good thing. Companies like the Blackstone Group are hiring talented people who are “financial wizards” with hotel backgrounds, he said.

Bedsole’s firm has worked on high-profile mergers and acquisitions over the past 18 months, he said, and he’s seen some interesting developments in that time.

The private equity investors that have entered the industry have a playbook they follow to come in and crank revenue, he said.

“A PE firm got into a large third-party management company and saw they had a lot of, let’s just call it fat,” he said. “We worked there to say, ‘Where’s the fat, where’s the muscle? Let’s make sure we don’t cut into the bone.’”

Ownership, management liabilities
The panel addressed a number of questions regarding the relationship between owners and management companies. One topic was liability—in light of cases such as that of sportscaster Erin Andrews, who filed a lawsuit after she was secretly videotaped through the peephole of her hotel room.

Historically, owners have tried to have their say in the hiring of key individuals who will run a hotel, Risman said, such as the GM or controller. But management companies have resisted that, arguing it “chills their ability” to hire and terminate employees, he said, since it means they can’t make a decision until the owner gets involved.

Having owners get involved in the hiring and firing of employees opens them up to liability, he said. If a lawsuit arises over the actions of such an employee, the manager and owner point fingers at each other over who is responsible.

Suzanne Gatrell, president of Kingsbridge Management, said she would fight an owner trying to take more control in a management contract. In one case, though, she said an owner set a condition that she personally act as the GM of a luxury property in Victoria, Canada, because the owner was not willing to bring in an outside GM.

“They felt comfortable with me; I knew the product,” she said. “Now is that good for me? No, it was quite stressful, but over time, I can move out of that.”

Commenting from the audience, Kirby Payne, president of HVS Hotel Management and HVS Asset Management, recalled a situation in which his company, as asset manager, was caught in the middle of a dispute between an owner and brand manager.

In that case, he said, the owner got fed up with the brand manager to the point of requiring the brand to become a licensor only.

“We stepped in as a manager,” he said. “It gave us the heebie jeebies. We were the manager for asset management, not a management contract. It was a scary situation. We stepped into a liability situation. We were really happy when the hotel sold.”

Alternative accommodations
Another area of conflict for hotel operators, the panelists said, is caused by the large volume of Airbnb assets in many markets and issues over taxation and regulations.

Gatrell said her company avoided a mixed-use project that would have had space for rental units, explaining she didn’t think it was a good idea legally or operationally speaking.

Some short-term rental operations will creep into mixed-use development, Bedsole said. Many people are at the drawing board right now considering these concepts, he said. Calling himself “an old dude,” he said he didn’t get why anyone would want to stay in other people’s homes. But, he said, things change.

“Once upon a time, I never thought I’d use Uber,” he said. “It’s going to be interesting. … They’re pretty much everywhere. I don’t see why they wouldn’t end up in mixed-use development.”

In traditional mixed-use arrangements, there might be a hotel and some fractional ownership, Risman said, and documentation for those typically would prevent short-term rentals and third-party rental companies.

Though he hasn’t seen any changes yet, he said it reminded him of when online travel agencies started. The hotel industry was up in arms, he said, and while the first response was to fight, the OTAs became a fact of life and hotel companies have figured out how to work with them.

“They formed entities to become OTAs and do it themselves,” he said.

Hoteliers will figure out how to work with companies like Airbnb and embrace them, he said.

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