STR Making Changes

Posted in Hotels, Management Agreement, STAR Report

STR is making changes to the highly regarded and widely used STAR Report.  Those of us who spend time drafting, reviewing, negotiating, and understanding hotel management agreements know that an important element of a management agreement is the Performance Test, and that a critical element of the typical two pronged performance test is the RevPAR threshold as compared to the hotel’s competitive set.  The guidelines that will go into effect on Jan. 1, 2017, are designed to recognize and accommodate for recent (and probably continuing) consolidation in the hospitality industry, and achieve a better balance within the competitive set.  One very important clarification in the new guidelines is that the competitive set would have not less than 4 hotels, excluding the subject hotel, and include at least 2 management companies, also excluding the subject hotel.

The new guidelines may be very helpful, and all parties to management agreements should consider the implications.  That being said, remember that not all management agreements permit changes to the initial competitive set.  Parties to management agreements should consider examining the existing management agreement to assess the potential for competitive set revisions while also reviewing the new guidelines.

For more information on the new guidelines, click here.

Case Law Update: Membership Deposit Refund Amendment Overturned

Posted in Clubs, Court Cases

Verandah Development v. Gualtieri, Florida 2nd District Court of Appeals (February 17, 2016)

http://law.justia.com/cases/florida/second-district-court-of-appeal/2016/2d15-2250.html

This case provides insight to clubs with refundable memberships who want to amend a membership document provision related to refunds or resigned membership resale.

The plaintiff member’s Membership Agreement provided that members who “resign their membership will be refunded their initiation deposit previously paid subject to a ‘one in, one out’ refund policy.” The Club amended the Membership Plan to provide that the Club would pay resigned member refunds on a one in three basis.

The plaintiff members resigned their membership after the Membership Plan amendment, and when they were told of the amendment, they filed a breach of contract suit.  In support of its position that the plaintiff members were subject to the new one in three refund policy, the Club cited to the provision in the plaintiffs’ Membership Agreement in which they agreed “to be bound by the terms and conditions [of the Membership Plan] as the same may be amended from time to time.” The trial court entered summary judgment for the members, and the appellate court upheld the decision. The court reasoned that the club’s unilateral Membership Plan amendment right applied to facilities use privileges, not the refund policy, which was a vested right.

The appellate court did overturn the trial court’s ordering the Club to pay the refund immediately to the plaintiff members. The court explained that an immediate refund would have placed the members in a better position than the members would have been under the one in, one out policy.

Although this decision may be cited by members of other clubs that amend membership documents in a manner that impacts membership deposit refunds, it should be noted that the language of the plaintiff members’ Membership Agreement differs from that of most clubs with refundable membership, in that the one in, one out provision was part of the refund provision and was actually in the member’s Membership Agreement; whereas, most clubs only include it in the provision for resale of resigned memberships in the Membership Plan. Any club that considers membership document amendments that impact membership deposit refunds should carefully review the refund, membership resale and amendment provisions in both the club governing documents and members’ individual agreements with legal counsel.

Guest Privacy, Safety and Security

Posted in Court Cases, Hotel Guest Health and Safety, Hotels

A jury’s decision to award sportscaster Erin Andrews $55 million as a result of a hotel’s failure to reasonably safeguard her privacy, safety and security is a forceful and important reminder to hotel owners and operators: A guest’s privacy and safety are paramount.  Certainly this jury saw it that way, and other juries might reach the same conclusion.  Not only should hotels and professional hotel operators have proper policies in place to protect the safety, security and privacy of its guests, they must also adhere to and follow those policies.

As industry veterans and careful industry observers know, effective employee training, especially those on the front-line of guest contact and the delivery of guest services, is paramount.  Hotel employees must know what is required and expected of them under the policies and procedures, and perform accordingly.  By its nature, the hotel industry is focused on providing guests with consistent excellent guest services that lead to a consistent positive guest experience.  In order for owners and operators to consistently deliver such excellent guest experiences, they would be wise to revisit and re-examine current training and operations, and make any modifications needed to reasonably ensure the safety, security and privacy of their guests.

The Court in the Andrews cases noted, as is the case in many jurisdictions, that hotel owners and operators owe a special duty of care to their guests.  The jury seemed to reach the very logical conclusion that this duty extends to reasonably providing for the privacy, safety and security of their guests.  If this jury verdict is taken as potentially predictive of the future in similar cases, the potential consequences for failing to reasonably provide for the privacy, safety and security of hotel guests may be disastrous.  There is no time like the present for owners and operators to ensure that they have up-to-date, written policies in place that address guest safety, security and privacy, and that all employees are being effectively trained to ensure compliance with such policies.  At the bare minimum, such policies should make it very clear that hotel employees should never provide a guest’s room information to any other person without that guest’s permission.  While this is considered to be standard industry practice already, clearly there are those persons who will find creative ways to gain this and other information for illegal or improper purposes.  The point is that these policies should also be regularly updated to account for legal developments, such as the Andrews case, and employee training should be an ongoing enterprise within the hotel.  If there are any questions as to whether such a policy complies with the applicable law or industry standards in any given jurisdiction, owners or operators should consult with appropriate legal counsel.

Case Law Update: Junior Membership Age Discrimination Analysis

Posted in Clubs

Javorsky v. Western Athletic Clubs, California Court of Appeals, First District, Division 5 (December 11, 2015)

http://scholar.google.com/scholar_case?case=1119351710053536383&q=javorsky+v.+Western+Athletic+Clubs&hl=en&as_sdt=2006&as_vis=1

Clubs throughout the country offer Junior Membership programs that afford younger members discounts in joining fees and/or dues or favorable membership financing. Some have questioned whether such programs violate federal or state age discrimination laws.   In Javorsky, a California appellate court recently upheld a ruling that a health and fitness club’s discounted initiation fee and dues program for members aged 18 to 29 did not violate California’s Unruh Civil Rights Act (“Unruh Act”).

Noting that the Unruh Act prohibits only arbitrary, invidious or unreasonable discrimination, the court explained: “Discrimination may be reasonable, and not arbitrary, in light of the nature of the enterprise or its facilities, legitimate business interests (maintaining order, complying with legal requirements, and protecting business reputation or investment), and public policy supporting the disparate treatment.”

The club argued that the program was reasonable and not arbitrary because it (i) expanded access to beneficial, recreational activities; (ii) benefited an age group with limited financial resources; and (iii) did not perpetuate any invidious stereotypes.   The club presented evidence from its expert witness demographer that individuals under age 30 tend to have substantially less disposable income than individuals over 30. The plaintiff’s expert countered that certain individuals in the under30 age group earn more than certain individuals in the over 30 group. But the trial court agreed with the club on all points, and the appellate court affirmed the trial court’s determination.

The Javorsky decision dealt solely with the Unruh Act. Anti-discrimination laws in other states may be interpreted differently. This decision, however, likely will be instructive as to how a club can defend a challenge to a Junior Membership program based on anti-discrimination laws in other states as well. Clubs can often demonstrate a reasonable basis for offering younger members a discounted membership.

Does Hiring Club Management Company Make Sense?

Posted in Clubs, Management Agreement

The decision by a club owner or board to retain a management company could greatly impact the success of the club. Approximately 18 percent of all U.S. golf courses utilize third party management companies. More and more golf courses are deciding to hire a third party management company. The number of golf courses that are managed by third party operators increased by 53 percent from 2001 to 2013 according to the National Golf Foundation. Troon Golf, the largest club management company, has added over 90 new courses since 2011.

It makes sense for a club to hire a management company when the management company can reduce expenses and increase revenues by more than the management fees. Management companies can often implement programs to increase membership sales, membership retention, and member spending. Sometimes, the reputation of a management company itself can help attract members. National golf management companies also often have national marketing programs to attract golfers to semi-private clubs and reciprocal club programs to increase usage of private clubs, which result in increased guest fees and spending. Management companies can often decrease expenses through national buying programs for equipment, supplies, insurance, and other services and economies of scale in sharing employees, systems, and other resources. However, the club should ask whether the company passes the savings of these programs to the clubs they manage. Management companies often can recruit employees that a club would not otherwise be able to hire, which can result in more efficient operations, enhanced members’ satisfaction, and improved membership sales in the case of a membership director.

Clubs need to scrutinize the fees and other costs of hiring a management company to fully evaluate the total cost. Costs often include items such as (i) allocations of national marketing program costs; (ii) allocation of centralized or corporate office expenses; (iii) reimbursements for costs, including travel costs, marketing costs, and employee relocation; and (iv) membership sales commissions. When a management agreement includes these costs, clubs should obtain cost estimates from the management company. Clubs should carefully scrutinize the scope of services to understand what services are covered by the base management fee and what services can result in additional charges.

Clubs should also obtain information about the management company to ensure that the management company and its methods are compatible with the club’s positioning, membership admission policies, governance, and non-member usage policies. A club may also want to inquire as to how the management company will handle existing employees.

Hiring a management company has the potential to significantly improve operating results. But, a club owner or board must obtain information and ask the right questions as to whether to hire a management company and in selecting the best one for the particular club, to ensure that it is making the right decision.

Collections Continue to Thrive

Posted in Brand Management, Hotels

Owners of strong, unique independent hotels are finding that they can gain many of the advantages of an affiliation with a branded hotel management company without entering into a management contract and relinquishing control of the hotel.  This is indeed the case and much has been written about the many collections of hotels now available in the marketplace, but the benefits should be approached with a clear head and a keen eye because at the end of the day there will be a signed collection agreement signed with the branded hotel management company that will have a significant term of years and that will not be subject to easy termination by the hotel owner.  To acknowledge the positives of the relationship, an owner with a hotel that has a unique story and that is recognized in its target market can benefit from the brand’s strength as a part of the underwriting process for financing, as well as better access to a rewards program, reservation system, buying power and training.  Nevertheless, remember that the collection contract is essentially a franchise agreement, with a significant term and fees to be paid to the brand.  The fees are not uniform, so care must be taken in examining that aspect of the transaction.  The variations on fees include fees based upon total gross revenues or total rooms revenues or simply the bookings through the brand’s systems.  If the owner is not going to self-manage the hotel, the better practice would be to involve the hotel manager in the process because the hotel manager will need to understand its duties and obligations to the owner in the context of being part of the collection.

To make the point, in early November 2015, Starwood rebranded the SLS-Las Vegas as part of the Tribute Portfolio, with the Lux Tower operating under the W brand.   The Tribute Portfolio is the second collection of hotels offered through Starwood, joining The Luxury Collection of hotels.  Other examples of branded collections include Marriott’s Autograph Collection, Hilton’s Curio Collection, Sofitel’s Legends Collection, the BW Premier Collection from Best Western and the Ascent Hotel Collection of Choice Hotels.

Difference Between Club and Hotel Management Agreements

Posted in Clubs, Hotels

Often, a club management agreement reads exactly like a hotel management agreement, with the word “hotel” changed to “club.” This should not be the case. Clubs have unique characteristics that should be considered in drafting a club management agreement.

1. If the club is a member-owned club, it is not a profit-seeking business. As a result, the management fee structure would not have a profit based incentive fee, but could have an incentive fee tied to membership sales and retention or members’ satisfaction.

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Competing Interests at Equity Club Turnover

Posted in Clubs

Equity club developers and equity club members often view turnover and member due diligence completely differently. The typical developer position is: “The Club will be turned over to the members ‘where is, as is’ in accordance with the club documents.” The typical equity member view is: “We want to find out if there is any problem with the Club facilities, membership program or Club finances, and we expect the developer to fix any problem.” Which position is right?

The developer is generally correct that all it is required to do is turn over the Club in accordance with the club documents, and most club documents provide for a “where is, as is” turnover. However, the club documents may include title, deficit funding, reserve, and accrued liability payment requirements. Turnover must comply with such requirements.

Club members may also look beyond the club documents, and claim certain rights by virtue of side agreements, correspondence, representations in marketing materials, and even alleged verbal representations. These materials should be reviewed, as well as any Club document disclaimers regarding such ancillary materials and representations. Continue Reading

Franchise Agreement Transfer Provisions

Posted in Franchise, Hotels

The number of hotels, particularly limited service hotels, operating under franchise agreements has exploded in recent years, and this trend is expected to continue in the near term.  Franchise agreements, including those in the hospitality industry, are personal contracts for the benefit of the named franchisee only, and are further limited by the franchisee’s ownership structure as of the effective date of the franchise agreement. From this point of beginning, it is logical that the franchise agreement would also include strict limitations on the franchisee’s ability to transfer ownership interests of the franchisee both within the franchisee company and to third parties. Each franchisor will adopt its own unique approach to the transferability of interests, but there will be certain commonalities that franchisees should be aware of and carefully study.

Franchisees would be wise to assume that a transfer of any direct or indirect ownership interest in the franchisee is prohibited without the prior written consent of the franchisor or expressly permitted under the franchise agreement.  Regardless of some of the variations of language, this means every transfer and covers direct and indirect transfers within the entirety of the franchisee’s ownership structure. There will be variations in the requirements to obtain the franchisor’s consent, and some transfers that may not require consent, but the general expectation should be that the general rule under the franchise agreement will be to prohibit transfers.  Continue Reading

Hospitality Sector Leads the Way

Posted in Hotels

It is difficult, if not impossible, to miss all of the positive indicators pointing to a robust and exceedingly vibrant hospitality sector. Whether it is the acquisition, financing, construction or opening of a limited service hotel in a suburban location or a non-NFL city, or the awe inspiring deals like the sale of the Waldorf Astoria or the Baccarat, the signs are all positive and the appetite for trophy product seems insatiable. Our experience working on both the Waldorf Astoria and Baccarat transactions has provided an up close and personal view of just how powerful our industry is right now and how transactions of this stature and magnitude are likely to continue.  All of the excitement and publicity over these types of transactions should not lead us to conclude that the competition for quality product will always go to the swiftest or the one with the deepest pockets.  The execution of these deals and even deals of far lower price tags will remain achievable only through experienced and capable principals, advisors and lawyers being present at each phase of the transaction.  Read more about these transactions.

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