Hotels Included in U.S. State Department Cuba Restricted List

Posted in Cuba, Hotels

As of Nov. 15, 2018, the State Department is adding 16 hotels owned by the Cuban military to the Cuba Restricted List (CRL).

As discussed in the November 2017 GT Alert, U.S. Implements President Trump’s Cuba Policy, the Department of State published the CRL, identifying certain entities and sub-entities that are “under the control of, or acting for or on behalf of, the Cuban military, intelligence, or security services.”

Except as otherwise authorized, no U.S. person may engage in a direct financial transaction with any entities and sub-entities identified on the CRL. Furthermore, any application to export or re-export items for use by entities or sub-entities identified on the CRL will be generally denied by the Department of Commerce’s Bureau of Industry and Security.

Among other entities added to the CRL, it now includes the brand new Grand Packard Hotel, a 321-room luxury hotel newly inaugurated in Cuba, managed by the Spanish brand Iberostar Hotel, which currently operates 27 hotels with 7,881 rooms on the island.

Cuban President Miguel Díaz-Canel personally attended the inauguration of the Packard Hotel, a little more than a year after the opening of the Kempinski’s Gran Hotel Manzana, showing the Cuban Government’s intent to make the island’s hospitality sector more upscale. Both the Packard and the Manzana (originally included in the first CRL) are now identified on the CRL.

This aspect of U.S.-Cuba relations continues to impact the hospitality industry. Caution is key. Please contact Greenberg Traurig should you need to explore this further.

Regulatory Update: Wireless Licenses Issued by the Federal Communications Commission

Posted in Regulatory Update

Hotels, resorts, country clubs, and other hospitality facilities commonly utilize wireless communications systems to support security, maintenance, and other functions conducted on the relevant properties.  Many private wireless radio systems used at hospitality facilities use portions of the radiofrequency spectrum that are licensed by the Federal Communications Commission (FCC).  Prior to operating radio systems (which include wireless headphone sets and handheld portable radios) it is essential to determine whether an FCC license is required to operate communications equipment and whether a license has been obtained.  The FCC considers unauthorized use of the radiofrequency spectrum to be a serious matter and has authority to initiate and enforcement action and impose monetary penalties for violations of its rules.

In addition to ensuring that any required FCC licenses are obtained, hospitality companies should be aware that the FCC also regulates changes in the ownership of FCC licenses or of licensees.   Section 310(d) of the Communications Act (47 U.S.C. § 310(d)) prohibits the assignment or transfer of control of any FCC license, including any private wireless license used for internal business communications, prior to obtaining FCC consent (see also 47 C.F.R. § 1.948).  Section 310 is applicable when an FCC license is sold to another entity in an asset sale (an assignment) and when a controlling ownership interest (50 percent or more) in a licensee is acquired (a transfer of control).  The statutory prohibition of assignments and transfers of control of an FCC license is applicable when such changes occur as the result of an internal corporate reorganization (a pro forma transaction under FCC rules), as well as when a third party is involved.  Obtaining FCC prior consent for transactions involving assignments and transfers of control of private wireless licenses is a relatively simple and inexpensive process.  However, licensees may overlook the need for FCC approval as part of larger transactions affecting the ownership or control of FCC licenses.  The importance of receiving prior consent from the FCC for assignments and transfers of control of licenses is highlighted by a recent Consent Decree entered into by the FCC and Marriott  International, Inc.  As part of the Consent Decree Marriott admitted liability, will implement a compliance plan, and will pay $504,000 as a civil penalty.  See GT Alert:  FCC Consent Decree an Important Reminder that Prior Consent Is Required for Transactions Affecting Control of FCC Licenses, August 2018.

Case Law Update: Golf Course Restrictive Covenant Upheld

Posted in Clubs, Court Cases

Owners of unprofitable golf courses are increasingly wanting to redevelop their golf courses as residential property, especially in areas where land for residential development is at a premium. Some golf courses are subject to recorded covenants that require the property to be used for recreational purposes and therefore prohibit such redevelopment.  In Victorville West Limited Partnership vs. The Inverrary Association, a golf course owner unsuccessfully filed a suit against the homeowners association seeking to cancel this type of restrictive covenant on the grounds that the golf course was unprofitable.

The trial court ruled in favor of the homeowners association. The golf course owner appealed, arguing that the trial court should have cancelled the restrictive covenant because a substantial change in circumstances prevented the covenant’s original purpose from being carried out and the covenant was an unlawful restraint on alienation.  The appellate court affirmed the trial court decision.  The court stated the test for determining the validity of a restrictive covenant is whether “the original intention of the parties can be carried out despite alleged materially changed conditions or, on the other hand, whether the covenant is invalid because changed conditions have frustrated the object of the covenant without fault or neglect on the part of the party who seeks to be relieved from the restrictions.”  The court determined that the Inverrary restrictive covenant was still valid because it continued to benefit the surrounding residential properties by preserving the character of the community and providing residents with a pleasant view.

If other courts follow the reasoning of the Inverrary court, it will be difficult for an owner of a golf course that is subject to a restrictive covenant to succeed in invalidating the covenant, because neighboring property owners can almost always claim the golf course continues to benefit their properties by preserving the character of the community and providing them with a pleasant view.

Industry Consolidation Reflected in New Franchise Agreements

Posted in Hotels

This is the time of year when the branded hotel operating companies that sell franchises (Franchisors) start to use the new 2018 forms of franchise agreements. As the hospitality industry has continued to consolidate, it should come as no surprise that some of the larger brands have modified their treatment of things such as group services contributions, marketing costs, and other expenses that apply across the brand or group of brands and impact every hotel within the specific system of hotels. For example, some separate contributions made by a franchisee will now be an element of a larger bucket of contributions, giving the Franchisor a single payment through which to allocate different amounts for a number of services delivered by the Franchisor across the system that might have previously been paid for by franchisees separately. This modification in approach has not altered the fact that the Franchisor may make changes to how the funds are used, merge a number of separate funds, or discontinue certain services, so long as it does so for all system hotels. The overall philosophy of treating similarly situated hotels within the brand system of hotels in a similar manner has not changed. It is also worth noting that the provisions of the franchise agreement with respect to liquidated damages and remedies may have been modified.

Providing for the payment of liquidated damages is a standard element of hotel franchise agreements. The calculation generally involves determining the average monthly amount of all franchise fees under the agreement, multiplied by the lesser of a certain number of months or the number of months remaining in the term or some percentage of the number of months remaining in the term. The franchise agreement is expected to say that it is difficult to calculate franchisor’s damages over the remainder of the term and the liquidated damages represent a reasonable estimate of fair compensation for the damages that Franchisor would incur, and are not a penalty. Some of the newer franchise agreements may, in one way or another, leave the door open for Franchisors to seek damages against franchisees in addition to the liquidated damages, relating to other matters and not compensation for franchise fees. Arguably, a Franchisor would have this right anyway if a franchisee had acted in a manner to besmirch the intellectual property and reputation of the Franchisor or fail to discharge any post-termination obligations. Nevertheless, there is often now an affirmative reservation of rights in favor of the Franchisor to seek other remedies available under applicable law, beyond the pre-negotiated liquidated damages stated in the franchise agreement. Under any analysis, a review of the new franchise agreements would be wise.

Trends In Hotel Branding: Hyper-Specificity

Posted in Brand Management, Hotels

It’s long been said that a successful brand understands its audience. This has been true of hotels, as the major internationally-branded hotel operating companies have developed and continue to develop various brands to service and cater to a wide array of guests and their specific preferences and assumed preferences. These hotels often have a variety of brands, and each brand is intended to target a particular type of customer (for example, a business traveler, the millennial traveler, the independent vacation traveler) at a particular price point. More recently, and with the entry of many non-traditional hotel competitors into the market, it has become increasingly important for hotel brands to target customers more precisely and directly.

Many brands have developed specific themes to set themselves apart and attract specific customer segments. One major demographic that virtually all hotel brands seek are millennials. Some brands design properties to encourage social interaction between guests outside of the guest room through live music and communal pool tables, while keyless entry and free Wi-Fi appeal to the technologically-inclined and connected young traveler.  Then there are the health conscious or “wellness” hotels.  A stay in these hotels might include organized morning runs, complimentary yoga mats in each room, 24-hour gym access, healthy food options, and aerobics channels presented every time you turn on your television.

This trend toward increased theme specificity is global in scope and appeal. Recently, Patrick Landman of GreenShoes Hospitality wrote an article titled, “How to Develop a Successful Hotel Concept.”  In his article, Landman writes that the “legacy form of segmentation was simple: business or pleasure. But, it’s not enough in this day and age. To be effective, it must go much further. Holistic, deep segmentation will go a long way towards informing your hotel concept.” Landman further discusses a hotel’s need to understand what makes it distinctive and combining a hotel’s best attributes to provide a unique experience and concept.

Developing a strong and focused theme will remain crucial to owners and hotels alike, to find ways to distinguish themselves from the increasing list of competitors in the industry. This trend appears to be only getting stronger as technology develops and globalization continues.

GT Guides Developer on Major ‘Six Senses’ Resort Planned in Northeastern Brazil

Posted in Firm News, Hotels

Global law firm Greenberg Traurig, LLP advised the developer of the Six Senses Formosa Bay Resort planned for Rio Grande Do Norte, Brazil. The firm acted as international hospitality counsel, in cooperation with Brazilian law firm Koury Lopes Advogados. 

The Formosa Bay Resort is to be managed by Six Senses, which operates resorts worldwide. According to the developer, an entity owned by international businessman Greg Hajdarowicz, the resort will be one of Six Senses’s first projects in South America. 

“This was a remarkable opportunity to work with one of Poland’s most prolific entrepreneurs on a unique ecological resort in an emerging tourist destination,” said Jaroslaw Grzesiak, managing partner of the law firm’s Warsaw office.

According to published plans, the resort will include 185 villas, 58 of which will include Six Senses residences, to be made available for private ownership. The seven kilometer long coastline on which the resort will be built is owned by the developer.

Continue Reading.

Case Law Update: The Potentially Alcoholic Member

Posted in Clubs, Court Cases

A recent decision from a Florida District Court of Appeal shows that dram shop cases against clubs are fact dependent and difficult to resolve by summary judgment without a trial. Gonzalez vs. Stoneybrook West Golf Club, 2017 WL 2988826 (Fla. 5th DCA July 14, 2017).

In Gonzalez, a car driver was killed in a car accident with a golf club’s member after the club member had consumed alcohol at the club.  The estate of the deceased driver sued the club for wrongful death pursuant to Florida’s reverse dram shop law.  Fla. Stat. § 768.125 (2014).  The reverse dram shop law provides that a vendor serving alcoholic beverages is not liable for damages resulting from a purchaser’s intoxication unless the vendor serves the purchaser knowing that he or she is habitually addicted to alcohol.  The District Court of Appeal reversed the trial court’s summary judgment order in favor of the club.  The court concluded that the plaintiff “offered sufficient evidence to raise a factual dispute not resolvable by summary judgment as to whether [the club member] was habitually addicted to alcohol and, if so, whether [the club] knew of his addiction.”  The evidence showed that the club member had played golf at the club approximately 70 to 80 times over a three year period and one of the club member’s playing partners testified that the club member was intoxicated virtually each time they played together.

The case illustrates the challenges a club faces in dealing with a member who drinks alcohol excessively on a regular basis.  The mere fact that the member drank excessively created a factual question as to whether the club knew that the member was habitually addicted to alcohol.

Case Law Update: Club Liability Release

Posted in Clubs, Court Cases

Clubs regularly require new members to sign liability releases, some of which are drafted quite broadly.   A recent decision from the New Jersey Appellate Division considered the enforceability of such a provision. Crossing-Lyons vs. Towns Sports International, N.J. Sup. Ct, App. Division (July 11, 2017).

In Crossing-Lyons, a fitness club member sued the club after sustaining a substantial hip injury as a result of tripping over a weight belt that a club trainer was alleged to have failed to remove.  The trial court dismissed the lawsuit pursuant to a summary judgment order based on the member having signed a liability release which included the following language:

[y]ou . . . agree that if you engage in any physical exercise or activity, or use any club amenity on the premises or off premises, including any sponsored club event, you do so entirely at your own risk[.] You agree that you are voluntarily participating in these activities and use of these facilities and premises and assume all risks of injury, illness or death[.]

The appellate court reversed the trial court.

The court held that the liability release was unenforceable because it was adverse to the public interest and unconscionable. The court noted that the club member was hurt tripping over a weight belt, not using the fitness equipment.  The court believed that the case was more like Walters vs. YMCA, a slip and fall case in which the court also reversed the trial court’s dismissal of the case, than Stelluti v. Casapenn Enterprises, a case where the club member was injured while participating in a spinning class at a private fitness center, which the court felt involved an inherent risk of injury.  This distinction suggests that the court might have found the liability release to be enforceable had the club member been injured while engaged in an inherently dangerous activity directly related to membership in the club.

Third Party Management for Hotel Lodging and Food and Beverage Services

Posted in Hotels, Management Agreement, Uncategorized

A sensitivity remaining from the recent “Great Recession” is that hotel owners are making a concerted effort to ensure that their hotel and all components of it are profitable.  This is something that is aspired to but not assured in a hotel management agreement.  To this end, many owners seek assistance in negotiating third party management agreements for their lodging and food and beverage services.  Typically, the compensation to the manager is split into two components: base fee and incentive fee.  The base fee compensates management for their ability to generate gross revenue.  It is the fee to keeping the doors open and the lights on and is generally calculated by taking a percentage of hotel gross revenues.  Most published sources benchmark the base fee percentage for hotel management typically from 2.5 percent of gross revenues to 4 percent of gross revenues.  Since the base fee is calculated on gross revenues, it is not an indication of profitability or how efficiently management runs the hotel. The ability for management to contain expenses and generate an operating profit is not addressed in the base fee.

The incentive fee has been characterized as the place to align the goals of hotel owners and managers.  While the structures of incentive fees vary widely, the idea behind them is to incentivize managers to conduct business efficiently and generate a profit for the owner.  Negotiations for incentive fees are often contentious, as there are a number of factors that can go into their calculation.  The basic structure of incentive fees is a percentage of gross operating profits (gross revenues minus certain operating expenses).  Average or “market” incentive fees are challenging to benchmark because they can vary in different segments of the business, such as luxury hotels as compared to full service upscale hotels, but it is often a percentage of gross operating profits, and often after the owner is paid an owner’s preferred return.  The goal of the owner is to use incentive fees to compel managers to manage operating expenses and have cash drop to owner’s bottom line.

Similar structures exist in the negotiation of third party food and beverage management agreements.  Hotel owners who wish to maintain control over the financial upside of having a restaurant, but want a third party with expertise in restaurant and/or lounge operations to handle those tasks will opt for a third-party operating agreement. Although it is common for the hotel operator to be the food and beverage operator, that is no longer assumed and Hotel manager run food and beverage services can coexist with third-party operated restaurants, lounges and roof top entertainment venues. Under food and beverage management agreements, the owner pays the manager a base fee calculated on gross food and beverage revenues. In most cases, the parties also negotiate incentive fees based on management achieving certain financial targets.  Contrary to the straight-lease scenario, these third-party management agreements offer hotel owners more control and earning potential (owners can receive all profits minus management fees), but they also force owners to assume additional responsibility and financial risk associated with the food and beverage operation.

Food and beverage management agreements are now as long and complex as the hotel management agreement, so the same degree of caution and care must be exercised in their structure and negotiation.

Playing Host

Posted in Brand Management, Hotels, Management Agreement

Hotel Management magazine recently noted that at the end of the day, it is the hotel management company that is really playing host to the guests as it executes the requirements of the brand and the desires of the owner.  But how does the hotel management company do this for the owner from the lawyer’s view?  The relationship of hotel owner and hotel manager is governed and memorialized in the hotel management agreement.  Hotel management agreements terms vary greatly depending on the circumstances of the project, who or what the owner is, the owner’s investment horizon and the size and sophistication of owner’s personnel.  There are management agreements with large international hotel management companies, third party managers that do not have their own brand, boutique and lifestyle managers, and regional and local hotel managers that often manage franchised hotels.  Even with the variations among hotel management agreements, there are common themes that should always be the focus of attention in the hotel owner and hotel manager conversation.

Managers, of every type, style and kind will begin the process and produce the initial forms of all operative documents.  The manager will deliver to the owner the form of management agreement that the manager has developed and refined over time based upon the manager’s cumulative experiences with many owners and any relevant judicial decisions and laws.  It is from this point that the owner will be negotiating.  It is a simple fact of hotel legal practice today that a mature, well-developed and robust hotel management company will begin the process with its documents and the preparation of the definitive agreements will proceed from there.  The hotel owner will be reacting to what the manager has drafted into its standard form documents, and not the other way around.  While we believe it is a best practice to involve the legal team in the negotiation of the owner’s letter of intent with the manager, because many points are won or lost at this early stage, the management agreement is the vehicle to clarify and revisit points an owner may have overlooked.

Owners and managers share a need to address all aspects of their relationship.  Here are some key elements to address, but each can be a minefield for the unknowing and require careful assessment as part of the conversation.

  • Term.
  • Management Fees.
    • Base Fees
    • Incentive Fee
    • Centralized Services Fee
    • Reservation Fee
    • Accounting Fee
    • Technology Fee
  • Owner’s Preferred Return based on the Owner’s Total Investment.
  • Termination-on-Sale or conversion to Franchise.
  • Performance Test Termination Rights.
  • Subordination, Non-Disturbance and Attornment with Lenders.
  • Labor and Employment.
  • Indemnification.
  • Radius Restriction or Area of Protection Restriction.
  • Budgets.
  • Cash Management.

By the very nature of the management agreement, the hotel owner puts its trust in the manager to provide a meaningful guest experience while preserving the value of the owner’s investment.  The challenge is in creating the appropriate legal framework for that to occur.