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.

Case Law Update: Covenant to Operate Golf Course

Posted in Clubs, Court Cases

Vista Golf v. Vista Royale Property Owners Ass’n, Florida 4th District Court of Appeals (May 13, 2015)

This was a case where an owner of a golf course that was subject to covenants to operate the golf course and keep it as a single parcel was seeking to nullify the covenants. Specifically, the golf course was subject to a covenant to continuously operate the property as a 27 hole golf course and a “unity of title” covenant that required the owner to hold, sell, or lease the property as a single parcel. The original developer placed the covenants on the golf course “for the purpose of enhancing and protecting the value, desirability and attractiveness of the condominium communities” that adjoined the golf course.

The trial court concluded that the golf course owner could not be affirmatively compelled to operate a golf course business. Interestingly, the property owners association did not appeal such ruling, and therefore, the appellate court did not discuss it. The trial court may not have wanted to enforce a covenant that might require the owner to raise capital and potentially lose money. Some courts are reluctant to enforce affirmative covenants that require the land owner to undertake an action compared to restrictive covenants that restrict a property owner from using the property in a certain way. See City of New York v. Dellafield 246 Corp., 662 N.Y.S.2d 286 (App. Div. 1997).

The trial court interpreted the covenant to operate the golf course instead as a restrictive covenant that prohibited the property from being used or operated as anything other than a 27 hole golf course. The District Court of Appeals affirmed the trial court interpretation, stating that it was the only reasonable interpretation. The court explained that when one interpretation of a contract is absurd and another reasonable, the contract should be interpreted in the reasonable manner.

The trial court nullified the unity of title covenant that required the land to be held as a single parcel. The District Court of Appeals affirmed on the basis that the covenant was an unreasonable restraint on the alienation of the property.

Although one who takes title to a golf course that is subject to a covenant to operate may find a court reluctant to enforce the covenant, this court decision suggests that the golf course owner should not assume that the court will ignore it and as such, the owner may not be able to convert the course to another use. However, the court’s decision to nullify the unity of title covenant may suggest that a court would not object to the owner reconfiguring the golf course so as to develop a small piece of it.

Nevada Gaming Regulators Begin Overseeing Las Vegas Nightclubs and Dayclubs

Posted in Casinos, Clubs, Nevada

The nightclub and dayclub industry has become big business for casinos along the Las Vegas Strip. State gaming regulators are now requiring resort operators to take a more stringent approach in monitoring activity inside club venues. These new regulations came out of the 2015 Nevada Legislative session and were approved by the Nevada Gaming Commission.

Under the new regulations, casinos will designate an employee to oversee and monitor the clubs. That employee must be licensed under state gaming regulations as a key employee. Also, promoters and independent hosts for the clubs will have to file written agreements and register with the Nevada Gaming Control Board.

Clubs are a big draw for Las Vegas tourists, particularly the younger customer base that spends time on the Strip enjoying the many lucrative non-gaming entertainment attractions, rather than gambling. According to the Nevada Gaming Control Board, more than 60 percent of the total revenue generated by Las Vegas resorts last year came from non-gaming sources, such as hotel rooms, shopping venues, restaurants, entertainment attractions, and clubs.

Other U.S. jurisdictions and tribal gaming markets are beginning to mirror Las Vegas’s push to add non-gaming attractions. Other gaming regulatory bodies may elect to adopt club venue regulations like Nevada’s.

The club venue regulations identify certain acts as unsuitable methods of operation and expand the requirements for reporting criminal violations. The clubs are also required to file annual reports on their activities.

Additionally, the club venue regulations impose a new registration requirement upon all club venue supervisors, managers, security and surveillance personnel, servers, server assistants, bussers, restroom attendants, and anyone employed or contracted to offer hosting or VIP services.

Security and safety requirements are also included. Operators must assess their calendars on a regular basis to consider the impact on attendance and determine the appropriate number of security personnel needed for an event.

Clubs must also abide by certain requirements for emergency medical support depending on the anticipated size of their events.

Nevada Gaming Commission Chairman Tony Alamo Jr. said the clubs have been good for the gaming industry, providing an economic “shot in the arm.” However, he also said that the clubs need to be controlled and regulated. “I believe these regulation changes do what we set out to do,” Chairman Alamo said.


Fore more information on the regulation of casinos and nightclubs in Las Vegas, please subscribe to this blog or see our Gaming blog, “Covering the Spread.”

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)

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)

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.