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How to Terminate a Hotel Management Agreement
When an Operator Really Deserves It
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By Jim Butler, Hotel Lawyer | Author of www.HotelLawBlog.com
5 February 2008

The love-hate relationship between hotel owners and operators is as old as the institution of hotel management arrangements (going back to the 1970s). A good hotel operator can add up to 25% to the value of a hotel. A bad one can subtract the same amount or even more. In 20 years of focusing on the hotel industry, and specializing in representing hotel owners, developers and lenders in more than $50 billion of hotel transactions involving more than 1,000 hotels around the world, we have seen a lot of eager owners anxious to sign up with a big hotel brand, thinking that was the end of their worries. Often it is.

Often it is NOT. . .

But hotel owners don't come to hotel lawyers to tell them how happy they are with a hotel operator. They either come to hotel lawyers to get help in signing up a hotel operator, or to complain about the unbearable financial pain caused by the incompetence, dishonesty and arrogance of their hotel operator. Sometimes the complaints are well-grounded and justify the termination of the long-term hotel management agreement, and perhaps even millions of dollars of compensatory and punitive damages. ( See: A Jury Verdict Rules Marriott/Ritz-Carlton Breached Contractual and Fiduciary Duties with Owner of the The Ritz-Carlton Bali).

How is it possible to terminate a hotel management agreement -- particularly one that purports to be a 30- or 50-year "no cut" management contract? Here at www.HotelLawBlog.com we have a few ideas . . .

Let's take a look at a few possibilities.

OUR PERSPECTIVE

We are not "hotel operator bashers." This is a very small industry. We know and work with all the operators -- branded and independent -- and they are an invaluable part of the puzzle of successful hotel operation in most cases. We have had operators who only half-jokingly called us one of their most effective development offices. We have never failed to get a deal done for a client that wanted it done -- after the client understood the likely effects.

But JMBM's Global Hospitality Group® is not likely to be the first referral from many of the brands, because we don't lay down for the referring source, and we take our duty to protect our client seriously. We flourish on referrals from satisfied clients and consultants who appreciate the substantial value we can help create in a hotel management agreement. 

Nonetheless, we are proud to say that we represent hotel owners, hotel developers and hotel lenders. We do NOT represent ANY of the major hotel brands (Marriott, Hilton, Starwood, InterContinental, Hyatt, Mandarin, Carlson or the others), because we made a conscious decision many years ago to serve the interests of hotel owners, hotel developers and hotel lenders. That decision has made it possible for us to advocate our clients' interest without compromise. 

We have negotiated, re-negotiated, litigated and advised on many hundreds of management agreements -- possibly more than a thousand. In fact, we have more experience with more operators on more transactions than many representatives of the hotel companies themselves.

We know the hospitality industry's players, norms, customs and practices. We are part of the fabric of the industry. We act as consultants and advisors to help owners, developers and lenders get the right business terms on their projects, because we start with strategies, checklists, deal terms, approaches and documents that are specifically built from the ground up for hotel projects.

HOW TO TERMINATE A HOTEL MANAGEMENT AGREEMENT

Q: So why would JMBM's Global Hospitality Group®, as an integral part of the hospitality industry, ever take on the operators to terminate a hotel management agreement? 

A: Because SOMETIMES they deserve it., Our clients do what all business owners do when their contractual agreements are broken -- they call their lawyers. And we are hotel lawyers that represent the interests of owners, developers and lenders. We have no conflicts taking on the brands. That is really how we started our practice in the late 1980s -- breaking long-term no-cut hotel mangement agreements.

Q: How do you terminate a long-term, no-cut hotel management contract?

A: Terminating a long-term, no-cut hotel management contract is very difficult, but not impossible in the right circumstances. There are no "silver bullets" but there are a number of technical legal tools that may be available in the appropriate situation.

Q: So exactly how do you terminate a hotel management agreement? What are these tools?

A: The answer to that question is complex. It is best answered by describing some of the critical tools in the tool chest -- by laying some foundations, and building upon those. 

WHAT ARE THE LEGAL TOOLS FOR TERMINATING A HOTEL MANAGEMENT AGREEMENT?

The critical starting point requries you to understand two things:

(a) it is possible to terminate a long-term, no-cut hotel management agreement (see the success story of our long-suffering client, the owner of the Ritz-Carlton Bali), 

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(b) a few basic pieces of information, like understanding that a hotel operator is an "agent" of the owner in most cases. For this, please see the JMBM article published in February 2000 about Sheraton's actions on a large hotel in Washington DC. Appeals subsequent to the article changed the damages but not the underlying legal principles. 

About the Author
Jim Butler is one of the top hotel lawyers in the world. GOOGLE "hotel lawyer" or "hotel mixed-use" or "condo hotel lawyer" and you will see why. Jim devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM's Global Hospitality Group® -- a team of 50 seasoned professionals with more than $40 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. In the last 5 years alone, Jim and his team have assisted clients with more than 100 hotel mixed-use projects, all of which have involved at least some residential, and many have also involved significant spa, restaurant, retail, office, sports, and entertainment components -- frequently integrated with energizing lifestyle elements. Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right "fit" for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done. Jim is frequently quoted as an expert on hotel issues by national and industry publications such as The New York Times, The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel Business. A frequent author and speaker, Jim's books, articles and many expert panel presentations cover topics reflecting his practice, including hotel and hotel-mixed-use investment and development, negotiating, re-negotiating or terminating hotel management agreements, acquisition and sale of hospitality properties, hotel finance, complex joint venture and entity structure matters, workouts, as well as many operating and strategic issues. Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm's Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at jbutler@jmbm.com or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.

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Contact:

Jim Butler
Chairman, Global Hospitality Group
Jeffer, Mangels, Butler & Marmaro LLP
1900 Avenue of the Stars, 7th Floor
Los Angeles, CA 90067-4308
(310) 201-3526 direct
jbutler@jmbm.com
www.HotelLawBlog.com 
 

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Also See: Owners of Westin Innisbrook Golf Resort Terminate Management Agreement with Westin; Wants to Operate Resort as an Independent and Unlock Potential of the Innisbrook Brand / October 2006
Thunder over Woodley Road - A first jury verdict focusing on the consequences for a hotel operator failing to meet its fiduciary duties to the hotel's owner / Jim Butler and Jeff Riffer / JMBM / Feb 1999
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