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Terminating Hotel Management Agreements Without Liability


By Jim Butler, April 2008

How do you terminate a long-term hotel management agreement(HMA)? 

It's no secret. The right management agreement can add a lot of value to a property. But in times like these, a long-term, no cut, hotel management agreement can be a big "encumbrance" on value. In fact, we have seen a number of real-life situations where hotel is worth up to TWICE as much without the branded hotel management agreement.

Doubling the value of the hotel by terminating the management agreement?

Not every hotel will double in value by terminating its branded management agreement, but some will. One reason is that over the past 25 years, more than 80 percent of the buyers for hotels costing more than $10 million are either competing hotel companies or a joint ventures of a hotel company and a capital source. If the branded management agreement cannot be terminated, then the seller loses 80 percent of the potential buyers of the property. 

The SNDA or Subordination, Non Disturbance and Attornment 

No wonder that owners and lenders alike want to understand more about termination options for long-term hotel management agreements (or HMAs). Of course, most of the branded HMAs came along with Subordination, Non Disturbance and Attornment Agreements (SNDAs). These are the troublesome agreements which bind lenders to honor the terms of the branded management agreement if the lender should ever become the owner of the property, or property should be sold by or through the lender, whether by foreclosure, deed-in-lieu of foreclosure, bankruptcy, or otherwise.

So here are some answers to the most common questions being asked today.

Hotel management agreements can be terminated
without liability in the right circumstances.

Q: Is it true that you guys got into the hospitality business by breaking long-term, no cut, management agreements? 

"Yes. In the late 1980s, we combined an extensive banking, securities, and real estate expertise with the street knowledge of a hotel partner who had done more than 200 hotel deals. All the brands already had their lawyers. We were primarily representing lenders and owners suffering great pain in the late 1980s and early 1990s. 

When we started doing this, terminating these long-term hotel management agreements was virtually unheard of, and the hotel industry was an "old boys" network. The brands wielded incredible authority. It just didn't look right or seem fair to me, and we saw an opportunity to really help our lender and owner clients. The best place for us was to go against the brands. And we did! We have been there ever since."

Q: But let's cut to the chase. Most branded hotel management agreements typically run for 20, 30, 50 years or more, with unilateral options by the brand to extend for additional 10- or 20- year terms. Are you saying that you have terminated these agreements? 
"Yes. "
Q: Even when there is an SNDA -- a Subordination Non-Disturbance and Attornment agreement? 
"Yes. "
Q: How do you terminate a branded hotel management agreement, with an SNDA, without liability to owner or lender? 
"First, termination is not always the right answer. Often, simple discussions or renegotiation of the management agreement are more appropriate. Who wants to re-brand, unless it's really necessary? 

Second, you really have to look at each individual client's goals. Again, termination is often not the answer. But one does need to recognize the available options in making intelligent decisions. Sometimes, you just can't get the brand's attention or cooperation, and termination is the answer.

We like to think that we help clients identify and evaluate the options and select the right one. This is the benefit of understanding hotels from a business standpoint in addition to a thorough understanding of the legal issues."

Q: Okay. But sometimes termination will be the answer. How do you do it? 
"There are at least three ways to terminate a long-term, no cut, hotel management agreement -- other than pursuant to express terms (e.g. by expiration of term, termination on sale, termination windows or options, and the like). 

In general, they are as follows:

  1. Talk to the operator and see if they will walk away as a matter of honor, or fairness, or possibly a trade-off of value. 
  2. Terminate the hotel management agreement for breach of contract or breach of fiduciary duty. These are subjects far deeper than one might initially suspect, and really are the subject of a whole different discussion. We specialize in evaluating situations in these areas, and have written many articles on these subjects over the past decade. 
  3. Terminate the hotel management agreement by "rejection" in owner's bankruptcy. A management agreement will almost always be an "executory contract" as defined in the bankruptcy laws. Such contracts can be rejected, as a matter of law, in bankruptcy by a borrower, and on rejection, the injured party (i.e. the management company) becomes an unsecured creditor in the bankruptcy. Where the value of an asset is less than the amount of the senior encumbrance, the hotel operator stands in line with all the other unsecured creditors and receives nothing or whatever amount is negotiated to facilitate the bankruptcy. By this process, potentially tens of millions or hundreds of millions of dollars of damages are converted to nothing or pennies on the dollar. "
Q: So it's really that simple? A borrower rejects a hotel management agreement in bankruptcy and sheds the management agreement for free? 
"That is an oversimplification, but it is the basic approach. There can be a lot of complications and questions, and you need someone who's been through this before to run the traps for you, or you can get tangled up. 

A borrower can reject a hotel management agreement as an executory contract without liability, and the lender will not be bound by the SNDA -- at least if the asset is sold through a bankruptcy, or a prepackaged bankruptcy. This can add tremendous value to an asset for both the borrower and the lender. "

Q: In other words, the borrower and the lender recover substantial value for the hotel asset that has otherwise been sucked out of the asset by the operator through the long-term, no cut, management agreement? 
"Yes. I am sure that operators would like to put it another way, but much of the suppressed value is recovered by the borrower (and, indirectly, the lender) when a long-term hotel management agreement is terminated. "

Q: So why doesn't every hotel borrower and lender take the option to terminate the long-term agreement? 

"As I said, termination is not the right answer in every case. It is always preferable to discuss the options and problems with the hotel operator to see if a business solution can be reached. But it is important to know your options. Hotel operators can be tough and don't usually tell you what your other options are. 

The bankruptcy rejection solution also requires that the hotel be "underwater" -- the value of the hotel is less than the value of the senior debt. Otherwise, the unsecured damage claim of the hotel operator for breach of contract will come out of somebody's pocket. So this resolution is generally reserved for cases where hotel is severely underwater.

And in these cases, one tries to avoid the bankruptcy trump card, if possible. In other words, it is preferable to arrive at the end solution without going through the "bankruptcy process" if possible. Sometimes, when checkmate is obvious in three moves, operators may accommodate the result without going through the process of all the plays to get the checkmate. "

As economic pain in the hospitality industry drives deeper and deeper, more owners and lenders will look to parties to share their pain. An obvious party that usually is "above the fray" is a branded hotel operator, hotel brand, or union. All are susceptible to rejection of their executory contracts in bankruptcy along the lines discussed above.

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.  He 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, they have brought their practical advice to more than 80 “hotel-enhanced mixed-use” projects, a term Jim coined to fill a void in industry lexicon.  This term describes one of the hottest developments in real estate-where hotels work together with shopping center, residential, office, retail, spa and sports facility components to mutually enhance the entire project’s excitement and success. 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 the author of the Hotel Law Blog,  He can be reached at +1 310.201.3526 or


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

Also See: A Jury Verdict Rules Marriott/Ritz-Carlton Breached Contractual and Fiduciary Duties with Owner of the The Ritz-Carlton Bali / February 2008



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