Franchisees of Hampton Inn and Hampton Inn and Suites take note. The 2002 version of the Franchise License Agreement is filled with pitfalls for the unwary. This article is intended to enhance your understanding of the Agreement and to point out the most potentially abusive and inequitable provisions.

1. Your Responsibilities

Paragraph after paragraph of the Franchise Agreement refers to your obligation to comply with the �System� and the �Manual.� However, Promus Hotels, Inc. (a subsidiary of Hilton Hotels Corporation � which Hilton authorizes to license the Hampton Brands � hereafter referred to as �Promus� or the �franchisor�) reserves the right to �add elements to the System or modify, alter or delete elements of the System at [its] sole discretion.� Promus also reserves the right to �change the Manual from time to time.� Further, you are �responsible for the costs of complying with the Manual, including any changes.�

What this means is that your Franchise Agreement is a moving target. Your obligations may change as Promus unilaterally implements changes to the �System� or the �Manual.� The following paragraphs extracted from Section 6 of the Agreement reflect your slippery and shifting obligations:
 

In other words, you may be required to purchase and install new computer and technology systems, to remodel your entire property and to replace your fixtures, furnishings, furniture, etc., if Promus decides to change its �Manual� or �System� requiring such transformation.

This does not mean to suggest that Hotel Quality Assurance is not important.
Certainly, it is critical to the Hampton brand and to the entire franchise system
that each property in the system maintain a modern, attractive and uniform appearance. However, the franchise agreement places all of the discretion in the hands of the franchisor to implement unlimited changes without any regard for the resulting financial impact to the franchisee.

2. Your Fees May Be Unilaterally Increased by Promus Up to Nine Percent (9%)

Under Section 7(a) of the franchise agreement, you are obligated to pay a monthly fee of four percent (4%) of your Gross Room Revenue to Promus.  However, this fee is subject to increase by Promus to as much as nine percent (9%). Promus may change this fee by simply revising the Manual to reflect an increase and you will be bound to pay the increase. Such fees will not increase more than one percent (1%) per year, or more than an additional five percent (5%) over the term of your Agreement.

3.  All Of Your Business And Financial Information Shared With Promus Becomes the Property of Promus And May Be Used For Any Purpose

You are required to regularly provide financial reports and other information about your business. Promus will not maintain the confidentiality of such information. To the contrary, Promus states in Section 8(d) that
 

Under this provision, Promus could determine, based on financial informa-tion and customer data provided to it by you, that your occupancy rates and financial results warrant the placement of a competitive Hilton family brand in the vicinity of your property. Under the Agreement, you would have no recourse.

4.  Your Ability To Sell Your Franchise Is Highly Restricted

Over five (5) pages of the single-spaced Franchise Agreement are devoted to the issue of the transfer or sale of the franchise. Your ability to transfer or sell your
franchise is much more restricted than is typical for a franchiseship. It is ordinary in all franchise relationships for the franchisor to condition a transfer or sale on the buyer satisfying the franchisor�s established criteria for approval. However, usually the franchisee is free to negotiate the sale of the franchise at any price a buyer is willing to accept subject to the franchisor�s approval of the sale.

Pursuant to Section 10 of your Agreement, you may not even attempt to put your
franchise up for sale without the prior authorization of Promus. Before attempting
to sell or transfer the franchise, you must provide Promus with an �Offer Notice�
advising Promus of � your intended sales price and all terms and conditions of the proposed sale or lease...� You may not pursue any further sales efforts for as much as sixty (60) days while Promus decides whether to make its own offer to purchase
your franchise.

During this sixty (60) day period, Promus may elect to make its own offer to purchase your franchise. If Promus makes an offer at the price in your �Offer Notice� you must accept it. If you reject a lesser offer from Promus, or if Promus fails to make an offer during the initial sixty (60) day period, you then have a one hundred eighty (180) day period, defined in the Agreement as the �Marketing Period,� to attempt to sell the franchise. However, you are restricted to selling the franchise for
no less than 95% of the amount set forth in the �Offer Notice.�

If you desire to sell the franchise for a price less than 95% of the amount set forth in the �Offer Notice� you must first issue a new �Offer Notice� to Promus for the reduced price. This starts the entire process over again, including Promus� sixty (60) day waiting period to evaluate whether it wishes to make its own offer.

If you are successful in working your way through this process and finding a purchaser, you then must comply with the �Change of Ownership� requirements of Section 11(b) of the Franchise Agreement. Your purchaser must first submit an application along with the �then prevailing application fee� to Promus. The purchaser may also be required to
 

Thereafter, the �Change of Ownership Application� will be processed by Promus �in accordance with [its] then current procedures...� This approval process, which can be changed at any time by Promus, may consist of any of the ten (10) conditions listed in this section , including a requirement of:
 

This extremely vague provision exemplifies the unknown and ever changing requirements that you may be required to satisfy in an effort to sell your franchise. In short, the onerous and indefinite sales restrictions set forth in the Agreement allows Promus to control every aspect of the sales process. Such restrictions may substantially diminish your ability to sell your franchise for fair market value.

5.  This Provision Could Wipe Out Your Investment In Your Franchise With One Default

Section 14 contains several potentially devastating provisions. For example, Section 14 a.(1) states as follows:
 

Under this provision, a violation of the ever-changing Manual,or a violation of any other agreement you have with Promus relating to the Hotel will constitute a default of your Franchise Agreement. This means that any asserted default by Promus, relating to the Manual,or under any agreement you have with Promus, must be taken seriously and immediately addressed by you to avoid the loss of your franchise rights.

Section 14 b. (1) of the Agreement is equally dangerous. It provides as follows:
 

Under this provision, any two (2) similar violations of either the Manual or the Franchise Agreement within any twenty four (24) month period, �regardless of [the] materiality� of the default and regardless of whether the default is immediately corrected after notice, may result in the immediate termination of your franchise rights.

This means that your franchise rights could be immediately terminated over even a trivial but recurring issue. This provision could be easily exploited and result in the immediate loss of your franchise rights.

6. Punishing Exit Penalties

If the Franchise Agreement is terminated by Promus as a result of your default, you will be required to pay a lump sum,or �Termination Fee,� equivalent to three (3) years worth of �Monthly Royalty Fees� and �Monthly Program Fees.� (See Section 14(c) of your Franchise Agreement.) Taking this provision together with the other provisions of Section 14 discussed above, it is conceivable that your franchise rights could be terminated over a minor dispute and you could suddenly be faced with a bill for payment of three (3) years of fees in advance even though you are without a franchise to generate any revenues. Unlikely? We would hope so. But under the Franchise Agreement such an outcome is author-zed and therefore quite possible.

7.  Own More Than One (1) Franchise And Triple Your Risk

Under Section 14(e) of the Franchise Agreement � entitled �Special Termination� � if you own two (2) or more franchise license agreements with Promus or any other Hilton brand, and two (2) or more such agreements are terminated by Promus as a result of a default by you within a twelve (12) month period, you will be required to pay Promus a lump sum, or �Special Termination Fee,� of triple the amount of the �Termination Fee� (discussed above) for each franchise. Such amount is equivalent to nine (9) years worth of �Monthly Royalty Fees� and �Monthly Program Fees� for
each terminated franchise.

8.  Any Dispute Must Be Resolved in New York City And You Waive Certain Rights in Advance

Under Section 16(b) of the Franchise Agreement, in the event of a dis-pute with the Franchisor, any litigation must take place in New York City.  Additionally, under Section 16(e) you waive, in advance, �any claim for money damages� against Promus for unreasonably withholding or delaying its �consent or approval to a proposed act by you under the terms of [the] Agreement.� Finally, you waive your right to a jury trial under Section 17 of the Agreement. Such provisions are designed to make litigation expensive for you and to limit your potential recovery.

9.  Avoiding Problems And Protecting Your Investment

As discussed above, the Promus Franchise Agreement contains many treacherous provisions. Your first line of defense is to have a thorough understanding of your obligations under the Agreement and to be certain to fulfill all such obligations. Any questions should be addressed with experienced franchise counsel.

Any revisions to the Manual established by Promus must be carefully reviewed by you to ensure your property�s compliance. If any problems or defaults are asserted by Promus with respect to your property, it is imperative that you immediately correct such problems and document such corrections in writing. You should also immediately consult with experienced franchise counsel who can instruct you on the best way to document the corrections and assist you in drafting appropriate letters and taking other necessary steps to protect your investment.

In the event that you seek to sell your franchise you should consult with experienced franchise counsel to navigate the complicated sale and transfer requirements of the Agreement. Likewise, if you desire to exit the franchise system you should work with counsel to develop an appropriate exit strategy designed to avoid the punishing exit penalties or other problems which may arise from a default or improper termination by you.