News for the Hospitality Executive
Hotel Lawyer on Hotel Management Agreements:
By Jim Butler and the Global Hospitality Group®,
Author of www.HotelLawBlog.com
February 25, 2011
For the most
recent update on this topic, click
message about liability to hotel investors acquiring hotel assets and
owners renegotiating agreements with their operators:
operator has most likely included indemnification provisions in the
Management Agreement (HMA) designed to limit their liability for
hotel. On your operator's draft of the HMA, it's a good bet that a
limiting YOUR liability does not exist in the agreement.
you think the liability limitations should be mutual? Here's how to do
Protecting the Owner's Assets
Robert E. Braun
| Hotel Lawyer, JMBM Global Hospitality
article briefly reviews the need for hotel owners to include a
hotel management agreements limiting the liability of the owner to its
in the hotel property. This kind of provision is commonly referred to
"exculpation clause," because it exonerates someone from blame or
liability. While this is, in many ways, basic "blocking and
tackling," it is important to remember as acquisitions in the hotel
increase and as owners renegotiate agreements with brands and
you like the idea of belt and suspenders in any part of your financial
or business life, please note that you will never see an exculpation
a draft hotel management agreement (HMA) from a hotel management
fact we have not seen them in very many HMAs drafted by others.
take a chance?
the hotel owner's liabilities under the HMA
hotels are owned in a special purpose limited liability company or
designed to facilitate financing, but also to limit liability to the
the hotel and its related business. Sometimes operators will seek
guarantees of individual owners or investors to stand behind the
ownership entity's promises in the HMA, but most owners won't consider
And if there is any kind of reasonable equity investment in the
appropriate insurance, personal guarantees should be out of the
on liability in hotel management agreements
the past several years, many hotel managers have gotten more aggressive
limiting their liability for operating hotels. These limitations
indemnification provisions that typically require the owner to
operator for all losses or damages arising out of the hotel, unless it
caused by the operator's gross negligence, willful misconduct, or
acts. In other words, they are indemnified for their negligence.
brands have also added limitations on claims to a fixed amount (such as
the basic management fee), or "actual damages," preventing the owner
from making any claim for punitive damages or other "extraordinary"
clauses are designed to protect operators, but rarely does the
of the HMA contain any protections for owner. We have almost always
successful in making the limitations mutual, and, in addition, we have
successfully demanded protection for our owner clients from unwarranted
liabilities through an Exculpation Clause.
does the Owner's Exculpation Clause look like?
each situation is different, a typical exculpation clause looks like
Notwithstanding any other provision of
this Agreement to
the contrary, the liability of Owner arising out of or in connection
Agreement and the transactions and obligations contemplated hereby
shall at all
times be limited to the interest of Owner in the Hotel, and in any
or any other dispute, neither Manager nor any other party shall seek or
recourse to any other asset of Owner or to Owner's partners, members,
associates, agents, executives or Affiliates. Without limiting the
neither Owner nor any party associated with Owner shall have any
excess of Owner's interest in the Hotel for any act by Owner, including
liability for the gross negligence, willful misconduct (either prior to
during term of or after the expiration or earlier termination of this
Agreement) or breach of this Agreement by Owner.
does the Exculpation Clause Do?
purpose of the exculpation clause is to ensure that the owner's
the Manager and any other entity making a claim under the management
is limited to the owner's interest in the hotel property itself. The
extends this protection not just to the owner, but to its principals
affiliates, and covers not just direct claims under the management
but any claim arising out of the management of the hotel. The
important and meaningful - owners build or buy an expensive asset and
significant sums in its equity. A manager should be satisfied that the
substantial equity investment is adequate to secure performance by the
an Exculpation Clause?
generally possible to negotiate with a manager so that the limitations
damages are mutual - that is, both the owner and the manager are
their claims. Moreover, hotels are typically held in single purpose
which limits their liability. Why is it preferable to include an
are several answers, the key issue is that holding an asset in a
entity, and limiting damages and causes of action, does not prevent a
or another party from "piercing the corporate veil" and pursuing
claims against the principals of the owner. This is particularly the
because the clause should include not just contract actions, but other
which are more easily brought against the principals of the owner.
should also be aware that the asymmetry of the owner-manager
militates toward ensuring, through all possible means, that the owner
protected. The owner should not lose sight of the fact that claims by
against a manager may be difficult to prove. They often depend on
measurements of quality, and often relate to matters where the manager
leverage. The manager, on the other hand, typically seeks monetary
based on fee calculations, which are transparent (particularly where
manager has been keeping the books)! Strictly defining the owner's
liability is, therefore, key to helping balance the relationship.
is Jim Butler, author of www.HotelLawBlog.com
and hotel lawyer, signing off. We've done more than $60 billion of
transactions and have developed innovative solutions to unlock value
troubled hotel transactions. Who's your hotel lawyer?
Our Perspective. We represent hotel lenders, owners and investors. We have helped our clients find business and legal solutions for more than $60 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at [email protected] or 310.201.3526.
Jim Butler is a founding partner of JMBM and Chairman of its Global Hospitality Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE "hotel lawyer" and you will see why.
JMBM's troubled asset team has handled more than 1,000 receiverships and many complex insolvency issues. But Jim and his team are more than "just" great hotel lawyers. They are also hospitality consultants and business advisors. For example, they have developed some unique proprietary approaches to unlock value in underwater hotels that can benefit lenders, borrowers and investors. (GOOGLE "JMBM SAVE® program".)
Whether it is a troubled investment or new transaction, JMBM's Global Hospitality Group® creates legal and business solutions for hotel owners and lenders. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.
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