News for the Hospitality Executive
|By Albert J.
Using a Letter of Intent (“LOI”) Instead of a Bullet-Point Term Sheet – Be Sure to be Clear Abount the Legal Effects of an LOI
Is an LOI legally binding? The general rule: look to the language of the LOI to determine if the parties intend to be bound to all or some portions of the LOI. Most litigation regarding the enforceability of LOIs arises because the parties did not clearly reflect their intention concerning enforceability. This is particularly so if the LOI contains the material provisions of a contemplated transaction and there is no unequivocal expression of the intent of the parties to the contrary. Yet in the hotel management agreement context, the LOI is useful and worth the effort, time and risk precisely because it is a way to conclude the negotiation of the material terms of the agreement prior to launching into the tedious and often protracted negotiation – mainly between lawyers – of the text of the definitive agreements. In the international context, the “management agreement” can consist of five or more separate agreements. It is almost always more efficient to ascertain if there is a meeting of the minds on the material (“key”) business terms first.
Notwithstanding a finding that a LOI does not constitute a contract, courts may impose a “good faith duty of negotiation”. These states are California, New York, Illinois, Maryland and Massachusetts. In other jurisdictions, no such right is recognized and is expressly excluded. They are Tennessee, Kentucky, Texas and Washington.
New York case law has also given us “Type I” (binding) and “Type II” (non-binding) LOIs. The United States Court of Appeals for the Second Circuit in a treatise-like opinion, explored the development of these two types of LOIs applying New York law in the case of Vacold LLC v. Cerami (545 F.3d 114 (2008))
For more on the subject of enforceability, please refer to:
“Term Sheets and Letters of Intent – The Contractual Ether World” presented by Alston & Bird LLP (333 South Hope Street, Los Angeles, CA 90071) at the Association of American Corporate Counsel meeting on October 15, 2008.
To make it more likely that a court will not construe the LOI as binding (except in respect of those few provisions that the parties intend to make binding), consider explicit disclaimers that include:
In addition, do not use contractual language, particularly the verb “shall” when expressions such as “may”, “intend to” and “would” can be used instead
Settle the Key Terms
These are terms that generally are the basis for negotiation of the typical Management Agreement and the time to identify and settle them is now. If addressed later, these issues, or any one of them, have the potential to be “show stoppers”. Generally confronting key issues in the midst of negotiating the definitive agreements can be expensive or can impose pressure upon a party to “cave” on the point “at this late stage and after all the expenses we have incurred”. Consequently, it is at this stage that the parties must identify for themselves the terms they insist upon. How the terms are phrased will dictate later how they are rendered in the definitive agreements. The alternative of having a term sheet with a few bullet points – “kicking the can down the road” – usually is not a good strategy.
What are the Key Terms for a Typical Hotel Management Agreement?
Identification of the Parties (Can be an issue on the Developer’s side)
Description of the “Hotel” or the “Project”
Where residences are involved that are branded and managed by Manager when they are included in the “Hotel” pursuant to a Rental Program, a branding fee will be paid to Manager. In addition, the Manager will benefit from the inclusion of the rental revenue from the residences in the Hotel’s Gross Revenue and typically insists that 100% of the rental revenue be so included and then the unit owner’s share of the rent (say 30-40%) is paid. Hotel Gross revenue is further enhanced by the provision of Hotel amenities, such as room service and maid service, to the residences even when they are occupied by the unit owner. These arrangements will vary depending upon the physical configuration and the perceived uplift in value attributable to the brand. The key terms should be included in the LOI.
The Developer’s /Owner’s Financing Terms
There are many variations that are the ‘stuff’ of hard negotiation
Restricted Area / Radius Restriction
Budget Approval by Manager
Employees: Who is the Employer?
Hiring and Firing Key Personnel
Insurance Types (except property) and Levels Will generally be specified by Manager and both Manager and Owner will be named insureds. This eliminates a right of subrogation.
Dealing with these key provisions at the LOI stage is
essential to knowing whether or not you have a deal. It is better to
know this prior to all the sturm and drang among the lawyers over the
definitive agreements. No point in kicking the can down the road only
to find out that in addition to the loss of time and incurring of legal
fees from the negotiation of the definitive agreements, there is no
Albert J. Pucciarelli is a Partner and Chair of the Hotels and Resorts Practice Group for McElroy, Deutsch, Mulvaney & Carpenter. He is admitted to practice law in New York and New Jersey. His practice is concentrated in the areas of hotel and resort development and operations, aviation law, general corporate law and real estate law.
From 1988 through 1998, he was Executive Vice President, General Counsel and Secretary of Inter-Continental Hotels with over 200 hotels in 70 countries. He served on the Board of Directors of Inter-Continental and was chair of the company’s Life Safety and Security Committee and a member of the Development Committee and the Pension and Benefits Committee. Prior to joining Inter-Continental, Mr. Pucciarelli served as Vice President and Counsel to Grand Metropolitan (U.S.) and its publicaly owned (NYSE) predecessor, Liggett Group, Inc.
He has served as Chair of the Hotels, Restaurants and Tourism Committee of the Association of the Bar of the City of New York (2001-2004) and as the Chair of the Aeronautics Law Committee of the Bar of the City of New York (1998-2001). He is a director and President of the Hospitality Industry Bar Association. He has taught International Business Law as an adjunct professor at the Fordham University Graduate School of Business, and was a member of that school’s Advisory Board (1996-2004). He is a Director of Skytop Lodge in Skytop, Pennsylvania and a consulting member of Cayuga Hospitality Advisors.
Mr. Pucciarelli is fluent in Russian. He is an instrument-rated commercial pilot, an FAA certified advanced ground instructor and an aircraft owner. He serves his local community as Councilman and Deputy Mayor of the Village of Ridgewood, New Jersey. He is also a member of the Ridegwood Planning Board on which he has served for twelve years. Until 1998, he was Vice Chairman of the Ridgewood Zoning Board of Adjustment on which he served for ten years. He was a Director of the Ridgewood Library Foundation from 2002 to 2010.
Mr. Pucciarelli’s clients include the owners and developers of Marriott, Courtyard, Ritz-Carlton, Fairmont, Mandarin-Oriental, Park Hyatt, Andaz, St. Regis, Westin, Crown Plaza and Indigo hotel and resort projects, various hotel management companies and several closely held companies in a variety of businesses, including hotels and restaurants, pre-schools and the second largest dealer of Cessna aircraft in the U.S. He also has been selected as an arbitrator in major commercial disputes.
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