“Balancing the Business and Legal Issues: Key Provisions in Hotel Contracts”

Looking for check-in information. Young handsome businessman in classical blue suit looks at his tablet device standing just in front of the hotel reception desk where young receptionists welcomes him with a smileBy:  Barbara F. Dunn, Esq.

Regardless of whether it is a “seller’s market” or a “buyer’s market”, negotiating hotel contracts for meetings and events these days is not an easy task. Planners and suppliers must  balance  their  legal  requirements  within  the  confines  of  the business climate.  As a lawyer who represents all types of groups negotiating their hotel contracts, I am frequently asked what provisions are essential to include in a hotel contract. So here’s a summary of key provisions in hotel contracts and the corresponding tips and best practices.

Room Block

Among the first items in a hotel contract is the room block. It is there that I pose my typical question to the meeting professionals I begin my review of a hotel contract, the typical question is how comfortable the meeting professional feels with their room block.  Is it based on history from previous year’s meetings? Or is it a guess because this is a new meeting and event?  Regardless, my recommendation to meeting professionals is to book ultra-conservatively.  Review any room block histories for previous years and take a percentage reduction off of that amount.  Remember, that it’s always a good problem to get to go shopping – shopping for additional rooms that is.  Many a group which has paid attrition fees because it blocked too many rooms for its attendees wishes they would have had to have gone shopping for more rooms.

In today’s competitive marketplace, however, it may be difficult to secure additional hotel rooms in certain key markets.  That would include rooms requested at the primary hotel above the contracted block.  In a good market, the hotel may be willing to offer the group additional room nights but at a higher rate.  So I recommend planners include language which permits them to increase their room block. The increase would be based on space availability any additional rooms would be at the group rate.   From my perspective, there’s no harm in including such a provision just in case and hotels are often willing to include such provisions once the parties agree on the percentage increase in the room block.

Room rates

One of the most widely discussed topics in the hotel contract arena is room rates.   While planners and suppliers work hard to negotiate a competitive room rate for the meeting, how do they know that the room rate will be competitive when the day of the meeting arrives – sometimes years down the road?  How do planners and suppliers address the issue of special discounted rates often found by attendees on the Internet?

First, the hotel contract should state the confirmed rate for the meeting – especially if the meeting will occur two or less years from the date when the contract is signed. If the meeting is more than two years away, planners should seek to have a current year discounted rate stated in the contract with a stated percentage cap on the annual increases of that rate and a date when a confirmed rate will be provided (usually 12 months in advance of the meeting).

Next, planners should state that regardless of the group rate, if the hotel offers lower rates to guests during the meeting dates, the hotel will offer those rates to the group’s attendees.  This can be a controversial request since many hotels have special rate programs with airlines and corporations.  So while some hotels may not be willing to agree on the lowest rate offered, they will  usually agree  on  the  lowest  group  rate  and  that  they  will  not  advertise  lower  rates (including on their web site).   Keep in mind, though, hotels that sell rooms to hotel room wholesale web sites, such as priceline.com or expedia.com, cannot control the prices offered via those web sites once they have sold the rooms to the site.  So in the end, planners must regularly check on rates prior to their meeting dates.

Planners should also add a provision stating the group rates will be available for 2 or 3 days pre and post the blocked dates, subject only to room availability.  Finally, if the hotel has agreed to provide the group with specially rated rooms for staff, the contract should provide for the number of staff rooms per night and the staff room rate.

Walking

Hotels, just like airlines, often accept more room reservations for a given night than they have in their inventory on the basis that many of those room reservations will be cancelled prior to arrival.  However, in the event a sufficient number of reservations are not cancelled, the hotel may not be able to honor every room reservation and will have to relocate or “walk” some guests with a confirmed reservation.

The contract should state the hotel’s obligations in the event of a “walk” situation.  First, the planner should be notified prior to any of its guests being “walked” so that it can establish a priority list of guests.  Second, guest should only be walked to nearby hotels of equal or better quality and the hotel must pay for the guest’s transportation to and from their hotel as needed. The contract should also state that the hotel will work to relocate the person back to their hotel as soon as possible and provide them with an upgraded room, in room amenity, etc.  Many groups customize this provision to include their “wish list” in the event of a walk situation.

Room Block Attrition

There is no doubt that groups continue to struggle with how to address the subject of room block attrition.  Suppliers struggle with this topic too as they need to ensure the total room revenue that will be generated by the group.  While this topic has been, and certainly can be, addressed  at  length,  here  are  some quick  tips  for  room  block  attrition  provisions in  hotel contracts.

First, decide what the minimum room block pickup that your group can agree to utilize.  Usually, groups can negotiate a minimum pickup that represents 80%-90% of their total block. That minimum room pickup number should be stated in the contract.

Next, the provision should state how the attrition fee is to be calculated.  Usually the fee is calculated based upon the difference between the minimum room pickup number and the actual room pickup number utilized by the group.   The contract should state that any rooms utilized by the group will be counted in its total regardless of rate paid or method of reservation. This is key given the amount of Internet rate specials as discussed above.   The room pickup differential number would then be multiplied by a dollar amount which could be the group’s single room rate or average room rate or 70-75% of the room rate (representing lost profit).  This dollar amount is, as with everything else, a negotiating item which will vary depending on the group’s bargaining power

If the hotel is sold out on any of the blocked nights, the group will not pay an attrition fee for that night. Also, if the hotel is partially sold out, i.e., there are fewer rooms remaining for sale than the slippage of the group for that night, the group will pay for the lesser of the two (e.g., group slipped 30 rooms on one night but the hotel only had 10 rooms left for sale, group pays fee on 10 rooms not 30 rooms).

Finally, the contract should state that upon the billing of any attrition fee, the hotel must provide the group with information and documentation to verify any attrition fee.   That information should include a list of guests during the blocked dates so that the group can ensure that everyone was counted toward its block as well as an accounting of the total number of rooms available for sale at the hotel over the blocked dates.

Note that some groups seek to include a contract provision which states that if the group returns to the hotel for another meeting within a certain time period, the hotel will waive the attrition fees from the present meeting altogether or offer a credit on the master account for the future meeting.

Food and Beverage Attrition and Cancellation

Just as with room attrition, groups often struggle on deciding which food and beverage events they will hold at the hotel and how many people will attend each event.  That can make calculating food and beverage attrition and cancellation fees on a per event basis very difficult.

To avoid this challenge, planners should consider guaranteeing a minimum amount of total food and beverage revenue it will generate over the entire blocked dates.  That gives the group flexibility to add, change or cancel events so long as the total number meets the minimum amount.    If  it  doesn’t,  the  group  will  pay a  fee  based  upon  the  difference  between  their guaranteed  minimum amount  and  their  actual  revenue  amount.    The  contract  should  state whether the minimum amount is inclusive or exclusive of tax and service charges.   Also, for groups who have sponsored food and beverage events, the contract should state that the revenue generated by those events will be included in the group’s total food and beverage revenue amount.

Function space

There are many key provisions to address relative to function space.  First, the function space room names, dates, times, attendee numbers, and room set up should be clearly outlined in the contract or in an attachment.  The contract should state that the hotel will not make room reassignments without the group’s consent.

The contract should also state whether function space is complimentary or whether there is a fee for the space – either stated in total fee terms or on a per room basis.   Many hotels propose a “sliding scale” for function space rental fees depending upon the group’s total room utilization.

As technology is an important aspect of meetings and events, the group should ensure that it has included its specific technology needs in the request for proposal (RFP) including bandwith, number of users, etc. The contract should then reflect that the hotel will provide the technology specified by the group and that if there are any failures to do so, the hotel will remedy the situation and pay all related costs.

Further, the contract should state that room set up and other items, such as pencils and notepads, are complimentary.  Groups may also want to include a “quiet enjoyment” contract provision to address the hotel’s obligation in the event their use of the space is disturbed by noise or odors.

Finally, groups that are concerned with competitive groups meeting at the hotel can seek to include a provision which prohibits the hotel from reserving space for such competitors without the group’s consent.

Master Account

If the group is interested in establishing a master account, the contract should make clear that the hotel will establish a master account for the group subject only to objective standards of creditworthiness.  The group may also be required to complete a credit application.  With the establishment of a master account, deposits should not be necessary but some hotels, particularly resort properties, will require a deposit.

The contract should make clear that the only charges to be posted to the group’s master account are those charges approved by the group’s authorized representatives.   The contract should also allow for a daily review of the master account during the group’s stay.

It is important to include a provision regarding payment of the master account.   The contract should require the hotel to provide the group with a master account statement along with all supporting information and documentation and a post-conference report.  The group should be required to pay all undisputed charges within thirty days of its receipt of the final statement and documentation. Disputed charges should not be due until they are resolved by the parties

Alcoholic Beverages

Given the potential that the group could be held liable for a liquor related claim, it is important to ensure that the group addresses the issue of service of alcoholic beverages in the hotel contract.  The contract should include a statement that hotel’s bartenders and servers have been trained and will not serve anyone who appears to be intoxicated.

The contract should also include an indemnification provision which protects the group in the event it is sued because a hotel bartender served an intoxicated person which later resulted in an accident.   For example, if the hotel bartender served an intoxicated attendee during the group’s reception and the attendee injured someone while driving home, the hotel would be required to defend the victim’s lawsuit on the group’s behalf and to pay any damages awarded against the group.

Compliance with Laws

The contract should include a statement that the hotel will be in compliance with all federal, state and local laws during the group’s meeting.  The group may also want to request a copy of the hotel’s latest fire and health department inspection certificates.

Indemnification

Indemnification is one of the most powerful and cost effective risk management techniques   that   a   group   can   employ  to   minimize  its   exposure  to   financial   liability. Indemnification clauses are a way of shifting risk to the party who can best control the risk.  In the hotel contract, it is important that the group is indemnified against the negligent acts of the hotel’s officers, directors, employees and agents.  For example, if a hotel waiter spills hot coffee on someone’s lap and that person sues the hotel and the group for their injuries, the indemnification provision will require the hotel to defend the lawsuit on the group’s behalf and to pay any damages awarded against the group. Essentially, the group is left “whole” from a financial standpoint as they are not the one that hires, fires and trains the hotel’s employees. Note that often hotels will ask groups to indemnify the hotel against the group’s negligent acts.  Many groups agree to include such provisions in order to be indemnified by the hotel as outlined above.

Rights of Cancellation

It is essential to include in the hotel contract a list of contingencies which, if they happen, will give the group a “right” of cancellation without liability, i.e., right to cancel without paying a cancellation fee. Here is a list of some commonly addressed contingencies:

Force Majeure

This French term, which refers to an occurrence beyond either party’s reasonable control which affects performance of the contract, has stirred up much controversy since the tragic events of September 11, 2001.  These clauses went from the “forgotten child” in hotel contracts to the “prodigal child” in terms of their importance.

Force majeure clauses are an essential to include in every hotel contract but what are the critical elements? First, it is important to include a comprehensive list of items which could arise to affect either party’s performance such as acts of God, weather, strikes, wars, threats or acts of terrorism, travel advisories, or diseases.  It is also important to include a “catch all” provision at the end of the list such as the following: “or any other cause beyond the parties’ control.”

The second element addresses the issue of performance of the contract.   If any of the items on the list occur, what has to happen to performance in order to trigger the protections of this provision?   Does performance have to be rendered impossible? Or illegal? Inadvisable? Commercially unreasonable? Depending on what requirement is included in the contract, the group may have a difficult time exercising its right to cancel the agreement without liability. Standards such as “inadvisable”, “commercially unreasonable” or “materially affected” make it easier to invoke protections for the group.

Groups are now also including a third element in their force majeure provisions which states that if the group could cancel under the provision but chooses to perform the contract anyway, the hotel will waive room and food and beverage attrition fees related to a smaller meeting and honor any lower room rates.  For example, if a snowstorm in the meeting city closes airports and results in lower attendance for the meeting, the group, which could have cancelled its meeting under the contracts’ force majeure provision, can hold the meeting and not be subject to attrition fees for a lower utilization of its room block.

Strikes

Contingencies such as strikes involving the hotel’s labor are important to address in hotel contracts.  The group should have the right to cancel the contract without liability if any segment of the hotel’s labor is on strike.  Many groups routinely ask the hotel for a list of labor contracts which are coming up for renewal.

Construction/Renovation

It is important to include a provision in the hotel contract which states that if the hotel will be undergoing any construction or renovation during the meeting dates, the group will have the right to cancel the contract without liability if the group determines that the construction/renovation will interfere with the group’s meeting. This will help to ensure the integrity of the group’s meeting.

Change in Management Company

If the group is concerned that the current management company of the hotel will change from a favorable chain to an unfavorable chain, the group can include a provision in the contract which gives it the right to cancel the contract without liability in such event.  This provision is especially important to include in contracts booked well in advance of the meeting dates

Deterioration of Quality/Limitation of Services

If the group is concerned that the quality of the hotel will significantly decline between the time the contract is signed and the meeting dates, the group can include a provision in the hotel contract which gives the group the right to cancel the contract without liability in the event the hotel’s quality deteriorates. One additional consideration currently is that hotels are cutting costs by limiting services such as restaurant and room service hours.  The provision should address this contingency and the corresponding right for the group to cancel the contract if such services and facilities are not provided at the level they were at the time of the contract signing. As with the change in management company provision discussed above, this provision is especially important to include in contracts signed well in advance of the meeting dates.

Unavailability of Facilities

If the group will be using the convention center or another facility for its meeting or trade show, it is important to include a contract provision which gives the group the right to cancel the contract without liability in the event the center or facility becomes unavailable or unsuitable for the group’s use.

Cancellation Fee

So now that the rights of cancellation have been discussed, what if the group decides it must cancel the meeting for business reasons, i.e., reasons not addressed in the contingencies above?  The hotel contract should include a provision which states the amount of cancellation fee which the group must pay to the hotel.  Such fees should be stated on a “sliding scale” basis such that the farther out from the meeting date the cancellation notice is received by the hotel, the smaller the cancellation fee; the closer the notice is received, the higher the cancellation fee. Cancellation fees can be based on a percentage of total room revenue, total room and food and beverage revenue, total lost profit on rooms, total peak night room revenue, and many other options. Ultimately, the cancellation fee will be based on how much bargaining power the group has in the negotiation.

In addition to specifying the cancellation fee, the group should require the hotel to attempt to resell the rooms and to refund to the group any revenue collected by the hotel for resold rooms over the meeting dates.  The group may also want to include a provision which states that in lieu of paying a cancellation fee, the group can contract with the hotel for the same or similar sized meeting to occur at the hotel within a certain time frame.  Finally, the provision should state that the cancellation fee is the exclusive remedy for the group’s cancellation for reasons not otherwise permitted under the contract (e.g., force majeure).

Miscellaneous

Many hotel contracts include a host of miscellaneous or “boilerplate” provisions at the end of the contract. Here are some key clauses to watch out for:

Choice of Law and Forum

Many hotels will state in their contracts that the law of the state where the hotel is located will govern in the event of any disputes and disputes will only be heard in courts located in the hotel’s  county and  state.    These  provisions, while  difficult  to  change,  put  the  group  at  a disadvantage if the state is not the same as their state or the state of their incorporation.

Alternate Dispute Resolution

In  lieu  of  going  to  court  first,  more  and  more  hotel  contracts  these  days  include provisions which require the parties to submit their dispute to some form of alternate dispute resolution  including  arbitration  and  mediation.    Before  agreeing  to  one  form  of  dispute resolution, the group should consider all of its alternatives and determine which form, if any, of alternate dispute resolution would work best for their organization.

Prevailing Party Attorney’s Fees

Many  contracts  state  that  the  winning  party  in  a  dispute  is  entitled  to  recover  its attorneys’ fees and costs from the losing party.  While these provisions may seem harmless on their face, they frequently work to the disadvantage of groups in that if the dispute involves the payment of money, such as attrition fees or cancellation fees, the hotel will likely be deemed the “winning party” by a court of some amount of money and the group will then have to pay the hotel’s attorney’s fees along with their own attorney’s fees.   These provisions are often used during settlement negotiations to “strong arm” groups into settlement. It is often better for groups to delete these provisions and to bear the cost of attorney’s fees if they become an issue.

Incorporation by Reference

Many contracts include provisions such as the following: “The policies and procedures of the hotel are incorporated into this agreement.”  The problem is that most groups have not seen the “policies and procedures of the hotel” yet by the statement above, they are bound to them. Bottom line: Obtain copies of all documents incorporated by reference.

As you can see from the above sampling of hotel contract provisions, there are many key provisions which must be addressed in hotel contracts.  Groups should consult their attorney regarding any contract before signing on the dotted line so as to be fully aware of the risk, benefits and potential liabilities.

Barbara F. Dunn, Esq. is an attorney and partner with Barnes & Thornburg LLP in the firm’s Chicago office. Barbara can be reached at (312) 214-4837 or barbara.dunn@btlaw.com.

©Copyright 2013. Barbara F. Dunn, Esq., Barnes & Thornburg LLP. All rights reserved under both international and Pan American copyright conventions. No reproduction of any part may be made without the prior written consent of the copyright holder.

About the author

Joe Clote

Joseph W. Clote is owner of Publishing Concepts, LLC a communications and marketing firm based in Saint Louis, Missouri. Mr. Clote is Group Publisher of MeetMed™ and Missouri Meetings & Events™ (MM&E) magazine, a quarterly publication read by thousands of meeting and event professionals, and producer of the St. Louis and Kansas City trade shows under the MM&E name. Mr. Clote has extensive sales and marketing expertise in the travel, tourism, fine art, insurance, and software development industries.