WASHINGTON, D.C.—The “midnight raid”– used to describe a surprise and unwelcome entry by an owner to take control of his hotel from a property manager–garnered much attention at the Hotel and Lodging Legal Summit last week in Washington, D.C.
In light of such disputes, the opening panel explored challenges to early terminations of hotel management agreements. Panelists focused specifically on Fairmont v. Turnberry—a 2011 case involving the management agreement by which Fairmont Hotels & Resorts operated and managed the Fairmont Turnberry Isle Resort and Club in Aventura, Florida—which was settled for $19 million for the plaintiff.
Aside from shedding light on the legal process, panelists gave practical advice on what to do if a hotel property is at risk for early termination.
When owners and property managers negotiate a hotel management agreement, each should define an arbitrator’s powers to assure the arbitrator can’t overstep his or her bounds in the event of an early termination dispute, according to Forrest Hainline III, an attorney with Goodwin Procter who represented Fairmont in Fairmont v. Turnberry.
“We had an owner who didn’t want us but never claimed we mismanaged,” said Terence Badour, an attorney with Fairmont Raffles Hotels International, parent company of Fairmont Hotels & Resorts. The owner “came in with security guards, escorted our people off the property, confiscated computers, cell phones and tapped into our information systems.” The takeover had been planned for six months, he said.
Among management’s mistakes, he said, “we got forced off the property and couldn’t get a judge for three weeks” for a temporary restraining order. The judge assigned the case had left for a three-week vacation and by that time, “we were toast,” Badour said.
Once removed from the property, hotel management will fight a losing battle to get back in, Badour said. Temporary restraining orders are tough to win in such situations, he said.
In a related case—M Waikiki LLC v. Marriott Hotel Services—hotel management received a temporary restraining order to remain on the property.
“Marriott held the hotel and was not evicted” pending a hearing for a temporary restraining order, Hainline said. “If you stay in possession as manager, you can go to court and enjoin” the hotel owner.
Hotel management agreements should reflect the idea of “quiet enjoyment” that should prevent such trespassing during a midnight raid, Hainline continued. He advised hotel management get to know local police in case such properties might be targeted.
In the Turnberry dispute, there was concern that security guards had guns, Badour said.
“We didn’t want to see a fist fight at the hotel. It was best to shut it down and just go,” he said.
Before a crisis develops with properties at risk, Badour said management should give staff additional training to deal with it.
Breach of agreements are costly for owners because of new-management preparation costs and guest disruptions. Plus, guests who book Four Seasons expect Four Seasons, Hainline said during an interview after the panel.
However, if management fails its performance tests, an owner has the right to terminate the agreement.
“We don’t want blood in the streets when an owner wants to take the hotel at midnight,” said Margaret Egan, VP and associate general counsel of Hyatt Hotels Corporation. Egan said, if put in a similar situation, she would expedite the legal processes through arbitration in the company’s contracts to remain on the property.
Negotiating agreements
State governments, the federal government and regulatory bodies each have heavily influence over franchise agreements, said Susannah Bennett, VP and general counsel for Marriott International. In California, franchising laws are particularly strict, she said.
Many issues can arise when an owner with a long-term agreement wants to change brands, said Amy King, senior counsel–development at Hilton Worldwide. Many long-term contracts offer owners the flexibility to transfer brands, but then questions about access to proprietary information by competitors arise.
“If there are no dollars for renovation, we will remove the franchisee,” Bennett said. “But we actively work with franchisees to help them stay and make it better next time.”