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Hotel Sales Legal Savvy

Understanding Key Issues That Can Arise Is Critical For Any Property To Avoid Disputes

Tuesday, April 09, 2019
Mr. Larry Mogelonsky
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It has been several years since I’ve been working in the sales trenches, pitching business and closing group event contracts. Getting the sale was one thing; getting the terms and conditions of the sale correct was quite another!

Just recently, I had an opportunity to sit down with Lisa Sommer Devlin, an attorney who specializes in the hospitality industry. My goal was to get her thoughts on the legal ‘what counts factors’ for hotel sales professionals. The following interview offers some foundational tips on contract law and it is essential that all salespersons understand this information.

Why should you have an attorney review your group contracts?
The simplest answer is the adage that ‘an ounce of prevention is worth a pound of cure.’ It is far cheaper to have your attorney spend an hour or two reviewing your contract before it is signed than it is to have your attorney spend many hours and thousands of dollars litigating over the contract when a dispute arises after it is signed.

Should we assume that there will be an issue that needs to be resolved in a contract?
You shouldn’t assume the worst, but you should assume:
  1. That somebody other than you and the person you negotiated with will become responsible for performing the contract. Thus, your contract must be written so that those who have to execute it understand its obligations.
  2. That if a judge or arbitrator has to enforce it, it is written so that it will be understood in the way that you want it to be, accepting that the judge or arbitrator knows nothing about your business or its jargon.
  3. Hospitality contracts have many unique provisions and issues that are unfamiliar to most attorneys. So, while your corporate in-house counsel is certainly great at regulations applicable to your business, they likely have no idea about hotel contracts.
What about short-form contracts?
These work until something goes wrong! Hotels hold hundreds of events each year that go off without a hitch, and a two-page contract is generally suitable. The problem, of course, is that you can’t predict when the contract is signed what issues might arise. Once there is a cancellation or your hotel unexpectedly schedules a major renovation over the event dates or any of a number of other things happen, your two-page contract rarely covers it.

The concept of ‘attrition’ comes up on contracts. How do we define it clearly?
An event contract is a ‘futures’ agreement. The hotel is agreeing to sell and the customer is agreeing to buy guestrooms, meeting space and F&B at a date in the future at a stated price. Both parties are obligated even if it turns out that when the dates for performance arrive, one or the other could have gotten a better deal. The ‘attrition clause’ is an allocation between the parties of the risk that the rooms contracted are not all used and paid for by attendees. Attrition is actually one of those industry jargon words while the correct legal term is ‘performance.’

So, in a 500-room-night event, while under the law the hotel could require the customer to fill all 500 room nights or else pay damages. It is common in the industry to ‘share’ that risk of the block not being filled. The hotel gives an ‘attrition allowance’ which means that the hotel absorbs the loss of the first 10 or 2% of the room nights that are not filled, and the group is responsible to pay for any rooms beyond that allowance that are not filled. The attrition allowance is a concession that is negotiated just like any other, such as complimentary rooms.

How do we deal with cancellation damages in an appropriate fashion?
When a contract is signed, the hotel must hold the inventory of rooms and space for the customer, foregoing other opportunities. The hotel is entitled to damages if the contract is cancelled, whether or not the rest of the hotel is empty or full. If you buy a car, the dealer is entitled to damages if you don’t pay for it whether or not the dealer sells the other cars on the lot. The same is true in hotel contracts.

The amount that the customer owes for cancelling can be very difficult to determine, since every room or group of rooms sold has a different profit margin. So, the parties usually agree on an amount or formula for the damages that will be paid in the event of a cancellation, known as ‘liquidated damages.’ To be legally enforceable, liquidated damages must be a reasonable estimate of the loss that the hotel suffers due to a cancellation.

The farther out that the event is cancelled, the more likely it is that the hotel will resell the inventory, so usually the parties agree on a sliding scale of damages that increases as the cancellation date gets closer to the event date, thereby reflecting that less resale will be possible. The law of liquidated damages does not require the damages to be based on ‘profit’ so long as the amount due is reasonable.

Nor does the law require ‘resale’ credit, as that credit is built into the sliding scale. Credit for rebooking the event at a later date is also not required, as hotels sell perishable inventory, meaning that if an event is cancelled in March, the hotel does not make up that loss if the event is rebooked in August.

However, if the parties agree to resale or rebook as a concession to the customer, it is critical that the clauses be drafted carefully. Poorly written resale or rebook clauses are one of the most common areas of dispute in event contracts.

Do we really need to get a physical contract signed and get a copy back?
Electronic signatures are becoming more and more popular as well as accepted. They do pose a risk that you cannot prove who input the electronic signature, so they are subject to challenges, like, “My administrative assistant did that electronic signature without my knowledge and he lacked authorization.” The key, whether using hand-written or electronic signatures, is to ensure that the contract is signed by both parties and that there is evidence that both parties were provided a copy of the signed agreement.

How do we deal with changes after the contract is signed?
If the terms of a contract are changed once it is signed, the only way to alter it is through an amendment signed by both parties. Many in the industry refer to ‘addenda’ but that is not technically correct. It is critical to review the entire contract and determine what provisions are changed by your amendment.

For example, if you are changing the room block, how does that impact concessions, attrition, cancellation? You do not have to rewrite the whole contract, but you need to address all terms that are changed. If not, the assumption is that they remain as in the original contract. Many a sales person has increased a room block, but neglected to increase the cancellation clause, so when the event later cancelled the hotel was not fully compensated. Signatures may be sent electronically or as a document attached to an email, but an email, even with an email signature line, is not a valid amendment, nor is a text message.

What are your key recommendations to sales leaders?
The pressure on sales leaders to book business is tremendous, and customers know that. Customers often insist that other hotels in your brand, or your competitors, always accept their clauses, which is sometimes true and sometimes not. Just because another hotel accepted a bad clause does not mean that you must or should, though.

Evaluate every clause carefully and make sure that you fully understand the risks that they pose. From there, you must determine if you are willing to accept that risk to book the business. Most of the time, it will work out fine. But for those cases in which it doesn’t, your file should reflect that you evaluated and accepted the risk, rather than having to tell your boss or your owners that you did not realize the dangers of the clause.

Larry Mogelonsky    Mr. Larry Mogelonsky
Managing Partner, Hotel Mogel Consulting Limited
Owners, Principals, or Partners
LMA Communications Inc.

Bio: One of the world’s most published writer in hospitality, Larry Mogelonsky is the principal of Hotel Mogel Consulting Limited, a Toronto-based consulting practice. His experience encompasses hotel properties around the world, both branded and independent, and ranging from luxury and boutique to select-service. Larry is also on several boards for companies focused on hotel technology. His work includes five books “Are You an Ostrich or a Llama?” (2012), “Llamas Rule” (2013), ...
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