Federal bailout for franchisors?

The RESTART Act would establish a new federal loan program, the proceeds of which can be used for franchise fees.[i] The American Hospitality and Lodging Association (AHLA) is supporting the bill.[ii]

Small businesses are the ones that really need support—not franchisors. See the article we wrote showing the big brands had over $11 billion in combined liquidity in March and April.

If passed, the legislation would help franchisors justify charging the same fees as they did before COVID-19. Instead, franchisors should reduce fees until the industry makes a full recovery.

Small businesses and hotel franchisees who are concerned about unfair franchise fees can contact AHLA about withdrawing their support.

 

Notes

[i] Text: S.3814 — 116th Congress (2019-2020). Section 3.g.2.I.. https://www.congress.gov/bill/116th-congress/senate-bill/3814/text#id8E2724015E3D40E69A2F48AC7FC43839.
[ii] Senator Todd Young’s website, “Support for the RESTART Act,” accessed 8/10/20. https://www.young.senate.gov/imo/media/doc/RESTART%20Act%20-%20List%20of%20supporters%20FINAL.pdf.

Compare your Courtyard franchise agreement to these ten

Ever wondered if other Courtyard franchisees got the same deal as you did? Now you can find out.

Below find ten executed Courtyard agreements for you to download and read. They may not necessarily still be in effect. We have a collection of other brands’ agreements too, so look back here for more in the coming weeks.

We did some of the work for you to compare some of the core terms. The agreements below are similar in the categories we explored, but not identical. One franchisee got a roughly quarter-square-mile restricted territory around their hotel, where Marriott agreed not to allow any new “System Hotels” for six and a half years.

The table below does not summarize every aspect of the agreements. The best way to compare the agreements to your own is to read them.

DISCLAIMER: This is a high-level summary of terms and is not intended to state the complete terms of the relevant franchise agreement.  The reader should review each franchise agreement for complete and accurate information as to its terms.

Franchisees just sued Choice Hotels over fees

After thousands signed a petition about unfair franchise fees from Choice Hotels, a group of Choice franchisees filed a lawsuit in US District Court on June 12th.

The Wall Street Journal reported the lawsuit “claims the hotel company is burdening operators with inflated costs for goods and imposing duplicative fees to boost its own revenue.”[i]

You can read more and see the complaint at Law360.com.

If you have any information you’d like to share about your own experience, please get in touch with us through the “About” page of this website.

Note:

[i] Wall Street Journal, “Operators Sue Choice Hotels Over Supplier Program, Fees, Alleged Discrimination,” 6/15/20. https://www.wsj.com/articles/operators-sue-choice-hotels-over-supplier-program-fees-alleged-discrimination-11592235026#:~:text=A%20group%20of%20Choice%20Hotels,to%20boost%20its%20own%20revenue

Using franchise termination fees to your advantage

The COVID-19 economic crisis in the hospitality industry means many owners are faced with an uncomfortable decision about whether to close their doors permanently. As you weigh the pros and cons, make sure you fully understand what your contract says about termination fees and liquidated damages—and how you could use them to your advantage.

Marriott earned $50 million in termination fees last year,[1] but in the current climate owners may not be able to afford those fees, or could escape them in bankruptcy. Marriott stated in an April SEC filing, “Hotel owners or franchisees in bankruptcy may not have sufficient assets to pay us termination fees, other unpaid fees or reimbursements we are owed under their agreements with us.”[2]

The brands know that pushing a franchisee into bankruptcy will cut off their own income. That could give franchisees some latitude in making requests for different forms of relief, such as proposing a temporary halt in franchise fees in exchange for paying some amount of termination fees in the event of a permanent closure—or vice versa,  or a total waiver of termination fees in exchange for future loyalty when the market supports re-opening or new development.

Attached to this article is a copy of a guide to Marriott’s termination fees and liquidated damages, first posted in 2018.

Notes

[1] Marriott International, Inc. Business Update Conference Call Transcript, March 19, 2020, Page 4, https://marriott.gcs-web.com/static-files/791fabc1-9897-4fff-a426-69027af1edcc
[2] Marriott Prospectus Supplement, 4/15/20, page S-7. https://www.sec.gov/Archives/edgar/data/1048286/000119312520108217/d915944d424b5.htm

Important Provisions on Franchise Fees

This article explores three important contractual and statutory provisions related to franchise fee relief during the COVID-19 economic crisis. Two are franchise contract clauses: a force majeure clause, and a Business Interruption insurance clause. The third is the “impracticability” provision of the Uniform Commercial Code. This article is not intended to provide legal advice, and franchisees are encouraged to explore their options with the guidance of an attorney.

Force Majeure clause

Some contracts contain a Force Majeure—“Act of God”—clause that excuses one or both parties from performing their obligations when an event occurs that is beyond the ability of either party to control and makes performance of the contract impossible. These clauses sometimes enumerate the covered circumstances; common inclusions are acts of terrorism, natural disasters, acts of government or war, and strikes or labor disputes.

If “epidemic” or “pandemic” are not mentioned in the clause, state law varies as to whether the clause can still be invoked. Law firm Akerman LLP published an article outlining force majeure clauses in the context of the COVID-19 economic turmoil, including variations in relevant state law.

The article stated, “Businesses seeking to invoke the force majeure clause of their contracts likely have a strong argument that the coronavirus outbreak is an unforeseen event, unless the parties entered into the contract after the outbreak of coronavirus.”[1]  In order to invoke a force majeure clause, a contracting party must also demonstrate that performance under the contract is impossible, and the precise scope of this standard varies by state.

Business Interruption Insurance

Hotel franchise contracts often require a hotel owner to maintain certain types of insurance, sometimes including business interruption insurance. Depending on how the clause is written, if the pandemic is covered by business interruption insurance, the clause may limit your fees to the amount of proceeds from the payout of an insurance claim.

One such clause in a 2013 Aloft hotel’s franchise agreement reads:

Business Interruption. If the operation of the Hotel is interrupted, Owner shall nevertheless pay to Starwood Companies all fees and other amounts that would be due to them under this Agreement had such interruption not occurred, regardless of whether any business interruption insurance proceeds are available to Owner to cover such amounts. All amounts payable to Starwood Companies shall be calculated based on then-accepted practices in the hotel and insurance industries for such matters. However, if the business interruption insurance obtained by Owner satisfied the Insurance Requirements, Owner’s obligation to pay License Fees shall be limited to the insurance proceeds Owner receives provided that Owner pursues its claim with diligence and good faith.[2] (emphasis added)

Impracticability under the Uniform Commercial Code

The Uniform Commercial Code § 2-615 is titled “Excuse by Failure of Presupposed Conditions,” and franchisees having difficulty affording franchise-related fees and charges may want to ask an attorney if the code can provide relief.

The code states,

“Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.” [3]

Notes

[1] Lawrence Rochfort, Meghan Boland, and Rachel McRoskey. “The Coronavirus and Force Majeure Clauses in Contracts,” 4/6/20. https://www.akerman.com/en/perspectives/the-coronavirus-and-force-majeure-clauses-in-contracts.html
[2] Aloft New York Midtown Franchise Agreement For New Build Hotel Between Fortuna Fifth Ave LLC and The Sheraton LLC, Section 10.2, page 23.
[3] Uniform Commercial Code § 2-615. https://www.law.cornell.edu/ucc/2/2-615

Which hotel brands are flexible with franchise fees these days?

We recently posted an analysis of the major US hotel brands’ liquidity, urging them to pause collection of franchise fees entirely. This post compares public statements by each of the major brands, rated by flexibility.

Marriott

Flexible

Marriott stated in an SEC filing that it reduced the cost of certain systemwide service charges by 50% for April and May, and reduced reimbursable expenses for certain systemwide services on behalf of owners and franchisees by approximately two-thirds.[1]

CEO Arne Sorenson said “These are the times in which we proved that actually even fixed costs are variable, that we will do things we’ve not anticipated before in order to make sure that we are not burdening our owners and not burdening Marriott until such time as the business comes back.” (emphasis added) [2]

Contracts don’t require flexibility

CFO Leeny Oberg said, “Our contracts are clear that we have the right to be reimbursed for our costs, including the ability to request additional working capital from our managed hotel owners to ensure we are paid. Needless to say, we are doing all that we can to reduce the costs we need to charge the hotels in these times.” (emphasis added) [3]

Writing on the wall

“Even if hotel owners or franchisees do not declare bankruptcy, they may be unable or unwilling to pay us amounts that we are entitled to on a timely basis or at all, which would adversely affect our revenues and liquidity.” [4]

“Even in situations where we are not obligated to provide funding to hotel owners, franchisees or joint ventures, we may find it necessary in the interest of our business to provide financial or other types of support to certain of these parties, which could materially increase our expenses.” [5]

Hilton

Writing on the wall

“Financing difficulties and significant declines in revenues for most hotels make it more likely that third-party owners of our hotels could declare bankruptcy or face other difficulties with their lenders. Bankruptcies, sales or foreclosures involving our hotels could, in some cases, result in the termination of our management or franchise contracts and eliminate our anticipated income and cash flows, which would negatively affect our results of operations. Hotel owners with financial difficulties may be unable or unwilling to pay us amounts that we are entitled to on a timely basis or at all.”[6]

Hyatt

Writing on the wall

In an SEC filing on April 23rd, Hyatt listed the following factors in the context of COVID-19: [7]

  • “the financial condition of, and our relationships with, third-party property owners, franchisees and hospitality venture partners;
  • “the possible inability of third-party owners, franchisees or development partners to access capital necessary to fund current operations or implement our plans for growth;”
  • “unforeseen terminations of our management or franchise agreements”

In the same filing, Hyatt stated,

“Moreover, our third-party owners and franchisees could fail to reimburse us for any payments we may be required to make to third-party lenders to whom we made financial guarantees for the timely repayment of all or a portion of the third-party owners’ or franchisees’ debt related to hotels that we manage or franchise. We may find it necessary or in the interest of our business to provide financial or other types of support to certain of these parties, which could materially increase our expenses and cash flows.” [8]

Wyndham

No recent filings or public comments on the topic.

IHG

Flexible on renovations and brand standards

“In addition, to support our owners and manage their cash flows, we have launched a comprehensive package of measures including delaying renovations and relaxing brand standards.”[9]

Choice

Flexible

On April 8th, Choice announced the following measures to assist franchisees:[10]

  • Implemented fee-deferral programs for domestic and international franchisees.
  • Suspended one-time finance charges, reputation management fees and guest relations handling fees.

Best Western

Flexible

On March 19th, the company announced the following relief measures for owners:[11]

  • Waiving one half (1/2) of Monthly Fees.
  • Waiving one-half (1/2) of Property Revenue Management Fees.
  • Reducing Best Western Rewards® (BWR®) loyalty point fees charged to members by one-half without lowering points awarded to loyalty program participants.
  • Increasing by 50% hotel redemption compensation for BWR loyalty guest stays.
  • Waiving in entirety BWHR co-op marketing fees.
Notes
[1] Marriott Prospectus Supplement, 4/15/20, page S-3. https://www.sec.gov/Archives/edgar/data/1048286/000119312520108217/d915944d424b5.htm
[2] Marriott International, Inc. Business Update Conference Call Transcript, March 19, 2020, Pages 6, 7, and 10. https://marriott.gcs-web.com/static-files/791fabc1-9897-4fff-a426-69027af1edcc
[3] Marriott International, Inc. Business Update Conference Call Transcript, March 19, 2020, Pages 6, 7, and 10. https://marriott.gcs-web.com/static-files/791fabc1-9897-4fff-a426-69027af1edcc
[4] Marriott Prospectus Supplement, 4/15/20, page S-7. https://www.sec.gov/Archives/edgar/data/1048286/000119312520108217/d915944d424b5.htm
[5] Marriott Prospectus Supplement, 4/15/20, page S-8. https://www.sec.gov/Archives/edgar/data/1048286/000119312520108217/d915944d424b5.htm
[6] Hilton Worldwide Form 8-K, 4/16/20. https://www.sec.gov/ix?doc=/Archives/edgar/data/1585689/000158568920000088/hlt-20200416.htm
[7] Hyatt Prospectus Supplement, 4/23/20, page S-v. https://www.sec.gov/Archives/edgar/data/1468174/000119312520115517/d908755d424b2.htm
[8] Hyatt Prospectus Supplement, 4/23/20, page S-12. https://www.sec.gov/Archives/edgar/data/1468174/000119312520115517/d908755d424b2.htm
[9] IHG Form 6-K, 3/20/20. https://www.sec.gov/Archives/edgar/data/858446/000165495420002896/a9029g.htm
[10] Choice Hotels Press Release, “CHOICE HOTELS INTERNATIONAL PROVIDES COVID-19 BUSINESS UPDATE,” 4/8/20. http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=114933096&type=PDF&symbol=CHH&companyName=Choice+Hotels+International+Inc.&formType=8-K&dateFiled=2020-04-09&CK=1046311
[11] Best Western Hotels Press Release, “BEST WESTERN® HOTELS & RESORTS PROVIDES MUCH NEEDED RELIEF TO HOTELIERS,” 3/19/20. https://www.bestwestern.com/en_US/about/press-media/2020-press-releases/relief-for-hoteliers.html

Did Marriott give you a break on franchise and management fees?

During these challenging times, hotel owners and franchisees are within their rights to approach brand companies and ask for a break on fees. In an analyst call in March, Marriott CEO Arne Sorenson and CFO Leeny Oberg both acknowledged the difficulty that their franchisees and owners are going through, stated they were going to marketing fees, and that the company is “doing all that [it] can to reduce the costs [it] need[s] to charge the hotels in these times.”[1] But owners will need to be proactive about requesting relief.

Marriott leadership: we can be flexible, but we don’t have to

The company posted the transcript of its March analyst call here.

Sorenson said to analysts, “We’re announcing internally here today as well, we are dramatically reducing the cost pools that depend on reimbursement from the owners so that they are rightsized. And I think in year’s past we’ve had conversations internally and with many of you about what percentage of those are fixed and what percentage of those are variable. These are the times in which we proved that actually even fixed costs are variable, that we will do things we’ve not anticipated before in order to  make sure that we are not burdening our owners and not burdening Marriott until such time as the business comes back.” [2] (emphasis added)

However, Marriott may not be forgiving across the board.

Oberg said, “Our contracts are clear that we have the right to be reimbursed for our costs, including the ability to request additional working capital from our managed hotel owners to ensure we are paid. Needless to say, we are doing all that we can to reduce the costs we need to charge the hotels in these times.” [3] (emphasis added)

What Marriott has done about fees so far

Marriott expects to cut expenses for certain systemwide programs by two-thirds, but it announced that it cut the charges to franchisees and owners for “certain systemwide programs and services” by 50% in April and May.

In an April 15th SEC filing, the company stated it “has taken additional steps, including reducing by 50 percent the cost of and offering delayed payment for certain systemwide programs and services charges for April and May, and supporting owners and franchisees who are working with their lenders to utilize furniture, fixtures, and equipment (FF&E) reserves to meet working capital needs.”

Marriott stated later in the same filing, “The Company also remains focused on significantly lowering the reimbursable expenses it incurs on behalf of its owners and franchisees to provide centralized programs and services such as loyalty, reservations, marketing and sales, which are generally charged on the basis of hotel revenue or program usage. Given the significant decline in hotel-level revenues and occupancy currently anticipated, the Company has implemented plans that it estimates could reduce these centralized, system-funded reimbursable expenses by approximately two-thirds compared to the monthly costs initially budgeted for 2020.”[4] (all emphasis added)

What can you do?

  • Take a close look at your franchise or management agreement to see what kind of relief might be available.
  • Document all your lost business, when local events canceled or attractions closed, when any state or local shelter-in-place requirements took effect, etc.
  • Take note of any fee breaks Marriott has already given you and compare those with the above quotes from the company’s SEC filings to see if you’ve gotten the relief they announced.
  • Call your contact person at Marriott and ask for a break on fees, and tell them you’re more likely to stay open later if they can work with you now.

Notes

[1] Marriott International, Inc. Business Update Conference Call Transcript, March 19, 2020, Pages 6, 7, and 10. https://marriott.gcs-web.com/static-files/791fabc1-9897-4fff-a426-69027af1edcc
[2] Marriott International, Inc. Business Update Conference Call Transcript, March 19, 2020, Page 7. https://marriott.gcs-web.com/static-files/791fabc1-9897-4fff-a426-69027af1edcc
[3] Marriott International, Inc. Business Update Conference Call Transcript, March 19, 2020, Page 6. https://marriott.gcs-web.com/static-files/791fabc1-9897-4fff-a426-69027af1edcc
[4] Marriott Prospectus Supplement, page S-3, 4/15/20. https://www.sec.gov/Archives/edgar/data/1048286/000119312520108217/d915944d424b5.htm

Hotel brands can do without franchise fees for now

The major hotel brands had over $11 billion in combined liquidity in March and April, much of that having come from new fundraising since the outbreak of the coronavirus. They could afford to put a moratorium on collecting franchise fees.

Hilton stated on April 16th that it expects their liquidity to last them 18-24 months, and it has no material debt due before June 2024.[1]

Marriott stated on April 15th that “As a result of the operating and financial strategies the Company has implemented, the Company strongly believes that it has sufficient liquidity and will continue to be able to successfully adapt as the [COVID-19] situation evolves.”[2]

Liquidity by brand

Company Cash and cash equivalents As of date
Marriott $3.7 billion 4/2/20[3]
Hilton $2.1 billion 3/6/20[4]
Hyatt $1.2 billion 3/31, plus $890 million 4/21 4/21/20[5]
Wyndham $735 million 3/17/20[6]
IHG $2.01 billion 4/27/20[7]
Choice $489 million 4/8, plus $250 million 4/16 “cash and available borrowing capacity” 4/16/20[8]
Total $11.374 billion
Notes
[1] Hilton Worldwide Form 8-K, 4/16/20.
[2] Marriott Prospectus Supplement, Page S-4, 4/15/20. https://www.sec.gov/Archives/edgar/data/1048286/000119312520108217/d915944d424b5.htm
[3] Marriott Form 8-K, 4/2/20. https://www.sec.gov/ix?doc=/Archives/edgar/data/1048286/000162828020004549/mar-2020drawdown8xk.htm
[4] Hilton Form 8-K, 3/5/20. https://www.sec.gov/ix?doc=/Archives/edgar/data/1585689/000158568920000060/hlt-20200305.htm
[5] $1.2 billion on 3/31/20 plus $890 million in proceeds from bonds on 4/21/20. Hyatt Prospectus Supplement, Page S-4, 4/23/20. https://www.sec.gov/Archives/edgar/data/1468174/000119312520115517/d908755d424b2.htm
 And Hyatt Form 8-K, 4/21/20. https://www.sec.gov/ix?doc=/Archives/edgar/data/1468174/000119312520117696/d920340d8k.htm.
[6] Form 8-K released 3/17/20, Wyndham Hotels. https://www.sec.gov/Archives/edgar/data/1722684/000110465920034779/tm2012583-3_8k.htm
[7] IHG Form 6-K, 4/27/20. https://www.sec.gov/Archives/edgar/data/858446/000165495420004437/a9283k.htm
[8] $489m cash and borrowing capacity on 4/8/20, plus $250m additional borrowing capacity on 4/16/20.  Choice Hotels Business Update, 4/8/20. https://www.sec.gov/Archives/edgar/data/1046311/000119312520101634/d916724dex991.htm and Choice Hotels Form 8-K, 4/16/20. https://www.sec.gov/ix?doc=/Archives/edgar/data/1046311/000119312520112318/d919274d8k.htm

Could a Marriott franchise agreement hurt your hotel’s value?

Report: Seller beware: Marriott franchise agreements vs. hotel sales

Before buying into a Marriott franchise agreement, hoteliers should learn the potential downsides that may come into play if they want to sell in the future. Our latest guide for Marriott franchisees explores the ways in which their franchise agreements could impact both the value and the pool of buyers for their properties. You can get all of our guides for free on www.fairfranchise.org.

There are several factors franchisees should be aware of that could impact a sale, including:

  • How potential buyers may perceive Marriott’s controls over hotel operations;
  • The many costs that may be involved in transferring control of a Marriott-franchised hotel;
  • Whether Marriott has retained the power to withhold consent for a sale or use a right of first refusal to block certain buyers;
  • Franchisees’ relative lack of control over the fate of their brands.

Check out our report here.

Who pays if Marriott terminates?

We just released our latest guide for Marriott franchisees about what to watch out for when negotiating your franchise agreement. You can find it for free here.

Marriott has included liquidated damages clauses in at least one of its franchise disclosure documents (“FDD”) requiring a franchisee to pay liquidated damages even if the franchisor is the one to initiate termination. A similar clause may appear in your franchise agreement.

The latest guide offers some ideas about how to make these clauses more fair.