Terminating Luxury Hotel Operators for Failing to Perform
Looking beyond contractual performance standards
By William A. Brewer III Managing Partner, Bickel & Brewer | June 25, 2010
Having endured the economic crisis since the latter part of 2008, owners of hotels in the luxury segment have not been in a "business as usual" mode. Owners have incurred significant losses during this downturn. Thus, owners have demanded operator accountability for bottom-line performance and responsible decision-making as it impacts their investments. Unfortunately, in many instances, chain brand managers have refused to obey owners' directives to reduce costs and to implement further revenue-generating measures. Such refusals raise the inevitable question: Does a manager of a hotel have a duty to act in the best interests of its principal-owner to preserve and protect the owner's investment in the business? We answer that question with a resounding "yes." Indeed, it is the central proposition of this article that when a hotel manager refuses reasonable directions from the owner to reduce costs, the manager loses the right to continue to manage the asset with which it was entrusted. This article discusses the rights of hotel owners to terminate their managers and the tools available to do so.
The Unfettered Power of Revocation: Removing the Disloyal Manager
When one party is granted the right to manage the business of another, the relationship is one of principal-agent. Consequently, as a matter of law, unless the managing party owns an interest in the property (i.e., holds an agency "coupled with an interest"), the principal always retains the power to revoke the agency relationship at any time and for no reason at all. This rule of agency law applies even if the contract between the parties states that it cannot be so terminated, and even if the agreement contains specific conditions relating to termination. Once the authority of an agent-manager of a hotel has been revoked by the owner, the manager must vacate the property and relinquish control of hotel operations.
In such a case, the terminated agent may have a damages claim for breach of the management agreement unless the owner can demonstrate that it was justified in terminating the agreement either because of the manager's material breaches of contract or violations of its fiduciary duties as the owner's agent-operator. In any post-termination proceeding, this is where the battle lines will be drawn. The hotel operator will assert that the owner did not have the right to terminate the management agreement and the agency relationship thereunder, because the conditions for a termination did not exist and/or the owner did not strictly comply with the termination provisions of the management agreement. The owner will assert that the operator breached fundamental duties that gave the owner the right and power under common law to terminate the agency relationship – irrespective of the management agreement or the termination provisions thereof.
Many hotel management agreements contain two types of termination provisions:
- notice-and-cure provisions, pursuant to which either party has a right
to terminate the contract following a failure by the other party to perform
an obligation, a written notice of default, the passage of a requisite
period of time (usually 10-30 days), and a failure to cure the default
within the allotted time; and
- performance-based termination provisions, pursuant to which the hotel's
failure to meet certain financial or performance criteria (which typically
must occur for two or more years within a defined period) gives the owner
the right to terminate the agreement.
The notice-and-cure termination provisions usually apply only to breaches of contractual obligations, and do not purport to cover violations of common law fiduciary duties owed by agents to their principals. Of course, there are likely to be serious questions whether a disloyal, uncooperative, or resistant manager is breaching provisions of the management agreement or is failing to perform specific contractual obligations. In addition, performance-based termination provisions are uncommon because the performance metrics are typically easily maintained.