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5 Tips for Creating a Bulletproof Hotel Contract

Bulletproof Hotel Contract

The improving economic environment has created a seller's market that puts hotels in the driver's seat. 

Last year, the average hotel daily room rate and revenue per available room (RevPAR) was the highest ever recorded by STR, a global provider of competitive benchmarking, information services, and research to the hotel industry. Occupancy for the first quarter of 2015 was also the highest ever recorded by STR for hotels worldwide. 

"The industry is firing on all cylinders, and I would expect more record-breaking demand and revenue numbers for the foreseeable future," says Jan Freitag, STR's senior vice president of strategic development. According to Freitag, a 66.8 percent occupancy rate in the U.S. is the highest STR has ever recorded for March. The industry also set a record with more than 100 million rooms sold worldwide, and RevPAR increased in the U.S. for the 61st consecutive month.

This boom has put hotels in the dominant role when negotiating. Many properties now also have the luxury to be choosy when selecting which meetings to accept.

"Hotels are no longer bending over backwards to win your business," explains Brooklyn, NY-based Roxane Kramer, a global account executive at ConferenceDirect, a full-service meetings solution company. "Plus, they are tightening their contract terms. Distinctly less flexibile, hotels are writing their contracts in their best interests."

John S. Foster, Esq., an attorney and counselor at law for Foster, Jensen & Gulley, based in Atlanta, agrees, saying more of an emphasis is being placed on the business aspects of relationships -- at the expense of hospitality. 

To avoid having their events get shot down by hoteliers, planners need to prepare thorough requests for proposal (RFPs) to determine who wants their business and then work with those hotels that are most interested. Experienced meeting planners are responding with highly targeted -- or "bulletproof" -- contracts that focus on the best interest of the meeting. Here's how to create one yourself.

Go Custom
Just as each client's needs are unique, so is each contract and it should be customized accordingly. Using a custom contract that is issued to the hotel by the client is best for a planner, says Terri Woodin, CMP, senior director of global meeting services for Granby, CO-based Meeting Sites Resource. "When the hotel issues the contract, it is typically one-sided and missing key cost savings and risk-reduction clauses," she adds. Clauses that are missing in hotel issued contracts according to Woodin include resell, so in the event of cancellation, the group and the hotel shall negotiate to establish mutually acceptable dates for a subsequent meeting to be held no later than twelve months after the original meeting dates and the hotel shall credit 50 percent of any cancellation paid against the subsequent meeting.

A published rate clause should also be included where no lower rates are offered after the contract is signed as well as a "do not walk or relocation clause." That focuses on when a hotel overbooks rooms and guests have to "walk." 

In addition, attrition and cancellation clauses in hotel-issued contracts are calculated on revenue and the hotel is only entitled to its "true loss" -- which is based on profit. It is important to understand that generally damages are defined as "lost profit," not 100 percent of the revenue, says Foster. Lost profit is gross revenue minus variable expenses.

"To seal the holes for a solid, bulletproof agreement, in addition to your attorney, you need an expert advisor with real industry experience who will help you negotiate the best terms and understand the commitments and the risks involved in your contract," says Kramer, who joined ConferenceDirect 11 years ago after almost a decade in the hotel industry. 

What are the main "bullets," or dangers a planner must watch out for when agreeing to a contract? The biggest problem is usually poor drafting, according to Lisa Sommer Devlin of Phoenix-based Devlin Law Firm. "The parties know what they want, but don't make it clear in their clauses," she says. "This is especially important in the financial clauses, such as rates, food and beverage minimums, performance (attrition), and cancellation. Make sure that the clauses are written so that there is no question as to what will be owed." 

Since it is a seller's market right now, planners should not expect huge financial concessions or lowest-rate guarantee clauses, Sommer Devlin adds. "If your attendees are price sensitive, go to a market that can meet their expectations rather than expecting a hotel in New York City to give you a great deal for a September event," she says. "A contract is a partnership, so both parties should be getting something as well as giving something. If you try to be fair, you will get a better contract."

Think Like a Hotel Revenue Manager
Understanding hotel revenue management, the real cost of your room and running an event, and what the total value of your business is to the property, are key factors in creating successful contracts. It is also imperative to understand the contract fully with special emphasis on its commitments and risks.

A bulletproof contract includes all the miscellaneous costs of the meeting so there are no surprises down the road. "Asking all the what ifs, planning and preparing for the worst-case scenario, while, of course, still hoping for the best, will ensure success," adds Kramer. "Understanding from top to bottom the terms of the contract, and what the implications are if the worse-case scenario happens is important."

The best way to do this is by thinking like a hotel revenue manager, says Woodin. The biggest profit center at a hotel is the sleeping-room block, while second-biggest profit center is food and beverage revenue.

A hotel will calculate the ancillary spend, which is the projected revenue for the business center, A/V, production, Internet, golf and spa, and sponsored events. They will also look at the history of the meeting for the past three to four years. 

Woodin says a hotel contract should be customized to include all contract components, value-added concessions, hotel fees and surcharges, performance clauses based on profit not revenue, and company legal and liability language. 

Getting Bumped
With travel booming, ironclad contracts have taken on added importance. Kramer keeps this in mind when creating contracts for her clients. "In some instances, hotels are bumping out previously contracted programs for more profitable business and are pushing to have mutual cancellation clauses in the contract, which means the hotel can cancel on you for an agreed amount of money," she explains.

By having a well-thought-out cancellation clause in the contract, there will be less liability if the hotel reneges. "It is so situational," says Kramer. "Depending on the size of your meeting and if it is being held in a low-demand period, like Arizona in July, you should have lots of options. If the hotel does cancel and gives you a check for the amount that was predetermined, you may not have a problem moving the program to another hotel." On the other hand, if it's not possible to find another appropriate venue, the check from the hotel may not be sufficient for the losses that will be incurred. 

Without a mutual cancellation clause, the hotel would be in breach of the contract and would be liable for the entire cost associated with moving the program. This is referred to as a "silent clause" and it may be more beneficial for the group -- but this varies by circumstance.

"With this new trend, you'll want to talk to your attorneys about arbitration-versus-court and who will pick up the costs of either scenario," says Kramer. 

Foster emphasizes the importance of understanding the rules behind liquidated damages in a contract. "A breach by one party entitles the other party to damages, but not penalties," he says. "Penalties in contracts are un-enforceable. A penalty exists if the injured party in a contract dispute would come out further ahead financially by enforcing a liquidated damage clause than if the contract was performed as anticipated."

Performance guarantees for rooms attrition would be based on guaranteed room nights, not guaranteed revenue, explains Foster. When attendees pay their own way, planners should never guarantee to meet a revenue goal because they can't guarantee what attendees will pay. Sometimes attendees get lower rates from hotels by going around the planner's reserved block of rooms. It's not reasonable to expect the meeting sponsor to make up the difference in revenue if the group falls short but may have met a minimum number of room nights.

On the other hand, catering-revenue guarantees should be based on revenue, not the number of covers -- meals actually served -- until the final guarantee. Damages for reduced spending in catering revenue should be based on lost profit, not 100 percent of the revenue. (The 100 percent would apply after a guarantee is given 24 to 72 hours before each function.)

Foster also advises that meeting sponsors not agree to pay both meeting-room rental and guest-room attrition damages unless their guest rooms-to-meeting space ratio is out of balance. For example, if the group uses 30 percent of the group guest room allocation in the hotel, they should get 30 percent of the hotel's meeting space for free. However, if they use 30 percent of the group guest room allocation but need 50 percent of the meeting space, then the ratio is out of balance and meeting-room rental may be appropriate. Planners will want to make sure the contract states that all guest rooms paid for as attrition damages count towards reducing rental.

Fair to Both Parties
A bulletproof contract is not one-sided. This is an industry built on relationships. If a contract gets approved, but is not beneficial to both parties, someone will end up feeling jilted and word will get out. 

A bulletproof contract includes:
• Dates: Dates when the event will take place.

• Room block: A development occurring with increasing frequency is that hotels are not allowing guest room name changes. Kramer keeps this in mind and creates a stipulation in the contracts she prepares that says name changes can be made up to arrival. Foster recommends that the contract state that rooms reserved for the group's attendees after the cut-off date be at the negotiated group rate. Raising the rates after the cut-off date is a deterrent to the group meeting its performance obligations, says Foster, and one party to a contract can't make the other party's performance more difficult and then try to enforce the contract. 

• Audit: Ability to audit the room block without a cost and a stipulation that states rooms found outside the block will be credited. This is the negotiated opportunity to compare the event registration list with the hotels in house guest list to find attendees who booked outside the group block.

• Needs: Any specific group need should be outlined in the contract in a clear way that can not be subject to misinterpretation. 

• Attrition and cancellation clauses: "If attrition damages are required in the contract, include provisions that the group rate will be extended to after the cut-off date, up to the last room available in the hotel," explains Foster. 

• Detailed description of meeting space: A description of agreed upon function space. Kramer makes sure to include the name of the meeting room, its size, and layout in the contracts she prepares. Is room rental complimentary? State it. 

• Food and beverage minimums: What happens if you do not meet it? Do other food outlets within the hotel contribute to the minimum?

• Relocation: What happens if attendees are relocated to another hotel?

• Overbooked hotel prior to cut-off date: Foster created this clause several years ago to address a common problem that occurs when the economy is favoring hotels. "Hotels frequently overbook during high-demand dates by blind-cutting into room blocks that they don't believe will pick-up," says Foster. "A group's attendees will get turned away even though the room block is not actually full." 

This term in the contract should state that if the hotel turns away rooms before the block is full then the hotel will owe liquidated damages to the group equal to the number of room nights the hotel is unable to accept in the group's block, multiplied by a percentage of the rate. Additionally, Foster says, the group should be credited with the number of room nights turned away to offset any attrition damages alleged by the hotel.

• Construction/remodeling clause: Stipulate that no construction or renovations will be conducted during the dates of the meeting that will impact it, its image, logistics, or the experience of attendees. Foster recommends that the contract state that the hotel must notify the group if construction is planned over the meeting dates and the group has the right to terminate the contract without liability if it reasonably determines that the construction will materially affect the success of the meeting. 

• Miscellaneous charges: What if the hotel is sold before your meeting and now charges a resort fee, asks Kramer. It must be stated in the contract that no additional resort fees or other surcharges can be added that are not listed in the contract. Describe the specific information technology needs of the meeting. What bandwidth do you expect? What will be the Wi-Fi costs? The contract should further state that acceptance of surcharges by a guest cannot be a condition of check-in, advises Foster. Compliance with these terms should be labeled a "material term" by the parties, giving the group the right to terminate the contract without liability if the hotel breaches this term, adds Foster.

Not only does Kramer create a customized contract for each client but a contract checklist as well. This way, she has a back-up in place to make sure all needs are being met and nothing falls through the cracks. 

What About a Breach of Contract?
If there is a breach of contract, both parties must state in the contract how damages for that breach will be handled. Foster explains that breach by one party entitles the other party to damages, but not penalties. Penalties are not allowed in contracts and will be voided in court, and they exist if the injured party would benefit more financially if the contract were breached by the other side than if the contract were performed.

Damages are defined as lost profits, not 100 percent of lost revenue. Lost profit is defined as gross departmental revenue minus variable expenses. An injured party has a duty to mitigate its damages (this is known as the Doctrine of Avoidable Damages) unless reasonable liquidated damages are agreed to by the parties.

"The bottom line is I don't want any surprises," says Kramer. "When you do good business, it's beneficial to all parties involved."

Foster summarizes the negotiation process this way: "If one side asks the other side for a concession before the contract is signed, it is called 'negotiating.' If one side asks the other side for a concession after the contract is signed, the legal term is 'begging.'" Begging is never a good position to be in, he adds. "Put the time in on the front end to discuss and include all of the terms that need to be included in the contract to avoid potential disputes between the parties in the future."

He recommends meetings professionals get the advice of an attorney to deal with the complexities that now define hotel contracts. He concludes that "hotel contracts today are no longer for the uninformed or unarmed to deal with alone."

This article appears in the June 2015 issue of Successful Meetings.