commodity broker

Fiduciary issues still keep lawyers up at night

The legal issues panel discussion at this year's 26th annual NYU International Hospitality Industry Investment Conference asks the question, "What is keeping your lawyer up at night?" The short answer: chronic ailments, such as the often contentious relationship between hotel owners and management companies, and relatively new sources of aches and pains, such as the control of room rates with Internet selling.

Panel moderator William Brewer III, managing director of the Bickel & Brewer law firm in Dallas, acknowledged that hotel executives continue to debate and litigate the various fiduciary responsibilities in management contracts, but said the issue has been at the forefront since the 1990s.

"If people still want to talk about it, they are Rip Van Winkle," he said. "Everyone knows that if you are going to be in the management business, or even the franchising business, and if you are going to collect money in the best interest of the hotels, you have to do it in a way that is transparently clear to the owners."

Brewer said Internet discounting is the newer, more explosive legal issue.

"Every night, 35 percent of inventory of three- and four-star hotel brands is being disposed of by brokers," he said. "If you are a large owner of hotels, are you going to be a commodity broker by the year 2010?"

The conflict between owners wanting to trade rates for occupancy and brands not wanting to cut rates has emerged because the concept of brand loyalty was built long before Internet discounting existed.

"Say I own a four-star J.W. Marriott [hotel]," Brewer said. "Marriott International says I cannot dispose of my rooms on the Internet, saying we have a no-cut contract signed in 1995. I, as the owner, say, 'As good as you do, you don't do enough, and whenever I have less than 80 percent occupancy, I want to dump the excess inventory on priceline.com.' Is Marriott allowed to say no to this?"

The related scenario of reservation technology and data collection methods running aground of the management agreement promises to rear its head, says panelist Michael Feldman, partner at Proskauer Rose LLP, New York. On one hand, a management company is bound by the contract to maximize profits for the hotel, but on the other hand, it might be a multibrand operator with a reservation system that cross-markets brands.

"The diversion of business from one hotel to another, one brand to another, previously was not actionable, but may become so in the near future," Feldman said.

Some panelists said debate over fiduciary responsibilities has actually settled down in recent years.

"In the past year, there has been less disagreement than during the previous three years," said Michael Sullivan, co-managing shareholder of Greenberg Traurig in Orlando. "This has been a by-product of the flags disclosing more information."

But Sullivan agreed that the collection of guest data by multibrand operators promises to create legal minefields. Flags with hotels that have a residential component benefit from that kind of data. It is a double-edged sword, he says, because it is unreasonable for an owner not to expect the deep market penetration that a multibrand hotel company gives you, but on the other hand, they don't want to be impacted by other flags in the brand owner's portfolio, he said.

Beyond the management contract, other legal issues will be discussed. Carl Lee, partner, Akin Gump Strauss Hauer & Feld LLP in Dallas, said terrorism continues to cast a shadow over insurance requirements for hotels. He said lenders tend to draft broad terrorism insurance requirements regardless of the nature of the hotel asset, typically resulting in a larger-than-expected expense. Also as a result of 9/11, Lee sees a potential increase in hotel security litigation because of disagreements over whether standards of care have been raised beyond practical levels.

Sullivan, meanwhile, sees water intrusion as a slippery slope for some hotel properties. He said the standard has been to spend about 4 percent of annual capital expenditures on the prevention of mold contamination, but as the issue becomes more and more litigated, a proactive stance might be warranted.

"Owners having a tendency to sweep mold contamination under the rug, let the condition worsen, and then a major cap-ex is necessary, but the eve of sale is too late to do that," Sullivan said.

He recommended that the owner and management company communicate periodically about water intrusion, "but these discussions have to be guarded because you don't want to deliver a smoking gun to the plaintiff's lawyer."

Panelists also are keeping an eye on municipally funded convention-center hotels. The political selling point of these types of projects typically is that all hotels benefit from a large hotel attached to a convention center because of the larger events that can be attracted.

"We question whether there is a ripple effect," Brewer said. "What happens if there are a few thousand new employees for the new hotel but the rest of the hotels board up?"

Brewer maintains that the convention center-related hotel bookings have been flat since 1980.

"It spikes up and down every few years, but by and large the major cities get all the business and the secondary and tertiary markets are fighting for a static amount of business," he said.

"[Convention center hotels] can do great things for the municipalities, but there is great debate over the way they are financed, which is essentially the room tax from the hotels in that marketplace," Sullivan said.

There are 25 to 30 deals for publicly funded convention-center hotels in bloom right now, he said, all of which could become the source of impact litigation for existing hotel owners.

26th annual NYU International Hospitality Industry Investment Conference

Workshop: "Tossing & Turning: What's Keeping Your Lawyer Up At Night These Days?"

Date: Monday, June 7

Time: 3:45-5 p.m.

Moderator: William A. Brewer III, partner, Bickel & Brewer

Panelists: Michael E. Feldman, partner, Proskauer Rose LLP; Sandra Y. Kellman, partner & co-chair, Piper Rudnick; Carl B. Lee, partner, Akin Gump Strauss Hauer & Feld LLP; Michael Sullivan, co-managing shareholder, Greenberg Traurig; William Weber, partner, Hughes, Hubbard & Reed LLP.

hmm@advanstar.com

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