Hotel Owner-Operator Disputes: Marriott V Eden Roc -- What It All Means For Terminating Hotel Management Agreements

 
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Hotel owners: How the appellate decision in Marriott International v Eden Roc can affect your hotel investment (and why you should understand the law behind the court's decision)

As we reported in our 27 March 2013 blog, a New York Appellate Division court made it possible for the owners of the Eden Roc Renaissance hotel in Miami Beach to oust Marriott as its operator -- despite the long-term hotel management contract between the two, which would have lasted another 43 years. (See "Marriott loses appeal in Eden Roc case: Why all long-term hotel management agreements are now terminable.")

Setting the stage: owner-operator disputes over hotel management agreements

The relationship between a hotel owner and hotel operator is complex. While the owner bears the financial risk of the hotel's success or failure and its gain or loss in value, the operator has the exclusive right to manage the owner's business and is paid "off the top" whether the hotel is profitable or not. The contract between the owner and operator -- the hotel management agreement -- typically transfers control of the hotel's assets to the operator.

Hotel owners nationwide are keenly aware of both the benefits and impediments of long term hotel management agreements with branded operators (and nearly all such contracts are long term, often running 40 or 50 years). On the upside, the brand can provide stability, consistent standards, a reservation system, marketing expertise and professional staffing. But the downside can be hard for owners to live with -- brands can rigidly incur needless expenses, be unresponsive to market conditions and impervious to the owner's need to run a profitable business and protect its asset.

While the majority of hotel owners and operators work hard to achieve a balance that is a win-win for both parties, it is easy to understand how things can go badly, fast.

Background: The Eden Roc - Marriott dispute

On March 30, 2012, Key International, the owner of the 631-room Eden Roc hotel in Miami Beach, terminated Marriott as the hotel's operator "...following years of mismanagement of the property and a failure to maximize the Eden Roc brand," according to its news release. But Marriott refused to acknowledge the termination or vacate the hotel. In October 2012, Eden Roc attempted to remove Marriott from the hotel's premises, but Marriott refused and obtained a temporary restraining order barring the hotel's owner from trying to oust it as Eden Roc's operator.

The owner appealed the decision and on March 25, 2013, a New York appeals court issued an order that vacated the lower court's injunction. Key International is now free to terminate Marriott as Eden Roc's operator.

What the Eden Roc decision means to hotel owners

Now that an appellate court has ruled that a hotel owner can terminate a hotel management agreement with its operator -- the second time an appellate court has done so -- owners are asking, "Does this mean I can terminate my hotel operator, even if I have a long term contract with them?"

The short answer is "Yes." Hotel owners can regain control of their hotel property when they see fit. This is good news for...

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