Broken Hotel Management Contracts Can, and Do, End Up in Court, says Cornell Report
When the world financial crisis hit, many hotel management contracts were terminated, often without the managers' prior knowledge or consent. However, now the bill is coming due—and it can run to millions of dollars. A report from the Cornell Center for Hospitality Research (CHR) explains how courts calculate the damages that result when a hotel management agreement is terminated without the manager's consent.
When the world financial crisis hit, many hotel management contracts were terminated, often without the managers' prior knowledge or consent. However, now the bill is coming due—and it can run to millions of dollars. A report from the Cornell Center for Hospitality Research (CHR) explains how courts calculate the damages that result when a hotel management agreement is terminated without the manager's consent. The report, "Calculating Damage Awards in Hotel Management Agreement Terminations," by Jan A. deRoos and Scott D. Berman, is available at no charge from the CHR and also from the Cornell Center for Real Estate and Finance.
"Although most owners and management firms have settled their contract issues amicably, we have seen some highly visible disputes go to court—and the damage judgments have been large," explained Berman, who is the industry leader for the hospitality and leisure sector for PwC. "We have seen damage awards in some cases exceeding $20 million. The reason for the size of these damage awards is that the courts calculate all the lost fees for what would have been the contract term, and that usually includes many years, if not decades. This means that the owner may have to pay out several million dollars in lost revenue to the management company."
"Based on the calculations accepted by the courts, we have developed a way to make a fairly solid calculation of the damages that would result from the involuntary termination of a hotel management agreement," added deRoos, who is the HVS Professor at the Cornell School of Hotel Administration. "I want to emphasize that the damage claims have to be solid, because the courts do not accept general averages and estimates. We also give a numerical example that demonstrates that the actual damage amount is at least twice and potentially five times the amount of a typical termination fee. In summary, once again we see proof that it's better to negotiate your differences than to go to court."
About the Center for Hospitality Research
The purpose of the Center for Hospitality Research is to enable and conduct research of significance to the global hospitality and related service industries. CHR also works to improve the connections between academe and industry, continuing the School of Hotel Administration's long-standing tradition of service to the hospitality industry. Founded in 1992, CHR remains the industry's foremost creator and distributor of timely research, all of which is posted at no charge for all to use. In addition to its industry advisory board, CHR convenes several industry roundtables each year for the purpose of identifying new issues affecting the hospitality industry.
Center Members: Accenture • Access Point Financial, Inc. • Barclaycard US • Cvent • Davis & Gilbert LLP • Deloitte & Touche USA LLP • DerbySoft • Four Seasons Hotels and Resorts • Fox Rothschild LLP • Hilton Worldwide • Host Hotels & Resorts • Hyatt Hotels Corporation • IDeaS Revenue Solutions • InterContinental Hotels Group • Jumeirah Group • Marriott International • NTT DATA • Preferred Hotels & Resorts • priceline.com • PwC • The Rainmaker Group • RateGain • ReviewPro • Revinate • Sabre Hospitality Solutions • STR • Taj Hotels Resorts and Palaces • Tata Consultancy Services • Wipro EcoEnergy • Wyndham Hotel Group
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