HOUSTON—Among the myriad legal issues making life interesting for hotel owners and operators, planners putting together the agenda for this year’s 10th Annual Hospitality Law Conference, held here this month, chose to highlight three: the legal dynamics in negotiating management agreements; real estate issues in dealing with distressed properties as the industry continues to recover from the downturn; and labor concerns, particularly in regard to hourly employees’ wages and tips.
“Management companies have become a more critical part of the hotel industry in the past few years and we felt they warranted more scrutiny at this year’s conference,” explained Stephen Barth, president & founder of HospitalityLawyer.com, sponsor of the Hospitality Law Conference.
Sessions devoted to the topic, which included a mock negotiation of a management agreement, drew a strong response. “There are a lot of issues around what we loosely call management agreements, which may or may not be legally binding. The focus was on the agreements themselves, key terms, and the best way to negotiate the agreements,” said Barth.
“Agreements can be letters of intent (LOIs) that are generally non-binding, but may contain some binding provisions,” explained Albert Pucciarelli, a partner at McElroy, Deutsch, Mulvaney & Carpenter, LLP, who spoke at one of the sessions. There have been a number of high-profile disagreements in the past few years between owners and management companies, Barth added. “You never used to hear of these disputes, but we’re seeing more and more of that. The agreements need more scrutiny today than might have been necessary in earlier times,” he said.
On one level, there’s simply more money at stake today than there used to be. There’s also more potential liability. Many management companies have grown to the point where they are significant players themselves. “Many also own and manage versus strictly third-party manage and that may need clarification as well,” noted Barth, who is also a professor at the Conrad Hilton College of Hotel and Restaurant Management at the University of Houston.
Management companies, in fact, frequently take an ownership interest in the properties they manage, even if it’s sliver equity of as little as 5%. They’re then able to say that their interests are aligned with the interests of the owner. “But this can also muddy the waters. The agreements need to be crystal clear in cases like these,” Barth said.
Changes like this translate into the need for lawyers to become more adept in this practice area. “We’re certainly seeing the need for better-informed lawyers about this aspect of our industry, lawyers who understand the relationship between owners and management companies, so they can help to draft these agreements accordingly,” he said.
Lawyers who are involved in real estate transactions, meanwhile, increasingly need to know about the financial side of the deal so that when they represent the owners or the management company, they understand all the technical aspects of the financing. In an environment where a large number of hotels continue to become distressed, lawyers, furthermore, need to be adept in bankruptcy and foreclosure, asset management and special servicers.
Certain management companies have positioned themselves as interim managers, specializing in getting properties out of distress and ready to sell. They consider themselves turnaround specialists. Some are formally appointed as receivers by the bankruptcy court. “There’s been a big burst of growth among those types of management companies and, consequently, a corresponding growth in the need for lawyers experienced in this area,” Barth noted.
As the economy rebounded in 2011 and industry fundamentals started to improve, the transactions market began to heat up, at least in the first part of the year. Yet not all markets benefited equally. “The top five markets have seen a lot of activity, but markets like Austin are attracting interest as well,” said John Bourret, managing director of Holliday Fenoglio Fowler, LP, on a panel about the availability of capital.
“It’s still too early in the year to tell how the transactions market will fare in 2012, especially regarding the REITs, which were very active players last year,” noted Jonathan Falik, a managing director at Cantor Fitzgerald & Co., who spoke on the same panel.
Labor and employment law remains a hot-button area, according to Barth. “We have this entire situation around tip credit, a wage issue affecting hourly employees that is causing some angst for hotels that use the tip credit system for wages,” he noted.
Sexual harassment still plays a role in the hospitality arena as well, “probably at a bit of a higher rate than in other industries. Some of it just reflects the nature of our business, which often entails entertaining with alcohol, access to guestrooms and so on,” he said. “Then there’s the whole question of whether we need to treat employees equally or equitably in terms of tattoos, earrings and piercings.”