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November 01, 1998
Meetings & Conventions All things Reconsidered November 1998 Current Issue
November 1998

All things Reconsidered

The contract is signed, but that doesn't mean the deal is done. In fact, renegotiating is becoming common practice. What are your legal rights?

BY MARIA LENHART

As no one knows better than those who plan meetings do, things don't always go according to plan. After a hotel contract is signed, any number of things can bring parties back to the bargaining table: You want a larger room block; the hotel wants to reduce the one you already have. The hotel wants to move your dates back a week; you want to move them up a month. The hotel announces a massive renovation that will be in full swing during your meeting; you don't want your group picking sawdust out of their awards-dinner entrées.

For these reasons and a hundred others, it's no longer safe to assume that done deals are really done. And although the prospect of renegotiating may be stressful, it may also be an opportunity to avert disaster or even improve upon the original agreement. "Savvy planners and suppliers do it every day," says Atlanta-based attorney John Foster. "As long as you follow certain guidelines, both sides win."

How likely are you to wind up back at the table? The chances are growing all the time, say attorneys specializing in meetings industry issues. They note that the hotel seller's market and the changing nature of the hospitality industry have made contract renegotiation increasingly common. "Hotels are under pressure to raise their rates, and they also have a greater chance of snagging a lucrative piece of short-term corporate business," Foster says. "So they may want an association to change its dates or room block to accommodate the short-term business. This is the biggest single reason why renegotiation is on the increase."

Of course, not only hotels initiate renegotiation. Planners often want changes, too, particularly when projected attendance skyrockets or nosedives as a meeting draws near. Unfortunately, the same factors driving hotels to seek concessions from groups also make them less flexible when planners seek changes. "Hotels do value their long-term relationships and they may be willing to give on some points, but they are also under a greater push for yield management and profits," says attorney Kim Zeitlin, partner in Zeitlin & Buonasera in Washington, D.C. "They will be sticklers on points that they used to overlook."

That's why legal experts recommend contracts be written with renegotiation in mind, specifically addressing potential changes and giving both sides room to adjust. They also caution against clauses that give one party the right to make changes without the other's consent. "The contract should always ensure that all future decisions be mutual," says Jed Mandel, partner in the Chicago-based law firm of Neal, Gerber & Eisenberg, who observes that too often, contracts let hotels dictate room block adjustments and rate increases.

The increasing probability of renegotiation also makes it crucial for contracts to spell things out in no uncertain terms. "It's a big mistake if planners are not specific enough about what they want," Foster says. "If the contract is too vague, it's easy for the other side to reinterpret things in their favor."

Zeitlin adds that ambiguous contract language makes for rocky renegotiation. "Sometimes words open themselves up to reinterpretation - words like 'quality,' 'reasonable,' 'prevailing' or 'deteriorates'...can lead to confusion."

What renegotiation scenarios should contracts anticipate? Although most contain attrition clauses that address room block changes, other important considerations are frequently overlooked. "Contracts rarely address situations that can affect the quality of the hotel and therefore the meeting, things like changes in ownership or disruptive renovations," says San Francisco-based attorney James Seely. "Astute planners will insist that the contract covers these and any other issues."

And no matter how difficult renegotiation might seem, it's nearly always better to work things out rather than go to court. "A court battle will usually be far more expensive and time-consuming than it's worth," says Zeitlin. "It's best to address the problem before it gets out of control."

Following are some common reasons hotels and planners return to the bargaining table - and what planners should do to protect their groups' interests.

  • A year prior to the meeting, the hotel asks for a higher room rate than was agreed upon when the contract was signed five years ago.

    With hotel rates in many cities increasing sharply during the past few years, it's little wonder properties are dissatisfied with deals made when buyers had more clout. Still, there's not much a hotel can do if an original contract spells out the group rate. "If your hotel contract says you get X room rate, the hotel can't change it to Y," says Phoenix, Ariz.-based attorney Lisa M. Sommer Devlin, senior member of O'Connor, Cavanaugh, Anderson, Killinsworth & Beshears. In other words, you can just say no.

    But what if a hotel wants to reserve the right to increase your rate between the time the contract is signed and the time of the meeting? "Usually when meetings are booked years ahead, the hotel rate is not set at that time," Devlin says. "In those cases, however, the contract should specify by how much an agreed-on rate can increase each year until the time of the meeting." So if a contract has allowed for a 5 percent a year increase from the time it was signed until the meeting, that's the maximum you have to agree to.

    If a contract doesn't specify a rate or set limits on increases, then the hotel has the upper hand. "In effect, it's like giving the hotel a blank check to set whatever rates it wants at the time of the meeting," Foster says.

    Regardless of whether a contract protects you from rate increases, there are times when it's actually to the group's advantage to give in to a request for more money - providing they get something worthwhile in return. "Sometimes the group will agree to a higher rate in exchange for getting a substantial break on food and beverage or meeting space," says Foster, who notes that many hotels offer myriad amenities, from turn-down service to airport transfers to hospitality suites, that can all be bargained for. "You need to weigh what actually provides the most overall value for your meeting."

  • It's prior to your cutoff date, but the hotel says it's overbooked during the time of your meeting and needs to reduce your room block. You know you'll need those rooms.

    Much has been made over a hotel's right to collect damages when groups don't fulfill their room blocks, but what happens when the situation is reversed? Unfortunately, few contracts give groups the same protection that hotels get from the attrition clauses that have become standard procedure. "In many cases, the most planners will get is an apology from the hotel and an agreement not to charge for the rooms that were made unavailable," Foster says. "It's difficult to quantify what damages you're entitled to in these cases, and planners are on thin ground if they try to seek compensation from the hotel."

    These days it's not unusual for hotels enjoying both high group and transient business to overbook or practice "blind cutting" - secretly reducing a group's room block. Both are happening so often that Foster advises planners to include in their contracts a "reverse attrition" clause enabling meeting sponsors to collect damages. "The seller's market has made it essential that groups get the same consideration hotels get with attrition clauses," he says.

    Foster developed a reverse attrition clause for clients two years ago after receiving numerous calls from associations dealing with shrinking room blocks. The "Overbooked Hotel Prior to Cutoff Date" clause stipulates that a meeting sponsor is due damages equal to a certain percentage of a group's average room rate on the number of rooms taken away prior to the cutoff date. It also stipulates that if a hotel does not provide a certain percentage, usually 70 to 75 percent, of the contracted room block, the meeting sponsor can terminate its obligations to the hotel without liability and hold the hotel liable for breach of contract.

  • As a meeting draws nearer, you realize your group will not be large enough to fill the room block.

    Let the hotel know as soon as you do that an adjustment needs to be made. "The sooner the hotel knows you can't make your room block, the greater chance they have to resell those rooms," says Devlin. "Trouble happens when you don't let them know until it's too late."

    "The best thing is to first explain the situation to the hotel - the more they know, the more they may be willing to help," says Zeitlin. "If you give them a valid rationale, it's easier to renegotiate. They might be willing to feature your dates in a hot dates promotion to attract another group or offer the rooms to a discount broker."

    Although an attrition clause might entitle a hotel to collect damages on unsold rooms, it's important to know that hotels are only entitled to lost profits (usually figured at 70 to 75 percent of the actual room rate, according to Foster), not the entire revenue lost on each room. Similarly, a hotel cannot expect you to pay for any rooms it is able to resell. "Attrition cannot be used as a windfall profit for a hotel - that's the law even if the contract doesn't stipulate it," says Foster.

    In some cases, planners might be able to lessen attrition damages on sleeping rooms by offering to spend more on other areas, such as food and beverage functions or meeting space. "As long as the hotel can realize its overall profits, it may be willing to let you renegotiate for different ways to accomplish this," Foster says.

    To avoid the situation in the first place, legal experts recommend that contracts allow for room blocks to be adjusted. "On long-term bookings, the contract should allow for revision a year prior to the meeting," says Zeitlin. "Since last year's meeting is usually a good indication of attendance at next year's meeting, this allows you to get a more realistic picture of how many rooms you'll need."

    Attorneys also recommend that contracts not give hotels the right to make any changes in the room block without the consent of the meeting sponsor. If a hotel is insistent that the room block be decreased even though you know those rooms will be needed, it might be worthwhile to guarantee payment for the rooms. "Sometimes a hotel will look at your meeting history and determine on that basis that you won't make your room block," Mandel says. "But there might be other factors that will make this year's attendance especially high - perhaps this is the association's 50th anniversary or the meeting is in a city that always draws heavy turnout. If you absolutely know those rooms will be filled, it may be worth it to make a guarantee."

  • The hotel asks you to change the dates of your meeting.

    When hotels have a chance to book a more lucrative piece of short-term business, they may attempt to get a less profitable group out of the way by offering alternate dates. If your contract specifies certain dates, you're under no obligation to comply, according to James Seely. "If those dates are in the contract, they're yours," he says.

    However, some hotels might go ahead and book the more profitable meeting anyway. "The hotel may figure even if they have to pay you off, they'll still make more money," says Seely. "In that case, you are entitled to ask for compensation to cover the expenses of meeting in a new location - the hotel should pay for such things as reprinting promotional materials, the difference in room rates and any increased costs in ground transportation."

    Sometimes, however, it may be worthwhile to comply with the hotel's request in exchange for lower rates, complimentary meeting space or other incentives that make up for the inconvenience. But, cautions Zeitlin, it's important to weigh the pros and cons. "One of my association clients was recently asked to move its dates up two weeks by a resort that had mistakenly booked another group at the same time," he says. "They got a substantial discount on the rate, but it remains to be seen whether this will be good or bad for attendance. The reduced rate might attract more people, but there's also the risk that the new meeting dates, which happen to be the week before Thanksgiving, could have a negative effect."

  • The hotel wants to reduce your amount of meeting space or move your group to a different set of meeting rooms.

    If your meeting space requirements are specified in the contract, the hotel is obligated to honor that commitment, says Mandel. However, many planners make the mistake of not specifying exactly which meeting rooms they want. "If the contract simply states that you want function space large enough to seat 300 at a banquet, the hotel could decide to move the group to a tent in the parking lot," he says. "If you're not specific about what you want, you've given the hotel the unilateral right to make the choice for you."

    However, there are also times when a hotel's request for a reduction or change in meeting space can create an opportunity for the group to get something of greater value in return. For instance, if a hotel asks you to give up a larger meeting room in exchange for a slightly smaller one, you might want to comply if the hotel agrees to waive all meeting room charges. Or there might be other concessions to bargain for. When presented with such a situation, Foster urges planners to "review their notes from the original negotiation and determine what they wanted in the deal the first time but didn't get."

  • You discover attendance at meal functions will be lower than anticipated.

    Most contracts require planners to commit to a minimum dollar amount of food and beverage, usually six months prior to the meeting, according to Jonathan Howe, senior partner in Howe & Hutton, Ltd., in Chicago and Washington, D.C. Although the situation gives little room for renegotiation, planners will have more bargaining clout if they agree to pay a minimum dollar amount for all food and beverage supplied during the meeting rather than agreeing to pay a minimum amount per meal function.

    "Always make sure your minimum is for a total amount of food and beverage that can be used for any function," recommends independent planner Arlene Sheff, president of Meetings etc. in Irvine, Calif. "That way, if you know only half the group will show up for breakfast, you can use some of your allotment for a cocktail reception."

    Food and beverage attrition clauses that require a minimum on each meal can be a double whammy for groups. "If you're already liable for attrition on rooms, you're likely to come up short on food and beverage too," says Sheff. "At least if you have a minimum that covers the food and beverage total, you can use it for ordering more sumptuous items."

    Sheff also cautions against giving a hotel (or any venue where you're holding a meal function) the right to increase food prices without consent. "Sometimes a hotel or yacht charter company will want a contract that says the food price will be determined at the time of the meeting. Don't give them that right."

    Devlin recommends that contracts stipulate when food prices will be set, normally three to six months out. "Wholesale food prices may go up or down before the meeting, but the hotel normally takes that risk or agrees to a limit on increases tied to the consumer price index."

  • The meeting is in progress and some attendees are complaining about bad food and rude service.

    Although you are unlikely to get the hotel to agree to reduce the meeting tab, it might be willing to soothe the feelings of disgruntled attendees in other ways.

    "Properties are always more willing to make service allowances than to give back money," according to Zeitlin. "For example, they might compensate for a bad experience with fruit baskets or extra amenities that really don't cost them that much."

    When problems with food or service arise, it is important to settle them on the spot. "If the food is bad, send it back immediately, or if service is poor, let the hotel know at once," says Zeitlin. "The hotel is much more likely to make amends at that stage. If you wait until after the meeting, it's very hard to get compensation."

  • The five-star hotel you've booked has suddenly changed ownership and/or management, and you fear a decline in service and overall quality.

    You can't cancel unless you have a contract that includes a clause that allows you to do so in the event of a management or ownership change. "If the contract is silent about this issue, it remains in force," says Zeitlin. "If the new owner or manager wants to perform, the group cannot back down without breach of contract."

    Conversely, a new management company cannot simply cancel your meeting if the contract doesn't give them the right. "Sometimes the new owner or management will want to upgrade the hotel and unload some business that doesn't give them the kind of profits they're seeking," says Mandel. "But they can't just back out of contracts that were negotiated by the previous management."

    Should you insist on a contract clause that addresses change of management? If holding a meeting at a hotel with name-brand recognition is important to your group, perhaps you should. "Change of hotel management happens frequently, and sometimes it makes a difference to the meeting," says Mandel. "If you are concerned that it could happen to your hotel, you might as well deal with the possibility up front."

  • You learn that the hotel has filed for bankruptcy.

    Under bankruptcy laws, including Chapter 11, which allows for reorganization, all contracts remain in place, says Howe. He recommends that meeting planners insist on a clause that gives groups the right to cancel if the hotel goes into bankruptcy or creditor reorganization.

    Howe also notes that management groups taking over financially troubled hotels often want to renegotiate contract terms. "It might be to the planner's advantage to attempt to renegotiate with the new management organization or trustee in the bankruptcy," he says. "That will allow for adjustments, either up or down, in rates and other amenities."

  • Change for the Better Ideally, renegotiation will result in a new contract that satisfies all concerned. Legal experts recommend the following measures for keeping change amicable.

    Keep in touch. Planners should communicate with hotel contacts at regular intervals. If you need to make changes, particularly in the room block, notify the hotel as soon as possible. The more time the hotel has to resell rooms or make other adjustments, the more likely things can be resolved.

    Give and take. "A basic principle of renegotiation is that if you're asked to give something up, you're offered something in return," says Atlanta-based attorney John Foster. Depending on what you receive, it could be worthwhile to comply with the hotel's request. For example, if the hotel asks for a higher room rate, you might ask for complimentary meeting space, free airport transfers or extra services that more than make up for the increased room charge.

    Make it mutual. The contract should not give either party the right to make changes or unilateral decisions without the written consent of the other.

    Bring in the referee. Washington D.C.-based attorney Kim Zeitlin recommends that contracts include a mediation clause that gives both parties the right to call in a mediator they both approve of, if necessary to resolve a dispute.

    Keep it civil. Always approach the other party with a cooperative - not hostile - attitude. If you initiate a renegotiation, don't give the hotel reason to view it as an adversarial move or a thinly disguised attempt to get out of an agreement.

    M.L.


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