THE CHANGING OF THE FLAG

In recent years, an inordinate number of hotels have changed hands. New ownership or management can have an impact on the contract between the meeting planner and the property.

Here is a hypothetical situation: In March 1998, a planner books a hotel for an event to be held in January 2001. The contracted room rate is $145, and $75,000 is to be spent on food and beverage. The hotel is sold in July 2000. In the process, the buyer says to the seller, “I only want contracts that generate at least a $150 room rate, plus a minimum of $100,000 of food and beverage. I will not honor the others.”

Unfortunately, from a legal perspective, there is little precedent as to what happens when a new owner “just says no” to your business.

A provision specifying that the contract must be honored by the new owner in the event of a sale might not be enforceable. The buyer could argue no agreement with him exists that the planner struck the deal with the former owner, and if the planner has a claim, it should go against the former owner.

If the new owner won’t honor the terms of the original agreement, the law provides remedies for breach of contract in two ways.

If damages can be computed, the courts will allow the planning organization to recover financial losses, probably from the former owner. In some situations, however, the court might insist the terms and conditions of the contract be upheld. But the buyer will contend there is no obligation to fulfill someone else’s agreement. The court might find the planner’s only recourse is against the seller the party who agreed to the contract initially.

THE REALITY
Scenarios aside, what are the planner’s options if a new owner refuses to honor a previous agreement? One doctrine of law deals with “interference with contract.” When the buyer and seller agree on the sale, knowing event contracts are outstanding, the courts might view the failure of the buyer to honor the agreement as an intentional interference with the contract between the original owner of the hotel and the planner.

There is some precedent allowing the planner to insist that the new owner honor the contract. The reasoning is, at the time of the sale, the new owner understood the obligation to perform and frustrated that obligation by refusing to assume the contract.

PREVENTION
We include a provision in our hotel contracts stating that if the hotel is either reflagged or sold, the meeting professional has the right to cancel without any liability. Planners might include a provision that the seller must consider the meeting contract an asset to be transferred, and must require the new owner to assume the existing contract if the event sponsor does not decide to cancel.

Such a clause makes it clear the buyer knows or should know of the contract, and by refusing to honor it he has prevented the event from going forward. The clause might also contain a provision recognizing the right of the planner to insist the new owner not only honor the original contract, but cover attorney fees and related costs if legal action is taken.

Also, remember that when a hotel is sold or reflagged, remodeling is certain to follow. Put terms and conditions in the contract that address the right to cancel and to be properly notified if any changes or remodeling might materially interfere with the upcoming event.

While nothing can guarantee a recalcitrant buyer will not try to cancel, these measures might make it smarter to honor an existing deal than to back out and risk a costly court battle.