The economic downturn has been marked by a surge in disputes between hotel owners and operators concerning their rights and duties under hotel management agreements. One of the issues that owners and operators frequently litigate is whether the hotel management agreement gives rise to an agency relationship governed by common law principles of agency.  A court’s decision on this issue alone can determine whether a hotel owner can unilaterally terminate a management agreement despite the fact that the management agreement may still have decades remaining on a standard 20-40 year term.  

This post provides a brief overview of the agency relationship, highlights the inconsistent treatment by courts, and offers a couple drafting tips to consider when negotiating a management agreement. 

Overview of the Agency Relationship

A hotel management agreement that divests the hotel owner of the day-to-day control of the hotel’s operations and places that control in the hotel operator typically creates an agency relationship between the hotel owner and operator, with the operator being the owner’s agent. This can happen even when a hotel management agreement expressly states that the hotel operator is not an “agent,” and attempts to otherwise disclaim the implied duties associated with an agency relationship.  When construed as an agency contract, the hotel owner (as principal) can unilaterally revoke the contract at will.  The owner may nonetheless still be liable to the agent for damages, but it remains a powerful option for the owner and a risk for the operator.

One exception to a principal’s right to terminate its agent at will is when the agency is coupled with a specific property interest. Courts reason that when an agent has its own interest in the subject matter of the agency, the agent’s work is, in part, to protect its own interest in the property it is managing, which means the agency is not solely for the benefit of the principal.  In practice, however, courts have been reluctant to find that a hotel operator (as agent) has an agency coupled with an interest.

Inconsistent Treatment by the Courts

Despite hotel owners’ and operators’ efforts to control the enforceability (or lack thereof) of a hotel management agreement, the courts have yielded different results on similar sets of facts.

For example, in FHR TB, LLC, et. al, v. TB Isle Resort, LP, where TB Isle Resort, LP (“Turnberry”) the owner of a hotel in Aventure, Florida, ousted its hotel operator FHR TB, LLC (“Fairmont”), a company owned by Fairmont Hotels & Resorts (U.S.) Inc. (“FHRUST”), in contravention to the language contained within the hotel management agreement entered into between Turnberry and Fairmont, and Fairmont and FHRUST sought a preliminary injunction reinstating Fairmont as the hotel manager, the court refused to grant such injunctive relief finding that the hotel owner was not likely to succeed on the merits under agency law principles as Fairmont’s agency was not coupled with an interest. On the other hand, just last week in Marriot International, Inc. and Renaissance Hotel Management Company, LLC vs. Eden Roc, LLLP, where Eden Roc, LLP (“Eden Roc”), a hotel owner, ousted its hotel operator Renaissance Hotel Management Company, LLC (“Renaissance”), a company owned by Marriot International, Inc. (“Marriot”), in contravention to the terms of the hotel management agreement it had entered into with Renaissance, Marriot and Renaissance succeeded in obtaining a preliminary injunction restraining Eden Roc from taking any action that would interfere with Renaissance’s management and operation of Eden Roc’s hotel.

Given this uncertainty, owners and operators need to understand the impact that agency principles, together with management agreement provisions intended to support or counter those agency principles, can have on the ability of a hotel owner to unilaterally terminate a management agreement.

Drafting Considerations

  1. The parties should clearly and accurately define the relationship between them in light of a common law agent’s fiduciary duties to its principal.
  2. Consider having Maryland law govern the agreement.  Sections 23-101 to 23-106 of the Maryland Code, provide, in part, that the express terms of hotel management agreements shall govern even if those terms conflict with principles of agency law. This can ensure that the agreed upon language set forth in the agreement will govern.
  3. A hotel operator, which of course will be interested in ensuring that the owner will not have a unilateral termination right, should consider a wrongful termination indemnity clause that includes damages which are customarily excluded from hotel management agreements (such as consequential and punitive damages and damages related to financial detriment the hotel operator sustains to its brand-reputation, loss of location and revenue stream). The success rate of such a provision is untested, but given that courts find that hotel owners are liable for breaking hotel management agreements prior to the expiration of their terms (assuming the hotel operators did not commit a material breach), making the damages as extreme as possible would be a significant disincentive.