Hotel management agreements (HMAs) are typically long-term agreements that extend for decades. Yet, courts in New York and beyond have recently confirmed that hotel owners may terminate a HMA at any point, for any (or no) reason.

Hotel owners have, in turn, increasingly begun to invoke their right to terminate as a means of disengaging from poorly performing operators and unlocking value from underperforming properties. This has led hotel operators to seek “contractual injunction” provisions in HMAs, which would afford them by contract what is otherwise unavailable at common law.

In their latest New York Law Journal article, Pryor Cashman Hotel + Hospitality Chair Todd Soloway and Partner Bryan Mohler examine the enforceability of contractual injunction provisions in HMAs, and explain how the CPLR’s injunction bond requirements imposed on operators may act as a barrier to enforcing such provisions.

Injunction Bond Basics

Under CPLR 6312(b), “if it is finally determined” upon a motion to vacate the injunction or a trial on the merits that the plaintiff was not entitled to an injunction, plaintiff “will pay to the defendant all damages and costs which may be sustained by reason of the injunction.”

“The basic function of CPLR 6312(b),” Soloway and Mohler wrote, “is to ensure that a remedy is available to a defendant who has suffered damages as the result of an improperly issued injunction.” As such, the posting of an undertaking is mandatory for plaintiffs in these actions.

What is an Appropriate Bond in a Case Enjoining Termination of a HMA?

Where an injunction is sought to prevent a hotel owner from terminating an underperforming operator, the amount of the bond can be considerable. In addition to legal fees incurred by the hotel owner, “determination of the undertaking may also take into account damages such as reasonably certain lost profits to be incurred by the owner as a consequence of being forced to suffer a poorly performing hotel operator during the pendency of the injunction,” the authors explained.

Because of the significant revenues generated by large hotels in metropolitan areas like New York City – and the corresponding potential for millions of dollars in lost profits in the event a hotel owner is forced to continue employing an underperforming operator – such sizeable bond requirements may be a deterrent for operators seeking contractual injunctions against owners.

Soloway and Mohler advise any hotel owner opposing an injunction sought by an operator to, in addition to asserting all substantive arguments concerning the enforceability of such an injunction, “submit proof, including expert analysis calculating future lost profits, to support the fixing of a sizeable undertaking in the event the injunction application is granted.”