Indemnification Provisions in Hotel Management Agreements
In their Hospitality Litigation column, Todd E. Soloway and Joshua D. Bernstein examine the structure of common indemnification provisions in hotel management agreements and what a hotel owner must be cognizant of before agreeing to this potentially burdensome additional financial obligation.
January 13, 2015 at 09:00 PM
9 minute read
As we have explained in prior articles, when a hotel owner hires a hotel management company to operate its hotel and executes a hotel management agreement, the hotel owner turns over to the manager virtually complete control over the hotel and its assets, subject only to the owner's consent in certain instances. The manager, with varying and limited approval or consent rights from the owner, dictates the hotel's finances, including the hotel's business strategy, revenue, bank accounts, and services provided to hotel guests. And it is typically the hotel manager who is the direct employer of the hotel's various personnel, having the authority to hire and fire the hotel's employees.
In the end, even though it is the hotel owner who has invested millions of dollars into buying and developing the hotel, the owner is relegated to waiting at the end of the quarter or year for the manager to turn over the owner's share of hotel profits, that is, once the manager has factored in its own costs, expenses, and bottom-line. In the meantime, the manager may pocket millions in management and other fees regardless of the performance of the hotel or the profits realized by the owner.
The disproportionate burdens born by the owner and manager do not end there, however. In the eyes of the manager, an integral part of any hotel management agreement is the indemnification provision, through which the owner is basically forced to indemnify the manager for any claims, damages or liabilities asserted against the manager save in quite limited, egregious circumstances. Thus, even though the manager operates the hotel and directly employs its personnel, the owner will likely be the party bearing the costs of defending claims asserted by hotel guests or the hotel personnel for the manager's own wrongful conduct.
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