In our previous articles, we detailed some of the issues and considerations for key hotel industry stakeholders in navigating the current distressed landscape, including the growing number of hotels headed toward loan defaults and foreclosures. While hotel owners, operators, franchisors, and lenders each have difficult and unique questions to answer, in today's climate perhaps no constituent faces a more complex situation than the hotel operator. When a hotel is not generating sufficient revenues to cover its expenses and ownership no longer supports a failing asset, its hotel, what happens next? The hotel still has guests checking in and out, complex operations to carry out, bills to pay, and reservations on the books. In this article, we explore some of the issues facing operators as they navigate these uncertain times.

Owner Funding Is No Longer Assured

As a general rule, hotel management agreements require the hotel owner, upon demand from the operator, to provide working capital when the revenues cannot cover expenses. But what happens when the hotel owner cannot provide (or refuses to provide) additional funds? Perhaps the hotel owner is truly out of money and is facing loan defaults, among other issues. Perhaps the hotel owner has made a business decision that it no longer wishes to provide funds. Either way, the hotel operator managing the business is left to deal with the fallout.

Hotel management agreements are generally drafted to provide operators protection against liability, both by making the hotel owner responsible for all of the hotel's liabilities, as well as indemnifying the operator against any claims (such as, for example, claims by vendors or a union for unpaid wages and benefits).