COVID-19 And Its Impact On Hotels

This week, TraveLaw Online’s Doug Crozier and Tim Law of Heifetz, Crozier, Law tackle the question of how COVID-19 has impacted on the hotel industry. It’s a simple question: Are hotels suffering as badly as other industry sectors?

Q: The travel press is documenting fairly thoroughly the impact of COVID-19 on the air and, to a lesser extent, cruise market. Are hotels suffering as badly?

A: Yes and, in some cases, more so.  The less people travel, the fewer the hotel nights that are booked, so the decline in hotel usage ought to be pretty well parallel with that of the airlines.  But there’s more.

Often, a hotel is owned by one company (“Owner”), which then contracts the operation and branding of the hotel to a Hilton or a Delta or Marriott, etc. (“Manager”).  Many of those contracts see Manager pay to Owner a percentage of Revenue and/or a percentage of Gross Operating Profit.  These will both be specifically defined terms in each contract, but you get the point … as hotel bookings dry up, so does the amount payable each month by Manager to Owner.  

Many of those same contracts also stipulate a fixed amount payable by Owner to Manager, in recognition of what Manager brings to the table … brand recognition and marketing, bulk buying, personnel and financial management, reservation system and other Intellectual Property, etc.  The amounts of those payments were negotiated when both parties expected the world to continue much as it had pre-COVID.  But it hasn’t.  Due to the pandemic, Owners aren’t getting their monies’ worth, but are still contractually bound to make those fixed payments. 

So long as hotels are not shuttered by government order, any Force Majeure clause in the contract may not be available, so the Owner has to take the hit. 

Negotiations between an Owner and a Manager will likely resolve these situations in some cases. But others may well end up in court. With respect to those contracts, don’t be surprised if an Owner switches its Manager once the current contract expires.

Disputes tend to leave a bad taste in a person’s mouth.

If you have a question, you can contact Crozier or Law at [email protected] or connect with Bob Mowat at Canadian Travel Press/Baxter Media at [email protected].

Heifetz, Crozier, Law is a Toronto law firm that has for years represented all aspects of the Canadian travel industry. The lawyers at HCL also maintain a non-travel practice, covering litigation, real estate, Wills, corporate/commercial matters, etc. To contact HCL, e-mail [email protected].