Hotels: News

Managing the alliance between owners and brands

By Guest Contributor on 9/16/2020

The immediate impact of COVID-19 on the hotel and tourism sectors is severe. International travel restrictions and the threat of second waves in key markets highlight concerns over the virus’s longer-term impact on brand management and performance.

Brands are assessing their global and regional strategies and inevitably will review which hotels do not fit their strategies. Owners managing their funders and struggling with reopening should review their management arrangements, costs, insurance triggers, and termination and force majeure rights in the context of the next phase. This should include reviewing the brand’s actions and costs during the pandemic, with a view to achieving necessary flexibility over a realistic recovery period.

Tensions between brands and owners are not unusual, and COVID-19 has exacerbated these tensions in areas where interests are not aligned. The longer and more severe the impact, the greater the pressure on the relationship. The willingness of brands to work with their owners to find a balance that addresses the tension between their interests (for example, in relation to proposals for reviving occupancy and managing costs) will be critical to the relationship.

Ultimately, there is a balance to be found in the relationship between brands and owners, and this will depend on an objective and honest understanding of the best interests of both. | Getty Images

While most brands were quick to offer capital expenditure holidays and brand standard suspensions, these interim relief measures are unlikely to continue indefinitely. Given they were introduced at a time when travel restrictions were at their most extreme and many hotels were closed, it will only be going forward that their effectiveness can be measured.

This complicates any assessment of the true value of brand support for owners. Although the long-term cost of those measures will inevitably sit with owners, decisions about the nature, extent and duration of these measures will be made by brands. Owners will need to be forceful to protect their interests in relation to contracts heavily weighted in favor of a brand and which contemplate a macro approach to any region.

Felicity Jones is partner and global real estate sector head, based in London, for Watson Farley & Williams LLP; Alan Polivnick is a partner in the firm’s Bangkok office.

Although brands and owners share the objective of a speedy recovery, without a fair and reasonable agreement on the strategy that properly reflects the profitability, longer-term viability, location and category of each hotel, an already uneasy balance of interests will become more so. However, there is still time to identify and implement an approach that recognizes both the significant investment of the owners and the need for a more flexible brand approach.

Both owners and funders should look critically at the benefits of the brand and the extent to which it will assist in delivering acceptable rates and occupancy levels. An owner may well seek flexibility in pricing, service levels and offerings that are inconsistent with brands standards and require brand approval. Brands that are no longer seen by owners to deliver satisfactory rates, occupancy and support are likely to be among the first targets for owners.

The inherent conflict where a brand strategy has been to have multiple (not always dissimilar) brands will also come into greater focus as the popular tourist destinations and city centers reopen and owners look to promote their individual hotels and resorts. The tension between global and local plans and objectives may only highlight issues between brands and owners. The potential conflict at senior management level between brand and owner loyalty and headcount reductions at brands’ regional and global offices are already making it more difficult for owners to ensure that they are heard and for brands to devote the resources to responding to owner proposals.

While all owners, and funders, would be pleased to see shorter-term management agreements in which the brand either took some of the risk or was prepared to exit on a realistic measure or non-performance, many still take comfort from the right brand in a given location. As hotels reopen and while owners lack funds to immediately invest and need to implement cost-saving measures, brands may well critically assess the extent to which a hotel fits within brand identity. Depending on how the brand approaches brand standards requirements as the industry emerges, owners may need, or wish, to consider repositioning and other commercially feasible alternative brand options (albeit at a cost when resources are scarce).

Some owners may wish to terminate their agreements with brands, inevitably leading to disputes. There are very few circumstances where a balanced negotiated settlement is not the preferred solution. In the current climate it may be in the interests of the individual parties to deal with the bad news in the current year, but brands may not necessarily be averse to litigation or arbitration, particularly if the eventual outcome is a compensation payment and a clear and unambiguous signal to owners that any challenge to termination of management agreements will be defended. Owners will need to consider the costs of such litigation and the likely outcomes carefully.

Ultimately, there is a balance to be found, and this will depend on an objective and honest understanding of the best interests of the owner and the brand. The approach of a private-equity owner of 24 branded hotels will be different to that of an owner of two luxury products in non-performing cities. Brands will face similar issues in dealing with owners and flexibility from the brand will be crucial. Whether or not the brands will show a flexibility and resilience that will benefit both sides of the equation remains to be seen, but the communication needs to start now.

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