Hospitality reform

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On behalf of the individual hotel & motel owners, representing all segments of the U.S. lodging industry, including hotel owners “franchisees”, we thank you for your steadfast leadership in guiding our nation through this unprecedented health and economic crisis. The economic impact of the COVID-19 health crisis on hotel industry is estimated to be three times greater than theSeptember 11th terrorist attacks. 

 

As you consider technical corrections and amendments to the Coronavirus Aid, Relief, and Economic Security (CARES) Act or additional legislation to address the economic fallout due to COVID-19, we urge you to consider the following technical corrections and critical enhancements which are necessary to reform the hospitality industry through this incredibly challenging period to make it sustainable by reforming pursuant to an FDD relations between franchisors and franchisees. 

 

Basics of Franchisor’s responsibilities (a) Proven business model, (b) Recognized sole trademark, (c) Established brand portal business systems, (d) Training and support, these are basic with limit to contribute or join with any other efforts must be independent choice of franchisees with limited interface business practice.

 

Franchisees responsibilities are (a) Paying royalty fees, (b) management of franchise location.  

However historically Franchisor’s and FDD disclosers have been voice in one direction as there were never been surveyed the consequence’s and franchising agreement were one sided.

 

We urge today to focus on some outline to be addressed and make free choice of living rather than tie up for unfair franchise agreement.

 

1)      Hotel brands must drive at least 50% of the revenues from the brand websites or sales and marketing teams. Hotel brands can offer revenue management or sales services to maximize revenue. If this requirement is not met, the franchisee is entitled to either monetary recoupment of additional OTA fees paid, in excess of a 50% brand contribution, or an option to provide a 6 month notice of termination without any liquidated damages assessed.

2)      Any affiliations fees other than royalties must be approved by 2/3 property owners consent survey conducted through a 3rd party agency.

3)      If a franchisee is cut off from the reservation system as a stipulation of a violation of brand standards or any other reason, the franchisee should not be charged to reconnect if the issue is rectified within a set 30 days. However, if a decision to cut off reservation system or terminate has been made, there should be no liquidation damages charged to exit out.

4)      Any revenue generated from 3rd party Online Travel Agents should be exempted from royalties, pass through fees or any marketing fees, as brand has no control on driving business to their brand locations.

5)      The right to transfer a franchise should be no more than $2,500 if the existing property has met a certain inspection score in the last inspection.

6)      Hotel brands should not mandate any particular vendor. Franchisees should satisfy brand standards to maintain the product quality.

7)      Hotel brands to limit in the economy and mid-scale segments to ONLY coffee to offer as a complimentary.

8)      Brand cannot introduce new flag to compromise with existing brand flag within minimum of 2 mile radius.

9)      No liquidated damages for franchisor initiated terminations, if franchisees does not satisfy with brand support as presented should match performance if not there should be no demand for any damages.

 

Franchise Agreement Pitfalls 
Franchising is about consistent, sustainable replication of a company’s brand promise, and an agreement must detail the many business decisions that go into creating a franchise system. It’s complex and, in most instances, a contract of adhesion, meaning an agreement that is not readily subject to change. 

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Franchisors who choose to work with lawyers and franchise packaging firms that cut corners and copy others' documents put their franchise systems in peril.

Because of the length and complexity of a franchise agreement, most qualified lawyers will not attempt to incorporate into one large agreement all of the other agreements required by the relationship, such as personal guarantees and leases. Instead, those agreements are kept as separate documents.

 

·         Overview of the relationship: This includes the parties to the contract, the ownership of the intellectual property (IP), and the overall obligations of the franchisee to operate its business to brand standards.

·         Duration of the franchise agreement: This involves the length of the relationship, the franchisee’s successor rights to enter into new agreements, and the requirement to upgrade the franchisee’s location.

·         Initial and continuing fees: Franchisees generally pay an initial and continuing fee to the franchisor for entering into the system and remaining a franchisee. Agreements also typically include a number of side fees. Most franchise systems provide for a payment to an advertising or brand fund that is used by the franchisor to market the brand to the public and for other contractually defined purposes.

·         Assigned territory: Not every franchise agreement grants a franchisee an exclusive or even a protected territory, but specifics about the territory must be defined. Franchisors also need to deal with reservation of their rights within a franchisee’s territory, including alternative distribution sites and sales over the internet.

·         Advertising: The franchisor will reveal its advertising commitment and what fees franchisees are required to pay toward those costs to support brand interest.

·         Some may call it boilerplate, but in well-developed agreements, it is not. Among the myriad issues contained in the franchise and other agreements are the franchisee's successor rights, default, termination, indemnification, dispute resolution, resale rights, transfer rights, rights of first refusal, sources of supply, local advertising requirements, governing law, general releases, personal guarantees, and roll-up provisions.

In developing a proper set of franchise agreements, each of the elements of the franchise need to be evaluated and decisions made. Prior to having the lawyers begin to draft the agreements, it is essential for the franchisor to first develop its business plan and decide on all of these important issues. For most franchisors, it is important that, in addition to working with qualified franchise lawyers, they first work with experienced and qualified franchise consultants in crafting their franchise offering.

 

Overbuilding and the explosion of new hotel brands have made the industry more vulnerable. Companies are going after every segment, launching multiple chains for luxury, boutique, select service, and budget/economy. Portfolios often include various brands in the same category, with little to no differentiation.

Ø  Best Western has 13 brands              

Ø  Choice Hotels has 12 brands

Ø  G6 Hospitality has 2 brands

Ø  Hilton has 18 brands

Ø  Hyatt has 20 brands

Ø  IHG has 17 brands

Ø  Marriot has 30 brands

Ø  Red Lion has 9 brands

Ø  Red Roof Inn has 4 brands

Ø  Wyndham 18 brands

Reason for reforming:

a)    Hospitality will be facing Economic Hardship to make it profitable due to COVID-19 disaster.

b)   If hospitality is saved by cutting operating cost, owners can continue keeping employees

c)    Owners can continue pay fair portion on mortgage interest, during COVID-19; many owners will not survive, moreover many properties are closed and will be more down the road.

d)   If owners are success they can rebuilt economy.

e)    If owner is fail, consequences are (i) Lender, (ii) Taxes, (iii) Employees & (iv) Suicide (owners)

f)    If complimentary breakfast does not provided by limited service hotels 80% of occupant will utilities local restaurant which can boost in taxes revenue and more hiring.

g)    FDD or Amendment in franchise agreements has no clause anywhere in case of Economic hardship or Pandemic disaster offering to sustain franchisees should be create fair to sustain.

h)   In any event Franchisors includes any new fees / charges to Franchisees should be held accountable to increase those fees somewhere to offset revenue to brand location.

i)     Brands CEO’s salary / bonus, etc. should be capped.