Critical ClausesOctober 1, 2017

Force Majeure, as Recent Natural Disasters Have Shown, Is Just One of Many Sticky Issues Planners Face in Today’s Contract Negotiation By
October 1, 2017

Critical Clauses

Force Majeure, as Recent Natural Disasters Have Shown, Is Just One of Many Sticky Issues Planners Face in Today’s Contract Negotiation

CIT-2017-10Oct-Hotel_Contracts-860x418The current climate, both meteorological and political, is far from stable: Hurricanes Irma, Harvey and Maria; North Korea’s missile tests; and possible terror attacks have all been in the headlines.

Disruptors

For planners who review hotel contracts and draft addenda, such tragic and worrisome developments are reminders of the importance of the force majeure clause in particular. The clause has long included various types of contingencies such as acts of God, acts of terrorism, civil disorder, strikes and government travel warnings that make it impracticable or impossible to hold the meeting at the intended destination. But extra care should be taken on the details of the clause in order to minimize risk. The location of the contingency, for example, should not be limited to the location of the hotel, but also cover the point of departure for most attendees, if applicable.

“During Hurricane Harvey your event could have been taking place in Seattle where the weather was not affecting, but a significant number of attendees could have been coming out of Houston where flights were cancelled and homes destroyed, not allowing them to attend. Protect yourself from attrition and cancellation (penalties) in these scenarios,” recommends Katie Muck, senior director, global meeting services for Meeting Sites Resource. The same point applies to acts of terrorism. The clause should account for those acts that occur either “in the meeting locale or the location of origin of a material number of registered attendees,” advises Deborah Borak, CDS, CMM, SMMC, vice president/team director for Conference Direct.

Another aspect of natural disasters and other potentially dangerous events is that they don’t always make it impossible or commercially impractical to hold a meeting, but they may make attendees wary about traveling. This can put the host organization in a difficult situation. “Many organizations are now dealing with hurricanes in Texas and Florida, and are having to navigate (the issue of) whether they can hold their event or if they need to cancel. This can be challenging if the hotel is open, but attendees think it is not safe to travel to the area,” Borak explains. “If the hotel is open and the airport in that city is operating and attendees can make it, force majeure does not apply. The organization should have a plan on how to get up-to-date information from the hotel and city and be able to communicate that to attendees.”

Market Forces

While the content of the force majeure clause is not typically a point of debate between planner and hotelier, other contractual items tend to be more contested, such as rates, concessions and attrition policy. The seller’s market in many first- and second-tier cities continues to make many hoteliers less flexible on these terms. “I am absolutely encountering a seller’s market in first-tier and some second-tier cities due to demand,” Muck observes. “The majority of new hotel builds have been in the select/limited service category; therefore, there is still a lack of function space, especially when it comes to large meetings.” Similarly, Kim Hentges, CMP, senior planner, events and incentives with Lennox Industries Inc., has found that “new hotel builds are offering less meeting space per room. …It seems finding available space is a bigger issue than actually going through the contract negotiation process.”

Limited growth in meeting space, combined with rising competition for that space among groups, does not bode well for planners seeking ideal contractual terms. And the seller’s market isn’t limited to first-tier cities and popular second-tier cities such as Austin, Texas. “Even in Kansas City (Missouri) where I’m located your negotiating power as an event planner seems to be less,” notes Shana Hoy, CMP, event manager with Husch Blackwell LLP. “It’s really become important to understand where the value for each (party) is, in order to create a negotiation that is going to work best for both parties.”

Open Dialogue

Hoy begins negotiations by outlining all of her group’s needs in terms of pricing and concessions, and then seeing where the sales rep can accommodate those needs. “Maybe they’ll come back with, ‘I’m flexible on parking but not on internet fees.’ If what they come back with is something that works for me and for our budget, then we move to the next step with the contract,” says Hoy. “I find that as long as it’s an open dialogue and we’re in it for a positive outcome together, then it usually works out.”

While it seems commonsensical to engage in a such conversation toward reaching an agreement, Muck has found that “Overall, the sales process has become more transactional vs. conversational. In the compressed market we face, together we need to figure out a better way to make it happen and talk to one another to get a yes on the RFP.”

The dialogue is important so that the sales rep can truly understand the group’s value proposition and advocate it to the revenue manager, Muck says. “Oftentimes, the revenue management team is giving the sales staff parameters to work within. However, if the sales manager is armed with the information from the customer first, they have the opportunity to get a yes for the client more often.”

Event History

Of course, the planner himself needs to be clear on the value of the group’s business in order to convey that to the rep. Being armed with key supporting data — including past and anticipated spend on guest rooms, F&B, AV, recreation and other items — is especially critical when negotiating in today’s market. “We keep good records of our event history,” says Thais Toro, MBA, event manager with Cox Automotive. “I like to know my numbers so I can create confidence” in the hotelier. The confidence instilled in the sales rep can lead to more favorable concessions than they would otherwise allow. Muck explains, “When you provide the supplier with the value of the program and the expectation of some of the prioritized concessions for the client before rate is quoted, you are more apt to receive those concessions.”

Toro’s approach has even yielded success in the highly competitive market of Las Vegas, where she once convinced a hotel sales rep to match her contracted room rate to any lower room rate subsequently advertised by the hotel. The contract included a clause stipulating that “if for any reason after our event is booked the hotel lowers the rate in any promotion, they will be willing to match that with ours,” she says. Her argument was that her company and she as a planner would not look good in the eyes of attendees if they see an advertised room rate that is lower than the rate being paid for the meeting. Per the clause, the hotelier indeed lowered the group’s rate to match a promoted rate during the dates of the offer.

Shocked by Electrical Outlet Charges?

Room rate is one of many cost centers that planners have to manage in an atmosphere where hoteliers are often raising surcharges and adding new ones. “Contracts are becoming increasingly long due to having to cover every type of scenario or any type of charge,” Borak observes. She gives a telling example: “The latest charge I am encountering is for electrical outlets. One would think that if there is an outlet in a meeting room, it is available for use. (But) if a group needs power strips, they not only have to pay for the strips, but the power itself. One client I work with had (attendees) in a breakout, and two people plugged their phones into the wall outlets to charge them. The conference service manager came along and unplugged the phones and told the planner they had not paid for power so the outlets could not be used. This is something that planners will need to keep an eye on as some hotels are utilizing this additional revenue stream.”

Service Charges and Taxes

Another growing cost center is service charges and taxes. According to Hoy, they can comprise 35 percent or more of the bill, particularly in first-tier markets such as New York City. “That really takes a chunk out of your budget when you’re looking at room rate or your F&B,” she notes, and looks to offset that expense with reduced room rental fees or setup fees, or a reduced rate on banquet menus or specialty menus.

“One of the things I’ve started doing is building menu pricing into the contract, so I know when I’m budgeting for the event what those fees and what those numbers are going to look like,” she says. Some hoteliers have also been adding porterage and housekeeping fees on the front end, as well as service charges in addition to labor charges for AV. “Ultimately, the services you are receiving should be included in the labor charge, and you should not be paying both,” Muck maintains.

Negotiable Items

Typically negotiable charges include internet and resort fees. “Most hotels have Wi-Fi as part of their business, so I don’t see why they need to charge for it,” Toro reasons. She also observes that resort fees have been on the rise, and tries to have them reduced or waived, depending on the nature of the meeting. “If it’s a business meeting, people are not going to be at the pool, and they don’t read the newspaper (delivered to their door). So I try to explain that I’m not going to pay (a fee for such amenities), and explain that there are other ways I’m going to bring profit to your business. In most cases, if they don’t remove the fee, they reduce it,” she relates. As always, it’s key to emphasize the group’s value to the hotel in order to try to get a concession on a particular fee. A case for complimentary outdoor setup, for example, may be made based on the volume of F&B revenue the group will bring through outdoor events.

Once the agreed-upon surcharges and fees have been specified in the contract, Hentges suggests it is prudent to include verbiage such as the following in order to guarantee transparency: “No additional charges not specified in this Agreement will be incurred by Group for work performed and/or services provided without written consent from an authorized representative of the Group.”

Cancellation Penalties

As discussed above, a comprehensive force majeure clause is not just prudent but necessary, especially in this day and age. But when the clause does not apply to a cancellation, the penalty terms go into effect, and here some hotels appear to be taking advantage of favorable market conditions to take a harder line. “Some clauses now have cancellation based on revenue instead of profit, and require cancellation (penalties) on F&B as far as a year or two out,” Borak says. Both have been points of contention among planners.

Muck urges that groups should only be penalized for the hotel’s “true losses.” “If the hotel wants to go after all their losses for the cancelled event, then a mitigated damages-based contract where losses are calculated afterward would address this.” As to penalizing for F&B losses, the cancellation clause should be “more related to the room block commitment,” Hentges argues. “Food & beverage should only be included closer to the program dates.” Regarding rebook and resell clauses, both of which can amortize the cancellation penalty, Muck sees many hoteliers accepting one or the other, but not both. “Often the hotel is in such a compressed market they will not accept either one,” she adds.

Whatever amount of the hotel’s lost revenue a group is ultimately liable for in the event of cancellation, the hotelier should not make more money via cancellation than it would have made if the group had held the event. “The cancellation clause maximum should (take into account) the attrition allotment and never equal 100 percent of the aggregate contracted guest room and food & beverage commitment,” Hentges advises. “You should never pay more for cancelling than you would have spent to execute the program.”

The average attrition allotment, however, tends not to be as large as it was during the buyer’s market. “We try to negotiate at least an 80 percent attrition clause, but not all hotels are willing to do that,” Hoy says. “I’m starting to see 10 and 15 percent (allowable attrition) as opposed to 20 percent.” On top of that, some properties are requiring attrition to be calculated daily instead of the cumulatively, which can be to the group’s disadvantage. Fortunately, this requirement appears not to be widespread; Borak indicates that she has encountered it mainly at independent properties.

Relationships

Fortunately, the platitude that hotels in seller’s markets are difficult negotiating partners has many exceptions. The real negotiating partner is the particular sales rep, who can be convinced of a given meeting group’s value proposition. A longtime relationship with that rep, where he or she has seen the group perform well on its room block, exceed F&B minimums and more, is of course ideal. But sales reps can and do change positions, and a planner can be left feeling like the wheel must be reinvented with a new rep. If that should happen, it is often good strategy to copy the hotel’s national sales office on email communications with the new property rep. “We have found that keeping our national sales office informed from the beginning and throughout the entire process is beneficial in case we come to a place where the negotiations stall for any reason,” says Hentges.

In a similar vein, if a planner feels he or she is being “taken advantage of,” Borak recommends asking to speak with the director of sales. “Since the director is typically the one that the sales rep is passing things by and getting approval from, it can be helpful to hear from him or her directly on something that is not approved, and why.”

A second recourse is the local CVB. “Include them in the process from the beginning,” she suggests. “The CVB rep will not negotiate the contract, but can help the hotel understand the value of the business being booked, especially if the group books the city a lot and uses a variety of hotels in that city.”

As a third recourse, the planner who has reached an impasse on some contractual item might schedule a meeting or conference call with a “behind the scenes” hotel staff member who can provide information that may resolve the issue. “For instance, when groups are trying to negotiate food and beverage prices or determine meals, talking to the chef directly can be a win–win for the group. The chef can advocate for what they need, and showcase other options that are not in the catering menus,” Borak says.

Room rate negotiations, securing balanced attrition/cancellation terms, and keeping surcharges and fees in check are all challenges that have been exacerbated by the seller’s market. When a particular property sales rep is not making it easier to meet those challenges, it behooves a planner to look to others on the supplier side that can help pave the way to an agreement, whether a national sales rep, CVB or property representatives outside of the sales office. Tight market conditions call for more patience and resourcefulness before deciding that a property has been given its fair shake. C&IT

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