Negotiating Hotel ContractsAugust 29, 2018

Mediating Force Majeure, Cancellation Clauses and Attrition with Authority By
August 29, 2018

Negotiating Hotel Contracts

Mediating Force Majeure, Cancellation Clauses and Attrition with Authority

 Negotiating with hotels isn’t a planner’s favorite activity even during a buyer’s market. However, the task is even tougher in the current seller’s market.

That’s why it’s crucial to have the savvy needed to strike good deals. Still, experts say, many planners have fair-to-middling negotiation abilities that lead to higher costs.

Planners too often accept contract conditions without asking questions or seeking concessions. One reason for that, experts say, stems from a disdain for the often tricky negotiation process that can involve posturing, posing, pretense and confrontation.
Nevertheless, it’s important to have the skills needed to get the best deals from hoteliers who believe they hold all the cards.

Seek Clarity

Being a good negotiator includes ensuring that every hotel contract term is understandable. “The best advice I heard from an industry expert is have the contract written clearly enough that it can stand alone and be implemented by people not directly involved in the contracting process,” says Genny Castleberry, director of sourcing, at Irving, Texas-based Brightspot Incentives & Events.

Castleberry adds, “Language should be specific and list dates, calculations and amounts so that both parties clearly understand any liability. Hotels tend to include language that protects only them and puts all the liability on the client. Be sure to thoroughly review all clauses and ensure both hotel and client share the same risk.”
The most important clauses to succinctly clarify include attrition, cancellation and force majeure (acts of God). “Because each of these clauses has financial repercussions, my first piece of advice is to know what you can afford,” says Joan Eisenstodt, founder of Washington, DC-based meeting consulting firm Eisenstodt Associates.

According to Eisenstodt, “No one goes into a contract thinking they will cancel or underperform, but it happens. Run the numbers and figure out if it is even financially feasible to enter into the contract. If not, have other options or mitigate the risk by buying event cancellation insurance, which can offset financial losses for a full or partial force majeure situation.”

Cancellation by Hotel

Hotels try to avoid cancelling because it’s bad for business. But it happens. Planners should prevent or minimize the loss of deposit and payment in the unlikely event of cancellation.

Most hotels have a cancellation clause written to protect the property. Typically, planners either agree to the hotel’s cancellation terms or negotiate changes. Either way, the result is one mutually agreed upon clause.

Eisenstodt suggests a different approach. “I prefer to negotiate dual — not mutual — cancellation clauses that include each party’s responsibility if there is a cancellation,” she says. “In a dual clause, damages suffered will not be the same for each party. Too often dual clauses are…neglected entirely for expediency.”

Experts suggest negotiating the following into cancellation clauses:

  • Mutually acceptable dates for holding the same or another meeting at the property within a certain time frame.
  • A sliding scale that allows room costs to be lower the further the new meeting is from the cancellation date.
  • A reduced cancellation fee to be paid along with a substitute meeting.
  • Alternatively, ask the hotel to help find a comparable property and pay the difference in cost.

Use Meeting History

Proving that a group is a dependable source of revenue can be an effective bargaining tool. Don’t start negotiations with a property without knowing the financial value of a group to a hotel.

According to Terri Woodin, CMP, vice president, marketing and global meeting services, Orange County, California-based Meeting Sites Resources, “Understanding the history of your meeting and demonstrating it in your RFP increases the value of your meeting to the hotel and will likely get you a positive response.”

Provide at least two years of meeting history that includes total attendee hotel spending. “Strong food and beverage spend increases the overall value,” says Woodin. “Ancillary spending, including spa, golf, gift shop, bar, etc., may be the difference for the hotel to say yes to your RFP over another in this high demand and limited availability market.”

“No one goes into a contract thinking they will cancel or underperform, but it happens. Run the numbers and figure out if it is even financially feasible to enter into the contract. If not, have other options …which can offset financial losses.”
— Joan Eisenstodt

Castleberry offers examples of possible bargaining chips to use based on meeting history: “Offer to include a higher food and beverage minimum in the contract if your group’s history attests to a higher consumption — especially when open bar is offered during your event,” says Castleberry. “Push (the) attrition deadline further out for a higher attrition allowance ratio if your group pick up is aligned with what you contracted in the past. History can be your best ally.”

Meeting history can be especially effective if there is a track record of providing profitable events within the same chain or destination. In addition, history can be a bargaining tool if other areas of an RFP aren’t particularly strong.

“For example, you might have a meeting that does not have the best rooms-to-space ratio and individual hotels are turning your RFP down due for this reason,” Woodin says. “Contacting your hotel chain or city CVB and discussing the total value of your account to the property or the destination could help you get a yes on RFP. ”

Tricky Attrition

Attrition is one of the stickiest negotiation points because penalties can vary widely, and planners lack control over how many attendees book sleeping rooms.

Typical attrition clauses state that a planner will guarantee that guests will book a certain percentage of rooms in a reserved block or pay a penalty for unbooked rooms. Experts say that attrition rates typically start at 10 to 15 percent, which means that a group must book 85 to 90 percent of a room block to forego penalties.

It may be possible to negotiate the attrition rate down to 20 or 30 percent, depending on the event’s total value and how the property calculates attrition rates. However, Tyra Hilliard, CMP, associate professor of restaurant, hotel and meetings management, University of Alabama, says it’s tough to negotiate attrition rates because it’s a seller’s market.

According to Hilliard, “I’m noticing that hotels are beginning to throw everything but the kitchen sink into this calculation,” says Hilliard. “If a group underperforms or cancels, the hotel’s calculation of damages includes not just what was contracted for — sleeping rooms, catered food and beverage, maybe meeting room rental — but also ancillary spend (guest expenditures in the bar, restaurant, gift shop, golf, etc.) that hotels forecast for each occupied room. My stance has always been that if we aren’t contracting for it, I don’t want it in the damages calculation.”

Experts offer the following advice on negotiating attrition rates:

  • Ask for a date by which you can increase or reduce room block size without penalty.
  • Try to have total room nights, not rooms per night, serve as the basis of attrition.
  • Strike an agreement with the property to perform a post-meeting audit to determine the number of attendees who ended up booking with the hotel but outside the room block.

Be Flexible

Using flexibility strategically at the right point in negotiations can help.
Woodin offers an example: “Say the hotel is charging meeting space rental they might not charge for in a down market, and you aren’t getting any consideration for it. Ask if you increase the food and beverage minimum (within reason of your expected spend based on their average menu prices) will they waive the rental fee. Now you are getting food and beverage for a minimum you would meet anyway, and the hotel is getting their margins.”
Hotels want to fill open dates that may not be in high demand. That’s why some properties offer concessions and lower pricing in exchange for flexibility. At the right point in negotiations, say something like, “I might be willing to consider other dates if you offer the right incentives.”

On one hand, flexibility is crucial because hotel inventory for group business is stagnant while the demand is increasing, making it now more challenging for planners to find space than a few years ago.

On the other hand, according to Eisenstodt, flexibility is not always realistic. “If moving the meeting by a day or two will get the parties more of what they’ve detailed as critical to them, look at it,” she says. “But beware of spring and fall dates that are offered as alternatives. They may conflict with religious, national or state holidays that may cause fewer people to attend or (they may) have other conflicts.”

Force Majeure (Acts of God)

This clause specifies each party’s responsibility if the event can’t take place due to something out of anyone’s control. Make sure the clause includes disasters, government regulations, civil disorders, terrorism, epidemics, disease, strikes, suddenly-occurring travel restrictions and incapacitated travel facilities. Force majeure usually isn’t part of many standard international hotel contracts, so make sure it is included.

Experts recommend seeking legal advice for force majeure clauses. “I highly recommend a lawyer, preferably someone familiar with hospitality law versus in-house counsel who may know contracts but not hotel or other vendor contracts,” says Hilliard. “Talk with them about what needs to be included and what doesn’t, and what your organization requires and doesn’t.”

Hilliard adds, “The more specific the force majeure clause is when it comes to dates, dollars and percentages, the more understood it will be. Remember: those signing the contract may not actually be the ones responsible for executing the meeting, so you want a good foundation (in case anything goes wrong).

Ask Key Questions

Offer flexibility, but be willing to walk away if it’s not reciprocated. Answers to the following questions can help determine a property’s willingness to be flexible.

“Do you know that competitors are charging less?” Ask this question only if you are willing to walk away if you don’t get the deal you want. The question demonstrates that you have done research and have good alternatives.

“How much flexibility is there in the room rate?” Don’t ask, “Is the room rate flexible,” because the response will likely be yes or no.

“Is there any interest in building a long-term relationship?”  This question is most effective for large meetings with a record of providing profits for a hotel.

“Why don’t we split the difference?” If you are going back and forth over say, food and beverage, make the suggestion with an eye toward a figure that is good for you and still allows the hotel to make a profit.

Other Tips

Don’t reveal the event budget during negotiations because the property will probably offer its standard or top rates. Share budget figures at the appropriate point to help get better rates. However, sharing budgets at the start may help if you have a good relationship with the property and have received value before.

Don’t be intimidated by hardline sales lines including, “We have another group looking to book the same space during the same time.” Or, “It’s difficult to lower prices because our hotel is in such high demand.”

Leverage repeat business. Properties like predictable revenue and are typically more flexible with groups they know will return consecutive years or on a rotating basis. Negotiating a multi-year contract can give value and perks.
Send the RFP to several comparable hotels, including some you may not be seriously considering. Compare costs and use competing offers to drive down costs during negotiations.

Include a clause that prevents a change in meeting rooms without sufficient notice.
Use food and beverage expenses as leverage. This area is the second largest profit area after guest rooms. The more you spend on food and beverage, the greater the leverage in other areas.

Reserve the option to choose audiovisual vendors. Don’t get locked into a clause that requires you to use an AV supplier associated with the hotel because costs may be higher.
Seek as many concessions as possible. If the property won’t budge on rates, request perks such as room upgrades, complimentary receptions, free conference rooms, suites, lower resort fees and free gym admission.

Never accept the first offer. Hotels are willing to negotiate most of the time. Remember that properties want meetings, especially large ones, because they represent a sure profit.
Don’t relinquish bargaining power up front. According to Hilliard, “The biggest thing planners do to shoot themselves in the foot is going into a negotiation with their mind already made up that the meeting will be held in that hotel. As soon as they do that, they’ve lost all leverage.” C&IT

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