A Changing Climate for ContractsNovember 1, 2017

Negotiating Controversial Clauses and Contentious Seller's Market Conditions By
November 1, 2017

A Changing Climate for Contracts

Negotiating Controversial Clauses and Contentious Seller's Market Conditions

ACF-2017-1011OctNov-Contracts-860x418Convention center and hotel contracts are evolving documents sensitive to both market conditions and new risks that need to be managed. They are, in effect, “signs of the times” for the meeting industry. The anti-discrimination clause is a prominent example. Meeting venues are long accustomed to granting groups rights of cancellation based on contingencies such as natural disasters, health emergencies, civil wars and airline shutdowns. But the anti-discrimination clause includes a new — and more controversial — contingency as a basis for penalty-free cancellation, namely, discriminatory legislation passed at the meeting destination.

Anti-discrimination Clause

Motivated by the much-publicized efforts to pass “bathroom bills” in North Carolina and Texas that restrict public restroom usage by transgender individuals, the clause is an attempt both to protect attendees from discrimination and to protect the host organization from becoming associated with destinations where such laws are enacted. Last summer (2016), the ASAE approved an anti-discrimination clause for its future convention center and hotel contracts, beginning with its July annual meeting in Salt Lake City, Utah. To paraphrase the clause’s legalese, a “discriminatory” legislation or regulation would either repeal legal protections for subject individuals; allow discrimination in employment, housing or public accommodations or services; or prohibit access to facilities based on race, color, religion, national origin, age, marital status, personal appearance, sexual orientation, gender identity, family responsibility, political affiliation or disability. The enactment of such legislation has the effect of a force majeure, allowing the group to cancel the meeting with any penalties for cancellation or attrition waived, and with any amounts paid to the property based on the agreement refunded.

While the clause is not unreasonable, planners can expect to encounter resistance to this application of the force majeure concept. Anecdotal evidence comes from Christopher Kirbabas, director of programs for the Society of Architectural Historians (SAH): “We’ve been trying to add an anti-discrimination clause into force majeure or in its own specific paragraph. We want to ensure that all of our attendees are protected in visiting the state or city. …I’ve had a situation where one city was able to sign it, while another city in another state said, ‘Our lawyers will not allow this in the contract.’ So I think it just depends on the city and state, but I think this (kind of clause) will continue to crop up over time.”

Seller’s Market Conditions

Seller’s market conditions also have increased the points of contention during contract negotiations, and the discussion is often related to surcharges and fees. Jeffrey W. Wood, meetings director with the American Institute of Chemical Engineers (AIChE), has noticed hotels increasingly “trying to institute more rental (fees) for function space, which we fight tooth and nail. They’re still willing to negotiate that, but they’re starting to institute it in the contracts for some of our smaller meetings.” A less familiar fee arose at a New York City hotel for one of the AIChE’s smaller meetings. The hotel charged “a $3.50 luggage fee for each attendee that wanted to store his bags for a late checkout,” says Wood. “It was in the contract, but when push came to shove, and they instituted it, all the attendees were shocked. We put that on the master; I said, ‘I’m not going to have the attendees pay that.’ So that’s a nickel-and-dime fee.”

For the AIChE’s annual meeting, which draws an attendance of around 5,000, a seller’s market is often inescapable, as the association typically meets in first-tier cities due to the superior international airlift. In such cities especially, “I think hotels want the business faster,” says Wood. “They’re pushing suspense dates, and we can’t always do it because we have a certain process here, and it takes a while to get the contract signed.” And in-demand convention centers can naturally be more selective about the business they do sign. “We’re not a full-center meeting in some cities, and they try to pair us up with another group,” he says. “I’ve seen that stiffen up, so they’re not willing to book us unless they can marry us with another group.”

Centers in first-tier cities also tend to “get away with having cancellation clauses that definitely work to their advantage,” Kirbabas observes. “But in cities like St. Paul, Minnesota (site of the SAH’s 2018 Annual International Conference), there is a lot more flexibility in the cancellation (terms).”

Of course, flexibility does not mean that the terms of attrition and cancellation laid out in the venue’s initial contract will favor the group. Kirbabas has found that features such as a sliding scale for the penalties and a rebooking clause have to be negotiated more often in the current climate. “I’ve just been amazed that (such terms) are not included in the first place, where that was not the case several years ago. I’m also not seeing a lot of mutual indemnification,” he says. “That’s why it’s really incumbent on the meeting planner to know which clauses you should have to protect your organization, by taking educational courses, reading trade magazines, etc.”

Attrition Issues

A company long known for its contract expertise is Meeting Sites Resource, founded by the late Tim Brown in 1993. Katie Muck, currently senior director, global meeting services

at the company, suggests that planners try to negotiate away tiered attrition by leveraging a strong history of performance on the room block. On the tiered approach, the hotel offers the group certain opportunities to reduce the block prior to the meeting, and if those opportunities are not taken, the group is liable for the full block. So if the group is entitled to 20 percent attrition, “they are only provided that give two ‘drop dates’ prior to the group check-in. For example, the group may reduce their block by 10 percent 30 days prior to arrival and then another 10 percent 21 days prior to arrival,” Muck explains. “After that point, the client is responsible for the full block if they do not take advantage of the dates to reduce. The argument with this that it allows the hotel to progressively resell the rooms on the front end; however, this is very difficult for groups, especially for associations, since the attendees typically make their reservations closer to arrival date.”

When calculating attrition, the association should be given credit for rooms booked at a rate lower than the group rate. “Be sure to include in the attrition clause that all sleeping rooms of registered meeting attendees will be counted toward the block regardless of rate paid to avoid attrition, and do an audit to capture any rooms around the block,” Muck advises. A published rate clause, if accepted, actually prevents the hotel from offering rates over the dates of the program that are lower than the contracted rates. “If this happens, we then ask the hotel to adjust our group rate down accordingly,” says Muck. The clause does not apply to rates offered by third-party wholesale entities such as Travelocity. In addition, most hotels will adjust the clause to cover peak sleeping room nights as opposed to all meeting dates, she notes.

Securing a published rate clause may be challenging in the current state of the market, however. “If it’s a first-tier city, I feel I’m less successful at getting that clause into a contract,” says Kirbabas. Where Kirbabas has found success is in adjusting the room block to prevent attrition in the years leading up to the meeting. “We book four years out, and I do look to the hotel to partner (on preventing attrition) as best as they can. Suppose they’re giving us a $149 room rate, and I can give rooms back two years out, one year out, etc., and they can resell those rooms at a higher rate to another group. That’s to their advantage and to my advantage,” he says.

Room Block vs. Function Space

Win-win situations are always nice, but it’s also important to be cognizant of the respects in which one’s business is not ideal for the property. In the spirit of fairness, one may then agree to a contractual item that is less favorable to the group. Some association meetings, for example, promise a guest room block that is small relative to the amount of meeting space the group will use. “Groups taking over all of the meeting space in the hotel but only blocking half of the hotel rooms, leave the hotel only having transient rooms to sell. For a hotel that is not a highly used transient property, this meeting will not be as attractive to bid on,” explains Deborah Borak, CDS, CMM, SMMC, vice president/team director for Conference Direct. One reason that some associations end up with a relatively small room block is that, unlike corporate groups, attendees pay their own way and may share rooms to save on lodging costs. In view of that less attractive guest-room-to-meeting-space ratio, “the hotel might add meeting room rental or ask for a higher food and beverage minimum to increase revenue from the meeting,” Borak notes. “But it is always a business decision and contingent on the hotel and their historical booking data on whether a group is a good fit or not.”

If the hotel decides on charging a meeting room rental fee due to the relatively low guest room revenue, here is where a planner might “give” instead of “take.” “With some of our smaller meetings there is a disproportionate use of function space relative to the room block, and I’d be the first to admit it, having a hotel background,” Wood says. “So sometimes we do pay a meeting room rental, but it’s minimal; we try to get it down as low as possible.” On the other hand, “if it’s the annual conference, then they understand that there’s no meeting room rental because of the huge F&B that we spend.”

F&B Minimums

In what is perhaps another symptom of the seller’s market, some hoteliers have been calculating the F&B minimum based on the function space square footage the group is utilizing, Muck observes. “This does not calculate correctly when you have a program that consists of breakouts or exhibits in addition to their general session and meal room,” she says. “I would advise that data is key, and to present to the hotel a cost analysis report showing the number of attendees for each meal event multiplied by the hotel’s average menu prices to support that the F&B minimum can be met.”

Kirbabas, who has not encountered the square-footage calculation of the minimum, comments, “We wouldn’t be able to do that. I don’t think that we’re necessarily space hogs, but we have a very low, very specific F&B spend, and if we were required (to spend) based on the square footage of our meeting space, we would just move on to the next property.”

When an issue arises during a hotel contract negotiation, it may be valuable to involve the chain’s national representative as a means of leverage, especially if one has a relationship with that individual. But it should be borne in mind that the relationship with the property rep is also important, lest one make such a decision hastily. “I feel very fortunate that in my 20 years of (convention planning) I’ve fostered some really great relationships with national sales hotel reps at Hilton, Hyatt, Marriott and Omni,” says Kirbabas. “But I don’t always escalate any situations I have with the hotel to my national salesperson, because I do want that relationship with the (property) salesperson. If I’m just not getting quite what I need, then I will take it to our national sales rep. But I want to start with the salesperson at the hotel.” The national rep is of course more likely to be aware of the scope of the group’s business across the chain, and can make a case for awarding the group a given concession on the contract.

Tout the Value of Your Business

In a seller’s market, however, association planners themselves need to be more skilled than ever at making a case for the value of their own business, and gaining desirable contract terms as a result. For the AIChE, the F&B revenue is what stands out to many hotels and convention centers, Wood feels. “The F&B is the kicker. Once they get wind of what we actually do spend, then they’re much more negotiable,” he observes. “We spent $800,000 on our F&B in San Francisco (2016 Annual Meeting). That’s a lot for a scientific/technical society, and the reason is that we have 60-64 university alumni receptions that take place all week. We try to split up the spend between the convention center and hotels. So the F&B is one attractive incentive for them to deal with us.”

The SAH’s F&B spend is comparatively small, so Kirbabas emphasizes the additional revenue the group promises in virtue of attendees extending their stay in the city. “Most of our members can be very frugal because they don’t always get paid a lot of money. But because they’re so interested and curious about the location, they will come into the city before and stay after the meeting to explore the region and all of the architecture,” he explains. “I try to tell the CVBs that it’s not just what they do during our meeting, it’s also what they do before and after. They will stay in the hotels, they will continue to have breakfast, lunch and dinner, and so on.”

Apart from revenue considerations, some association meetings look good on a city’s “resume” and can draw the attention of groups in related industries that are not yet clients. That aspect is worth emphasizing (if it is not already obvious to the city) at the contract stage or sooner. The AIChE Annual Meeting draws chemical engineers from all over the world to present the latest research. “There is some prestige attached to it,” says Wood. “We make the point to the CVB initially and then start dealing with the individual properties.” On occasion, he finds that bringing the annual to a city will afford leverage in negotiations for smaller AIChE meetings in that locale; the association holds approximately 35 small meetings throughout the year.

While Kirbabas does advocate for the value of SAH meetings business to CVBs, he finds that not all of them will then further the group’s case in contract negotiations with facilities. “There are some CVBs that are just hands off; that’s not what they do per their policies and bylaws. But by and large CVBs will step up to the plate and be your advocate (in discussions with) a convention center or hotel,” he says. Which is ideal, given that planners are contending with a negotiation climate that is often rife with new challenges. AC&F

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