Hotel Franchising in the Time of COVID-19

Sign up for our Coronavirus roundup email.
Visit our Coronavirus resource page.

With hotel occupancies plunging to levels well below those seen in prior epidemics, wars and recessions, particularly in large cities, hotel and hospitality franchisors and franchisees are awake at night trying to deal with a tsunami of uncertainty and the severe economic challenges and damage they must deal with today and when COVID-19 passes.

Here is a checklist of some critical issues and possible actions to consider:

• Many hotel operators have already trimmed staff to basic levels, and reduced operating costs to a minimum. The small business loan programs being offered through the Federal Government stimulus package are in high gear, and for those employers who use furloughs rather than layoffs and retain staff long term, these loans can be converted to outright grants. Employee retention also opens the door to payroll tax and other relief.
• For portfolio owners, the small business relief is available hotel by hotel most likely, or they can access the special loan programs being offered through the Federal Reserve. Again, employee retention is the door to converting low interest loans to grants. With larger enterprises, the loans also come with restrictions on stock buybacks and executive compensation.
• Hotel owners and operators who are considering layoffs and furloughs need to consider whether the notice requirements under the Federal WARN Act (and under any applicable state and local equivalents) will be triggered by the layoff or furlough, as the potential liability could be enormous. Even though most hotel employees are employed by the hotel management company, the owner still needs to be concerned with such potential liability since most hotel management agreements provide that the owner is ultimately responsible for any such liability, either expressly or implicitly under a broad owner indemnification provision.
• Now is the time to review applicable loan agreements and related documents (including any guaranties) and discuss the situation with lenders. The hotel lending community, including CMBS lenders, are already putting forbearance and other relief programs in place, as well as waiving financial and other covenants in the short term. Understanding the scope of those programs and the short and long term implications is important.
• This is a challenging time for both hotel and hospitality franchisors and franchisees. Hotel owners and operators also need to review applicable franchise agreements. Some hotel franchisors have implemented financial relief programs that include temporary waiver of certain fees and charges and various brand standard operating and physical requirements. If there is a franchise council it may provide an effective means for network wide communications concerning potential adjustments, for example to fee provisions, operating requirements and brand marketing and related programs.
• Regarding operating requirements, many hotel brands, including the major brands, are offering temporary relief, including reduced operations or even closures, provided that the hotel owner /operator satisfies certain requirements and conditions. Such requirements and conditions can often be found on the applicable owner websites rather than on the brands’ general/public websites.
• An owner planning to close its hotel should review the hotel’s franchise/management agreements and loan agreements and related documents (including guaranties) to determine if the closure will result in any fees/penalties or a default or trigger recourse to the guarantors under any guaranties.
• Hotel owners and operators need to keep their Boards of Directors fully informed. They have difficult duties and decisions to take, and depend on full and current information to act appropriately.
• Make sure you are in compliance with State, County and Local Government orders on the movement of non-essential employees, social distancing, reporting of infections and the like. And speak with them about possibly using your hotel to house emergency workers and self-isolating individuals.
• Owners may be approached by state or local governments to aid with COVID-19 matters, ranging from use of the parking garage/lot for screening or testing to housing patients that are being treated for, or are recovering from, the virus, and this may be more likely to occur with respect to a hotel that has been closed.
• An owner considering to allow such use may be tempted by the fees/rent for such use, but it needs to consider whether the consent of the franchisor, management company or lender will be required, and the owner needs to consider potential negative effects to the hotel, including potential exposure to guests and employees, clean-up and stigma issues.
• Even the mere use of the parking garage/lot for screening or testing could result in issues. For example, will the personnel conducting the screening or testing be permitted to enter the hotel for a meal or coffee break or to use the bathroom?
• An owner may also be approached by state or local governments to house homeless individuals that are not infected with the virus, especially those living in homeless encampments, as there are concerns that the virus could spread amongst homeless populations. The government may be more likely to make such request with respect to a hotel that has been closed. Allowing such use raises many of the issues discussed above and longer term occupancy issues.
• Check your business interruption policy, it may have real value.

Eventually travel and tourism will recover, and all stakeholders in the industry are collaborating dynamically to ensure a prompt return to business as normal.