Industry Consolidation Reflected in New Franchise Agreements
This is the time of year when the branded hotel operating companies that sell franchises (Franchisors) start to use the new 2018 forms of franchise agreements. As the hospitality industry has continued to consolidate, it should come as no surprise that some of the larger brands have modified their treatment of things such as group services contributions, marketing costs, and other expenses that apply across the brand or group of brands and impact every hotel within the specific system of hotels. For example, some separate contributions made by a franchisee will now be an element of a larger bucket of contributions, giving the Franchisor a single payment through which to allocate different amounts for a number of services delivered by the Franchisor across the system that might have previously been paid for by franchisees separately. This modification in approach has not altered the fact that the Franchisor may make changes to how the funds are used, merge a number of separate funds, or discontinue certain services, so long as it does so for all system hotels. The overall philosophy of treating similarly situated hotels within the brand system of hotels in a similar manner has not changed. It is also worth noting that the provisions of the franchise agreement with respect to liquidated damages and remedies may have been modified.
Providing for the payment of liquidated damages is a standard element of hotel franchise agreements. The calculation generally involves determining the average monthly amount of all franchise fees under the agreement, multiplied by the lesser of a certain number of months or the number of months remaining in the term or some percentage of the number of months remaining in the term. The franchise agreement is expected to say that it is difficult to calculate franchisor’s damages over the remainder of the term and the liquidated damages represent a reasonable estimate of fair compensation for the damages that Franchisor would incur, and are not a penalty. Some of the newer franchise agreements may, in one way or another, leave the door open for Franchisors to seek damages against franchisees in addition to the liquidated damages, relating to other matters and not compensation for franchise fees. Arguably, a Franchisor would have this right anyway if a franchisee had acted in a manner to besmirch the intellectual property and reputation of the Franchisor or fail to discharge any post-termination obligations. Nevertheless, there is often now an affirmative reservation of rights in favor of the Franchisor to seek other remedies available under applicable law, beyond the pre-negotiated liquidated damages stated in the franchise agreement. Under any analysis, a review of the new franchise agreements would be wise.