by RICHARD M. SALTZMAN
We are all familiar with elements of a brand standard: the color scheme in a hotel lobby or the particular type of shampoo and conditioner in a hotel room. Every hotel has a brand standard, whether it is a franchise or independent operation. Brand standards can become a point of contention between franchisors and franchisees. However, it is necessary to understand the importance of brand standards from a legal perspective.
PROPERTY IMPROVEMENT PLANS
Brand standards are an integral component of the franchise agreement at the outset of the franchise relationship. When an existing hotel is converted to a franchised brand, a property improvement plan will be included in the franchise agreement. Depending on the brand, there may be an opportunity to negotiate specific requirements in the property improvement plan. This may involve outright waivers of these requirements or extended time periods for the completion of certain required items. Whatever the negotiated change, it must be clearly set forth in the property improvement plan to be legally effective. Failure to meet specified deadlines could result in a default under the terms of the franchise agreement which could lead to termination of the franchise agreement.
Once open, franchised hotels are required to meet operational brand standards throughout the term of the franchise agreement. These standards can run the gamut from equipping guest rooms and common areas to cleanliness standards and front and back office operational requirements. The list can be highly detailed and extensive. Thus, before entering into the franchise relationship the hotel operator is well-advised to understand these requirements and decide if they are equipped to meet them and incur the cost of complying with standards.
In the industry, we often hear complaints of “amenity creep” or overreaching brand requirements. Those complaints may be warranted, although franchisees have little recourse in these situations. However, franchisees can make their concerns known to their franchise advisory councils who often have input in creating brand standards. Many times, the requirements that franchisees object to existed when they signed the franchise agreement. Therefore, it is critical that a prospective franchisee understand their specific agreement and the franchise’s brand standards before entering into the franchise relationship.
Brand standards can significantly impact the sale of a franchise property. In the event of a requested transfer, franchisors can condition the granting of the request on a requirement that the franchisee or new owner adopt an extensive renovation or modernization plan for the subject property. Although the parties can attempt to try and negotiate these terms, the franchisor does not have to agree to such modifications.
Failure to include a clause in the agreement making the proposed transfer of a franchised hotel contingent on franchisor approval, including the acceptability of the punch list, by all parties can have negative consequences. More importantly, the expense of a punch list destroys the commercial viability of a proposed sale, making it essential that prospective buyers and sellers address this issue as early as possible in their discussions.
Finally, if brand standards are not being met, franchisors and franchisees can enter into “workout plans” to allow the franchisee bring their hotel into compliance with brand standards. Every effort should be made to avoid the consequences of termination of the franchise agreement.
Richard M. Saltzman is an attorney specializing in franchise matters at Giambrone and Saltzman, LLC in Fairfield, NJ. Prior to establishing the firm he was in-house counsel and a franchising executive with Wyndham Worldwide and its predecessors for over 20 years. For more information about his law firm, visit www.giambronesaltzman.com or contact him at (862) 210-8137 or at [email protected].