Franchisees face a tough decision: try to ride out COVID-19 and complete their franchise term, or terminate, re-brand, or repurpose? These decisions require thought and planning.
Preparing a strategy requires a lot of input from owners, partners, lenders, brands, and others. Patel Gaines’ Partner Rahul Patel and Associate Attorney Cyra Dumitru examined several high-priority issues hotel franchise owners should consider when deciding next steps.
- Understand your opportunities to negotiate.
From a legal perspective, now is a good time to reach out to your brand representative and try to negotiate a franchise agreement that allows some flexibility during COVID-19. Examples include: (1) renegotiating and/or adding windows of termination and tying these windows to revenue or occupancy goals; (2) negotiating waivers of certain franchise requirements; and (3) negotiating reductions on royalty fees. The important part is to ensure you can terminate if the hotel industry is unable to meet your specific needs.
Don’t start 2021 without a clear understanding of what COVID-19 means for your hotel.
Regardless if you are involved in a new build, PIP, or conversion, open the line of communication with your franchise representative as soon as possible to ensure timeliness and legal compliance. COVID-19 has caused numerous unprecedented delays in the hotel and construction industry. It also may be prudent to consider repurposing square footage into more usable space including renting out conference rooms or using breakfast areas as a source of revenue. “Different states and jurisdictions have different rules and regulations in place to mitigate the spread of COVID-19,” Dumitru said. Due to all the legal uncertainty, it’s important for franchisees to ensure they have built-in extensions for upcoming deadlines. Most importantly, franchisees should negotiate or renegotiate formal extension options, as applicable, ensuring they will receive guaranteed, not optional, extensions or waivers at little to no cost. Otherwise, a franchise project may become overly burdensome before it even gets off the ground.
Amenities and third-party agreements.
“Audit your existing hotel amenities, such as breakfast and transportation services. In some cases, your home state may no longer allow these services, or it may not be in the best interest of your guests,” Patel said. “In addition, are you absorbing increased costs from your vendors due to COVID-19? You may be able to get out from or renegotiate these agreements.” It may be a good idea to modify your payment schedule or terminate the agreements if you cannot use a service. Most agreements have what is known as “force majeure” clauses which allow contracts to terminate with little to no penalty. Depending on what the agreement says, it may be the best time to activate this clause.
Upfront conversations with your business partners, even in the face of the unknowable, is the first step toward minimizing your risk and protecting the viability of your property. When open discussion is combined with expert legal guidance from an experienced law firm, the franchisee will gain significant benefits with their planning efforts.