While the Coronavirus Disease 2019 (COVID-19) pandemic continues to impact all areas of the world economy, the global hospitality industry is being impacted particularly hard. The suspension of international travel with the closure of multiple borders has caused an unprecedented collapse of demand. Over the past two months hotels have scaled down operations where possible, with some terminating staff or putting them on furlough and looking for other ways to reduce costs. Given the fixed expenses for a hotel to remain open, many have closed down completely until circumstances improve.
The various third-party stakeholders – brands, operators, landlords, and lenders – often involved in hotel properties, may complicate matters further. Internationally branded “flag hotels,” whether brand-managed, or franchised and operated independently, are subject to agreements that mandate various operating standards be maintained, and may require continuing operation and/or capitalization of the hotel by the owner. Leases for hotels subject to a ground or operating lease may contain analogous provisions, as may loan documents – along with strict financial covenants. While many agreements may contain force majeure or similar clauses, it is not yet clear whether those will be held to be applicable to the havoc being wrought by COVID-19 or whether such an event was contemplated. That may depend, at least in part on the contract language. There is also already debate on that as a general matter, and litigation on that question is already under way and likely to increase. Hotel owners should carefully review the language on that subject in their contracts, and in general for whether breaches of financial covenants, significant construction delays, reduction in operations or full closure of a property may constitute a default.
While reaching out and coming to a mutual understanding with the brand, landlord, and/or lender may be beneficial, this may not always be practical or fruitful. These third parties may have different interests and incentives than owners and some may only be willing to entertain contract modifications by demanding prohibitively onerous extractions from an owner in return. Others who are inundated with accommodation requests may therefore be unwilling, or unable, to affirmatively provide hotel owners with the immediate flexibility needed.
For many hotel owners, continuing to spend money in the absence of clear guidance is not a viable option. Instead, some hotel owners may simply feel the need to act as they deem most reasonable and proper under the circumstances, relying on the possibility that given the completely unapparelled present situation they are facing, sufficient legal justification for their unilateral actions may be found even after the fact.
For instance, an excuse for complete closure mat exist where governmental orders have limited guest stays to “essential lodgers” or the like, and hote l owners have decided that for insurance and liability reasons it is more prudent to shut down the hotel than expose the hotel to COVID-19 contamination for the low rate/low occupancy business such guest stays represent. Likewise, even where restrictions have not been imposed directly on hotels, some sources of hotel data attribute much of the decline in hotel demand to governmentally mandated ‘social distancing’. Some jurisdictions have placed restrictions on lenders’ and/or landlords’ rights to enforce their contracts during this time.
That being said, all legal theories and justifications still remain untested. Owners who do choose to act independently should consider keeping detailed track of all government orders impacting their operations and carefully record all correspondence related to their decisions.