Hospitality Law Check-In - Commentary on hotel, resort, club & hospitality legal issues

Club management's challenge in structuring a guest policy is balancing competing interests reflected in the following hypothetical comments:

Member A: "I acquired my membership so I can play golf with my friends, so don't restrict me from playing with them."

Member B:  "Member A has played golf with the same guy 10 times.  His friend should get his own membership."

Member C:  "I want my brother and his wife from Boston to play the course on Friday, but I can't join them."

Member D:  "I keep seeing non-members playing the course.  I thought this club is private."

Membership Committee Chair:  "We need to introduce the club to new prospects through our guest program."

Guest rules and policies should properly balance the interests reflected in these comments, taking into account the nature of the club, the membership and the club's business goals.

Specific provisions may include:

• Prohibition or restriction on unaccompanied guest play;
• Provision for host committee to play golf with members' guests when the sponsoring member is not available;
• Restriction on number of times a person can be a guest in a year;
• Black-out of peak periods when guests are not permitted;
• Restriction on number of guests at one time; and
• Rule governing payment of guests' charges; and
• Special rules or fees for extended family and/or houseguests.

Club management can take measures to minimize problems and maximize guest program benefits.  First, management should strictly enforce guest adherence to dress codes and guest rules to minimize member objections.  Second, the club should invest in software to track guests both for purposes of enforcing limitations and identifying membership candidates.  Third, the club's guest policies should be regularly communicated to members and prospective members to avoid surprises and embarrassment to members and their guests. 

Most clubs welcome members' guests, but sometimes the welcome mat need some definition.

Actually, I heard it on the radio.  Specifically Michael Bull’s nationally syndicated weekly talk show about business and commercial real estate called The Commercial Real Estate Show. My few moments of fame, shared with Judy Hendrick, the CFO of Aimbridge Hospitality, and Mark Woodworth, President of Colliers PKF Hospitality Research, was actually very interesting and covered a wide range of topics relevant to the hospitality industry today.  If you want to hear any parts of the show, you can click here.  If you have less time, you can click here to go to the web site of the show and find some of the information we discussed.

The short summary is that the fundamentals of our industry remain positive and are improving.  With national occupancy levels and ADR levels moving up, there will be some pricing power for the hotel operators.  The transaction side will remain uneven, with large trophy assets on either coast getting the most attention.  There is cash, but insufficient and inadequate product, making the acquisition of the desirable asset a more competitive exercise. Still to come in 2014 and 2015 are some large CMBS pools, which, if used to release assets to market, would be a benefit for buyers.  I suppose we will have to watch those CMBS maturities more closely.   

Within hours of the appeals court’s ruling [Marriott International v Eden Roc 3-26-2013.pdf], there have been announcements about the demise of the long-term hotel management agreement and the hotel owner’s inviolate right to terminate (revoke) management agreements “at-will.”  But the wiser course might be to not speak too soon, but, rather, to ponder the consequences.  Remember that Judge Schweitzer’s prior ruling on October 26, 2012 granted Marriott’s request for a preliminary injunction to prevent the hotel owner from removing the hotel operator in another of a series of “midnight raids,” where the hotel owner sweeps in and removes the hotel operator.  The hotel operator at the Eden Roc chose to stand its ground, and the injunction order maintained the status quo.  In many situations, the parties are able to resolve their dispute, either on their own or with the assistance of a mediator.  In fact, the Judge urged the parties to do just that. 

The parties were not able to resolve their differences, and on March 26, 2013, a New York appeals court vacated Judge Schweitzer’s injunction.  This is not a sweeping and staggering new law. Citing the 1991 Woolley case, the order merely confirms that a principal may freely remove its agent and terminate the agency relationship “at-will” (absent the presence of a “coupled interest” as part of the contract; see the attached link to our prior piece on the Turnberry decision).  (To this extent, I disagree with the appellate court’s dicta that the agreement in question is not an agency agreement; in fact it is). The order further confirms that certain contracts that have the characteristics of a personal services contract cannot be enforced by means of an injunction.  It is also not news that if a hotel owner desires to terminate its management agreement with the hotel operator in this manner, that the hotel owner may be answerable in damages to the hotel operator.  Some blog posts within the last 24 hours make reference to the recent Fairmont Hotels & Resorts termination at the Turnberry Resort.  Very few of those blog posts complete the factual story and note that the hotel owner ultimately paid Fairmont damages reported to be roughly $19,000,000, representing the approximate present value of expected future management fees. Depending on the performance of the hotel, an Owner’s summary revocation of a hotel management agreement could be akin to selling “puts”; you get to own the stock, but do you really want to own it that cost?

So, let’s just be more judicious here.  Hotel owners and hotel operators actually do talk with each other more often than not, and do enter into legally binding agreements for management of the owner’s hotel.  I will continue to advocate for good faith negotiation over litigation, and monitor the complete story, including the fact that terminating the hotel management agreement may grant an owner its wish to regain the hotel, but that will come at a price, and then, the next step is that the hotel owner will need to replace the removed hotel operator with yet another hotel operator - which hotel owners realize can add a significant expense for the owner.

From the mid-1980s to the mid-2000s, high-end developers of large residential communities often thought building a golf course and creating a club in the community was necessary to attract its target market. Today, such developers want to avoid doing that due to the excessive oversupply of golf (see Growing the Game of Golf, posted November 26, 2012) and the financial failure of many golf clubs (see Club Membership Deposits in Bankruptcy, posted July 2, 2012). However, these conditions create a unique opportunity for the residential developer to arrange with a local golf course owner not only to give the developer's residential purchasers golf access, but to actually create a golf club at the area golf course. Similar opportunities exist at area family oriented recreational facilities such as lake clubs, beach clubs, fitness centers and adventure centers, which will help attract non-golfers and young families.

How can a residential community developer turn an access arrangement into the type of club experience that amenitizes the community similar to having the club actually in the community?

• The golf course or other amenities should be easily accessible from the community.
• The arrangement should be long term and preferably structured to run with the land so as to give purchasers a guarantee of continued access.
• The residential community owners should be able to acquire memberships that give them preferences over the general public, charge privileges and regular dues payments rather than only "pay as you play" fee arrangements.
• The residential developer and facilities owner should develop member services and activities, which include a member services/activities director, full calendar of activities, and a member website newsletter.
• The golf course and other amenities need to be comparable in appearance to the residential community.
• The arrangement needs to be viable for the amenities owner, with both sufficient dues payments to support operations, plus the member services and activities costs, and ongoing capital to fund capital improvements and replacements in order to allow the amenities owner to maintain the club. The amenities owner should expect financial support based on the developer not needing to build the amenities and the amenities increasing property values of the homes.
• Provided such financial support is provided, the agreement should establish maintenance and operating standards for the amenities.

The right arrangement can be a win-win for the developer, the amenities owner and most importantly, the homeowners.

A lender who holds a mortgage on golf courses and other recreational amenities should consider two issues (among others) before foreclosing on the property when club members have use privileges at those facilities.

Issue 1: Does a lender take title subject to the club memberships? A foreclosing lender takes title subject only to real property interests existing at the time the mortgage is granted. Generally, club memberships and the memberships agreements grant personal property interests and, therefore, the lender would not take title subject to them. However, there are cases where courts have determined that club memberships were real property interests based on plat descriptions and references to memberships in the real property public records. For example, a community's declaration of covenants may include easements or other interests in favor of club members or property owners that could be considered real property interests. A lender and its counsel should carefully review title documents and plats before concluding that the lender will not be subject to club memberships.

Issue 2: After foreclosure, how is the lender or foreclosure purchaser to keep the club members as dues payers and customers? Although most lenders and foreclosure purchasers do not want to assume membership agreements, they do generally want to keep the members as dues payers and purchasers of the club's products and services. The new owner should implement a membership plan or other type of offering to club members immediately after the foreclosure, which is carefully crafted to induce the club members to continue to generate needed revenue.

Offerings to existing club members should be made on a preferred basis compared to what is offered to new members. The pricing of memberships, dues and fees should further a business plan created by knowledgeable professionals based on current market data. The introduction of the membership plan or offering should be accompanied by well crafted communication that addresses concerns and issues that members will likely have after a foreclosure. The new owner should have trained staff in place to answer members' questions and proactively solicit their enrollment in the new club. In addition, the membership documents and communication should be crafted so as not to create successor liability.

Filing and prosecuting the foreclosure complaint may be the easy part. Conducting diligence on the memberships and planning how to continue project revenue are likely the keys to success for the lender.