In 2011, the global hospitality industry finished on a positive note, with lodging performance exceeding expectations, in part due to an uptick in global economic activity. As a result, even with an economic outlook that anticipates continued sluggish growth in the US economy through much of 2012, industry analysts anticipate there is adequate momentum to support meaningful increases in hotel occupancy and rates in 2012. According to Smith Travel Research (STR), US hotels rented more guest rooms in 2011 than ever before.
Notwithstanding the historically difficult 2009 and 2010, a number of signs moved in a positive direction in 2011, resulting in greater need for transactional legal services. This momentum, coupled with the limited new hotel room pipeline resulting from lack of new development over the past few years, led many companies to focus on capitalizing on international growth markets and to attempt to take advantage of acquisition opportunities.
While hotels faced these difficult economic challenges during the past two years, lenders and hotel owners played the game of 'extend and pretend', which allowed the parties to wait out a potential economic turnaround and avoid foreclosure or deed in lieu of transactions. The result was that traditional transaction volume in the hospitality industry decreased during that period and distressed sales constituted the bulk of the transactional activity. Recently, however, hotel and resort acquisition financing availability has improved, resulting in an upturn in legal demand in connection with purchases, sales, joint ventures and refinancings.
Expectations for 2012 remain high as credit markets continue to loosen and hotel occupancy and rates continue to climb. As hotel trades begin to occur at an increasing rate, pricing stabilization should occur and portfolio transactions are expected to grow in number.
The rise in the number of mixed-use hospitality projects during the past ten years has also resulted in some very complex transactional activity, particularly with partially sold condo-hotels, which have created difficult challenges for the developer, lender, operator, unit purchasers and owner associations. The potential for successor developer liability (i.e., liability for unpaid assessments, construction defects, contractual warranties and declaration obligations) also makes the unwinding and sale of these mixed-use projects far more complicated than other real estate assets.
Hotel Risk Management Issues and Litigation
One of the most important aspects of representing hotels is assisting with minimizing the various physical and property-related risks associated with operating hotel businesses. In reviewing hotel risk management strategies, evaluation of all potential areas of exposure, the availability of insurance and the magnitude of potential damages must occur. The primary areas of concern include premises liability, workers’ compensation, property damage and employee liability.
A hotel’s potential premises liability is high due to the large number of guests in the hotel at any point in time. Balconies, swimming pools and railings create high-risk areas to be monitored and properly insured. Slip and fall cases are plentiful in a hotel setting.
Property liability exposure for hotels is also high due to high combustibility of hotel contents and multiple sources of ignition in hotels. In resort areas, potential wind and storm damage also creates high property liability and claims exposure.
Workers’ compensation claims are high in the hotel industry, too, with the large number of maintenance and cleaning employees on staff. General employment law claims, such as wrongful termination and discrimination claims, are also significant in the hospitality industry.
Breach of contract, accounting irregularity claims and noncompliance with governmental regulation claims (such as the Americans with Disabilities Act) by and against hotel owners and operators are just some of the various litigation matters that face hotel practitioners on a daily basis. Defense of intellectual property rights, particularly trademark infringement claims and claims related to protection of guest data, are also growing areas of litigation in the hospitality industry. The building boom of the recent past has also resulted in an increase in construction-related litigation in the hospitality industry.
Resorts and Shared Ownership Properties
The resorts and shared ownership (timeshare, fractional and branded residential) segment of the hospitality industry has also been greatly affected by the economic downturn of the past three years. A focus on increased credit score requirements, tighter underwriting requirements and larger down payments has resulted in fewer overall sales, but higher quality receivables portfolios. Developers also cut back on their marketing efforts to improve profitability by focusing on sales to existing customers.
In recent years, the industry has added significant flexibility to the shared ownership product. Instead of just selling one fixed week per year, many timeshare companies now offer vacation clubs or ‘points’ products that owners can use to customize their vacation needs. Contracts with major exchange companies also allow timeshare owners to use their interval to access use rights to numerous other resorts worldwide. The structuring and documenting of these products and contracts has become increasingly complex, with the challenge to legal practitioners being to make the product understandable to the consumer, in compliance with governmental regulations and meeting the needs of the operator.
There has been a material increase in available timeshare, fractional and condo-hotel inventory caused by the spike in mortgage and maintenance fee-related defaults by consumers. It is therefore unlikely that there will be much new construction in this segment in the coming years. The enactment of non-judicial foreclosure laws in many states has enabled timeshare companies to realize more quickly and cost-effectively upon defaulted intervals financed by the developers.
The challenge for this segment continues to be the general lack of available working capital financing historically provided by revolving loans secured by the pledge of timeshare notes and mortgages taken back by the developer at the point of sale. Larger, established timeshare companies have continued to be able to access the public markets and close securitization transactions during the past two years, albeit on terms not as favorable as those available previously. Several small and mid-sized timeshare companies that filed for bankruptcy protection have been acquired or re-emerged with reorganized operations.