By Dave Lutz

This article reviews two sample clauses, pinpointing contract language that needs more definition, identifying pieces that are missing, and suggesting language that should he added. (Editor's note: None of the following information is intended to be "legal advice." Meeting sponsors and hotel managers should consult a qualified attorney to review all contract issues.)

The first example is found in many small meetings contracts and is more typical of a small chain or independent hotel.

Sample Clause 1
If the Group room count should fall short of utilizing eighty percent (80%) of the original group commitment, or should any food and beverage function be deleted from your agenda, we reserve the right to review and adjust the special rates offered, and/or a charge for meeting space may result.

This clause presents several challenges:

• Very few groups can support a room rate adjustment (increase) after promoting the group rates to potential attendees.
• The clause is so vague, it's impossible to determine the actual liability.
• This clause does not encourage review of pickup and advance management and adjustment to the room block.
• This clause does not allow for the hotel to reduce (mitigate) the group's damages if it is able to recoup lost revenue.

The next clause, more typical of a large convention hotel, is far more detailed.

Sample Clause 2
Should the hotel not realize the full amount of its anticipated revenue from sleeping rooms and food and beverage functions, due to reduced usage of sleeping rooms within your block and/or reductions in food and beverage functions or their scope, the parties agree it would be difficult to determine the Hotel's actual loss, because the Hotel would not only have lost the anticipated revenues derived from this agreement, but also the opportunity to have offered the unused sleeping rooms and/or food and beverage services individually or as part of a larger block to other parties. Accordingly. the parties agree that the following performance scale (see chart) will apply, that it represents a reasonable effort on behalf of the Hotel to establish its loss prospectively. and that it shall represent liquidated damages.

Some items that should be negotiated to make this clause more equitable include:

• There is no "resell" provision. The hotel is assuming it will definitely lose revenue. If it is successful in reselling, it may not suffer a loss.
• There is not formula for computing the total anticipated revenue expected by the hotel. Could two salespeople at the same hotel come up with the same figure?
• If there's no fee for an 80 percent pickup, should the group really pay 10 percent of total room revenue if it actualizes 79 percent?
• This clause does not encourage review of pickup and advance management of the room block.

A combination of market-driven trends has made "performance" a highly charged issue for both buyers and sellers. The following are some of the reasons contracts have gotten longer and more complex to interpret:

Owner demands are increasing. Not long ago some hotels were purchased as real estate and tax write-offs. Today, in contrast, many hotel chains and ownership groups are publicly traded. They need to deliver a return back to their shareholders by delivering an attractive bottom line. Hotels compete against each other and against other investment opportunities in today's economy. In addition, the better a hotel chain's performance, the greater its ability to attract additional management contracts from other hotels wishing to fly its flag.

Availability is shrinking. The demand and growth in the group market has far outpaced the building of convention hotels. While lodging facilities continue to be built, most fall in the limited-service segment and have limited meeting space.

Hotels need to recoup investment from renovations. Many convention hotels invested tremendous amounts of capital in the early to mid 1990s for renovations. Their rates reflect the need to realize a return on that investment.

Guest rooms are perishable. It's the lodging industry's mantra: A guest room empty tonight cannot be sold tomorrow. Enter yield management. Because hotel's goals include maximizing revenue and occupancy they must ask themselves the critical question: Can we afford to take a piece of business that is unprotected?

Judging from the length and complexity of today's contracts, the answer is no.

What to Look for

1. Beware of contracts that include multiple performance clauses tied to room pickup, such as those that include attrition and a meeting room rental sliding scale.
2. Attempt to negotiate a clause that allows both parties the right to revise the room block, without penalty, after additional history information is obtained. Eleven or 12 months prior to arrival works for most groups and allows hotels time to offer released rooms to other groups. (Most hotels will expect a proportionate reduction in meeting space as well.)
3. Attrition fees should never include room tax.
4. Stipulate that attrition fees will not be due until after the meeting has concluded. This is when the hotel would have received the revenue from occupied guest rooms and allows time for the hotel's actual loss to be reviewed.
5. Do not use the term "penalty" in a contract. Penalties constitute unfair, unequal financial payment and may be frowned upon in a court.
6. If you must pay an attrition fee, work with the hotel to determine whether all rooms occupied by your attendees are properly coded to your group's block.
7. If there is no attrition clause in the contract, add a clause stating that there will be no liability for guest room slippage. (Just because there isn't a clause, it does not mean that you are exempt from liability if the hotel suffers a loss due to poor room pickup.)
8. Request that both parties have the right to review the city ledger report to determine the actual occupancy over the meeting dates.

Managing the Room Block

Consider clauses that allow the group and the hotel to manage the room block together so that the hotel has a greater opportunity to resell unused rooms. While the formula will depend on the type of property and its mix of business, here's one scale to consider:
From 329 days to 120 days prior to arrival: up to 10% of the total room block.
From 119 days to 60 days prior to arrival: up to 5% of the total room block.
From 59 days out through arrival date: up to 3% of the total room block.
(Allowable reductions are usually based on the room block held at the time of the reduction, not on the original room block.)

Computing Attrition Damages

For room block reductions or pickup deficits that exceed the agreed-upon scale, a concise formula should be used to determine the damages. The parties should be able to get the same calculation from the formulas, which should also take into consideration making the hotel "whole" for the damages that it actually suffered. To accomplish this, a provision describing the hotel's duty to attempt to lessen the damages is recommended. No hotel should receive more room revenue from an attrition fee than it would have received had it run full.

First published in: Convene Magazine, September 1997