Calculating Damage Awards in Hotel Management Agreement Terminations

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When a hotel management agreement is terminated without the consent of the manager, the law clearly allows the manager to recover damages (from the owner) as a result of the termination. In most cases, the owners and managers resolve their issues without litigation. For the substantial number that cannot agree and thus must be adjudicated, the courts have supported solid estimates of forgone fees for determining damage awards, based on careful, defensible calculations of the hotel’s performance during the prospective contractual period. The methodology outlined in this paper provides a way to establish with reasonable certainty the damages that occur from the involuntary termination of a hotel management agreement. While many hotel management agreements contain a liquidated damages clause that establishes the termination fee when the parties agree to terminate the contract, these liquidated damages clauses are not applicable in a situation where the hotel management agreement is terminated even though the manager has not breached the contract. This report provides a numerical example demonstrating that the actual damage amount is at least twice and potentially five times the amount of a typical termination fee. An analysis of recent court cases shows that the courts accept the methodology proposed here, although they may debate the assumptions that underlie the calculations (such as the anticipated inflation rate). What courts will not accept are unsupported estimates and certain expense claims not expressly found in the contract language.
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Cornell; real estate; finance; management agreements; hotels; bankruptcy
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