Court Verdict May Change Hotel Business

LOS ANGELES? Hotel operators may soon be surprised to find their management agreements are not as sacrosanct as they think, thanks to a recent $51.8-million judgement against Sheraton Corp. On the contrary, such contractual obligations may provide property owners with an unimpeded exit strategy while saddling operators with nearly incalculable monetary damages. The judgment served up in U.S. District Court in Delaware just before year?s end regarding 2660 Woodley Rd. Joint Venture et al v. ITT Sheraton Corp. et al, the findings held that a hotel operator is an ?agent? for the owner and, as such, is charged with a fiduciary responsibility to act strictly and solely in the principal?s best interest. Furthermore, if such is determined not to be the case, it was ruled that the principal (or owner) has the express right to terminate that agent (operator). In the aforementioned case, the jury levied a $51.8-million judgment against Sheraton,focusing on the concept of Sheraton?s implied duty as a fiduciary. As covered by the case (which involved various vendor discounts and rebates kept by Sheraton), the jury reportedly labeled such inducements as ?kickbacks? and maintained they amounted to ?criminal bribery.? Additionally, the jury was also said to be of the mind that the dispensing of ?complimentary rooms? was a practice specifically entered into for ?the benefit of the operator.? The end result of the Delaware Federal Court?s deliberations was that the plaintiffs (2660 Woodley Rd. et al) were entitled not only to nearly $52 million in monetary damages but were also permitted ?free? termination of the management contract (initially signed with Sheraton in 1979 and slated to run through 2030). The ruling claimed no liquidated damages were in order as Sheraton breached the implicit terms of the management contract. ?The possible implications and repercussions of this case are absolutely mind-boggling,? noted Jim Butler, a principal and partner of the locally based law firm of Jeffer, Mangels, Butler & Marmaro LLP and an attorney whose practice involves considerable work in the area of management agreement issues for both owners and managers. ?The way the situation now shapes up, the industry is going to need to change its business mentality altogether or else hotel operators can?t help but get creamed!? Calling on his background as chairman of his firm?s Real Estate Department as well as its Global Hospitality Group, Butler pointed out that this decision was? in essence? a lineal continuation of the ruling delivered up in the case of Robert E. Wooley v. Embassy Suites (1991) which held that a hotel operator is indeed an ?agent? and, as such, has certain understood fiduciary duties and responsibilities. ?Keep in mind that virtually every management pact in existence today [in this country]has created a similar ?agent? relationship,? Butler explained. ?Furthermore, when you add to this fact the reality that? in many states? the usual concept of statute of limitations is not applicable to this situation, it?s easy to see why virtually every operator is now vulnerable to legal action and recourse…and why virtually every owner needs to review the management agreement in-place as well as that operator?s performance. ?Operators/managers are not bad people. However, whether it involves phone company rebates, ?bonus? television sets from suppliers, or just about any other type of marketing incentive imaginable, the bottom line is that every operator today risks fiduciary exposure,? Butler said. ?And it won?t stop here [in the lodging industry],? he added. ?There?s no doubt this ruling will find equal application in general real estate endeavors as well, particularly in the area of asset-management and third-party-management agreements.?