Hotel Franchise Lawyer: 5 Things to negotiate in your next Franchise Agreement

By Jim Butler - Partner, Chairman, Global Hospitality Group® and Robert E. Braun - Partner, Jeffer Mangels Butler & Mitchell, LLP

30 April 2021
Jim  Butler
Jim Butler
Robert E. Braun
Robert E. Braun

After a year of economic upheaval in the hospitality industry, hotels are making big changes as they look ahead to recovery. Oftentimes these changes involve a complete rebrand, and this leads to questions about what is negotiable in a franchise agreement. In the article below, Bob Braun, senior member of JMBM's Global Hospitality Group® and Co-Chair of the Firm's Cybersecurity & Privacy Group, talks about 5 important franchise terms that can usually be negotiated.

Hotel Franchise Lawyer: 5 Things to Negotiate in your next Franchise Agreement

To say that the past year has been a shock to the hospitality industry is a gross understatement. While many believe that a recovery is in sight – even if requires high-powered binoculars to see – most properties are being forced to re-evaluate their status and prospects. Many hotel owners – and brands – are re-evaluating whether a current brand is the right brand. While many hotels did well simply because of the surging economy during the long post-recession boom, the new normal, whatever it may be, requires that hotel owners, operators and brands rethink whether what was right in 2019 is right in 2021 (and will be right for the next ten years).

As a result, many hotels are changing their brands and management. This may be the impact of lenders foreclosing on properties, changes in ownership, and increasingly, the mutual agreement of a brand and a hotel owner that the brand may not be the optimal operator, or the brand may not be the optimal brand for the property.

During this time of change, it's important to reacquaint ourselves with some of the basics of hotel franchising.

What's really negotiable in a franchise agreement?

The most common question we hear from clients is, "What's really negotiable in a franchise agreement?" While brands take the position franchise agreements are not negotiable, our experience with hundreds of hotel franchise agreements is that there knows that there is wiggle room to get some important concessions if you know what to go for and don't waste your effort where it won't do any good.

Setting the context: Understanding the competing interests

Hotel owners, especially after experiencing what amounts to a near death experience for their properties, have legitimate interests, and there needs to be some recognition of these needs and the unique circumstances of every situation. Within certain limits, the business terms of franchise agreements can be negotiated to address franchisee concerns.

5 Things To Negotiate In Your Next Franchise Agreement

Here are 5 franchise terms we actively negotiate in rebranded franchise agreements:

  1. Franchise and Royalty Fees. While it's unlikely that franchise fees will be reduced for the entire term of the agreement, a "ramp up" in fees over the initial years of the agreement, particularly for a newly built hotel, can often be achieved. While other chain fees are more difficult to negotiate, it can be possible to get some temporary relief there as well.
  2. Area of Protection or Non-Competition. Hotel owners are properly concerned about the brand opening a competing hotel within their property's market area. If it's not offered, a franchisee should ask during the negotiations for a geographic area of protection or non-competition. The length and breadth of the restriction vary, but some protection is usually granted.
  3. Management. A good independent operator can provide an owner with a valuable buffer to the brand's demands for operating and capital expenditures, implementation of new and expensive brand standards, property improvement plans, and certain brand programs that may not make sense for a given property. While brands are understandably interested in an operator that has the experience to run the property, the management company should be the owner's choice, and should have primary loyalty to the owner, not the brand. Thus, it's important to prevent a franchisor from having veto power over change in management of the hotel.
  4. Capital Investments. Franchise agreements usually give the brands the ability to require substantial additional capital investments by owners to meet new physical brand requirements. There are a number of ways to reduce an owner's exposure, including restricting time periods and clarifying the types of capital improvements that can be required. This is particularly the case for a newly built property or an acquired property that may have recently undergone renovation.
  5. Key Money. While brands are generally unwilling to provide key money for repurposed or rebranded properties, brands are increasingly willing to do so to retain an existing property or obtain a new property. Owners should consider key money with a grain of salt; key money is typically only paid after the hotel opens, and is probably the most expensive money an owner will get; in return for key money, brands typically will be even less willing to negotiate important franchise agreement provisions.

While there are limited areas that an owner can expect to successfully negotiate with a brand in a franchise agreement, changes in these limited areas can make a big difference in the value of the brand to the owner. Our expertise in understanding how to implement these changes, and what other changes might be appropriate in a particular circumstance, has achieved significant value for our clients.

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JMBM Global Hospitality Group

1900 Avenue of the Stars, Seventh Floor
Los Angeles, CA 90067
United States
Phone: (310) 203-8080
www.jmbm.com

Jim Butler

Jim Butler is a founding partner of JMBM and one of the top hotel lawyers in the world. Devoting 100% of his practice to hospitality, Jim is author of www.HotelLawBlog.com and chairman of the Global Hospitality Group® which focuses on representing hotel owners, developers, and lenders. Jim and his team have helped clients as business and legal advisors on more than $87 billion of hotel purchase, sale, financing, and other transactions, involving more than 3,900 properties all over the world. In the last 18 months, they have closed more than $1.5 billion of EB-5 financing and sourced more than half of that for our clients. In addition to acquisitions, dispositions and financing, the Group handles ADA compliance and defense, hotel mixed-use development, labor and employment, management, branding and franchise agreements and litigation. With experience gained from more than 1,000 bankruptcies, receiverships and workouts, they use innovative solutions to unlock and create value for lenders and opportunistic investors for distressed assets. Jim also serves as an expert witness in hospitality matters.

Robert E. Braun

Robert Braun co-chairs JMBM's Privacy and Data Security Group and is a senior member of the Firm's Global Hospitality Group. Mr. Braun specializes in transactions with an emphasis on data security, privacy and information technology. Mr. Braun's practice includes establishment and development of strategies to implement computer software, cloud computing, computer hardware, communications and e-commerce solutions, designing and implementing privacy and security programs and protocols, as well as remediating security breaches. Mr.Braun has spent more than 20 years representing hotel owners and developers in their contracts, relationships and disputes with hotel managers, licensors, franchisors and brands, and has negotiated hundreds of hotel management and franchise agreements. His practice includes experience with virtually every significant hotel brand and manager.