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The University of Texas System Hotel Contract Cancellation and Attrition Fees Office of General Counsel The University of Texas System January 2011 This.

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Presentation on theme: "The University of Texas System Hotel Contract Cancellation and Attrition Fees Office of General Counsel The University of Texas System January 2011 This."— Presentation transcript:

1 The University of Texas System Hotel Contract Cancellation and Attrition Fees Office of General Counsel The University of Texas System January 2011 This training should take approximately 1 hour to complete.

2 2 What is the purpose of this training? This training will provide general introductory information about the legal consequences of cancellation and attrition fees in hotel contracts.

3 3 Who can answer questions regarding System hotel contracts? Mark Gentle, OGC Attorney 512/ , Amy Mitchell, Travel Services Administrative Assistant, 512/

4 4 What will you learn in this training? You will learn the definitions and objectives of cancellation and attrition provisions. You will learn how to minimize the risk of losing money through cancellation and attrition fees. You will learn techniques regarding how to negotiate these clauses. You will learn the basic differences between the System and UT Austin Agreements

5 5 Stop and Read the Contracts The University of Texas System Travel Services Office has compiled links to all of the Pre- Approved System Hotel Contract Forms and other valuable information on its Off-site Meeting and Planning web page:

6 6 Stop and Read the Contracts For the remainder of the training you will need to print and read the following contracts that are found on the Travel Services web page: The UT System Event Contract Template (for use with the Master Hotel Agreements) The UT System Hotel Agreement Template (over $25,000) and…..

7 7 Stop and Read the Contracts You will also need to print and read the UT Austin Hotel Agreement (plus Cancellation Option 2) found at ments/contract_std_agrmnt.html ments/contract_std_agrmnt.html

8 8 What is a cancellation fee? Hotels may require their groups to guarantee some portion of the hotels expected profit, even if the guests cancel the visit, in exchange for holding a block of rooms. This reduces the hotels business risks. Under the law, the cancellation fee paid by the guest who cancels the contract is considered liquidated damages.

9 9 Cancellation Fee Best Practices Avoid to the greatest extent possible Develop a formula in the contract to minimize the cost of cancellation Avoid pre-payment by deposit or otherwise Base fee on hotels lost profits not lost revenue Never include any taxes in fee calculation

10 10 Whats the Big Deal-The Event is Going to Happen? A poorly worded cancellation provision is the single biggest risk in any hotel contract Your program budget can get wiped out even if you just need to change the date As a state agency, our duty to protect public funds requires the highest level of diligence The unexpected happens, just when you dont expect it

11 11 Whats the Law on Cancellation Fees The law does not allow the hotel to get more from a guests cancellation than from the guests performance of the contract-in other words, the hotel can only ask for actual damages The hotel has a legal duty to mitigate its damages-in other words, the hotel needs to make all reasonable efforts to resell the rooms

12 Cancellation Fee Provision: What Are My Options The UT System Event Contract, UT System Hotel Agreement and the UT Austin Hotel Agreement provide optional cancellation provisions: Option 1 allows the University to cancel without paying a fee-this is the preferred provision Option 2 allows the hotel to charge a fee and allows the authorized University official to negotiate the cancellation fee 12

13 13 How to Negotiate a Cancellation Fee Agree to a cancellation fee only after the hotel has refused Option 1- no fee Option 2 in UT System Event Contract Requires approval by Department Head Does NOT provide a formula for calculation of cancellation fees Limits cancellation fees to Hotels documented lost net profits on rooms

14 14 How to Negotiate a Cancellation Fee What is a reasonable cancellation fee? The decision to accept a cancellation fee is a business decision If you accept a cancellation fee, be prepared to pay it Compare the value of securing the facility to the risk of the event being cancelled Limit cancellation fees to room block charges, do not include food and beverage charges

15 15 How to Negotiate a Cancellation Fee What is a reasonable cancellation fee? Base cancellation fee on lost profit of hotel, not 100% of lost revenue The industry average profit margin on a hotel room is between 70% to 80% of the rate If your event does not occur, the hotel does not incur the related costs, so when the hotel asks for 100% of revenue for cancellation, it is attempting to achieve more than actual damages

16 16 Examples of Cancellation Fee Contract Provisions-EXAMPLE A Cancellation fee is based on total revenue including anticipated guestroom revenue, food, beverage and meeting room rental. If the contract is cancelled 90 days or less prior to the event, University owes 100% of all anticipated revenue. Take the Test on Next Page

17 17 Test Your Knowledge Why should the University NOT agree to the Cancellation Fee in Example A? And the answer is..

18 18 What is Wrong With Example A? The hotel would make more than their actual damages under this Cancellation Fee provision; actual damages would only be the lost profit. Profit on a hotel room is typically between 70% and 80% of the room rate Food and beverage lost profit is much less; on average about 30%-40% of the charges, so the University is being penalized and the hotel is trying to profit from the cancellation

19 What is Wrong With Example A, continued? There is no mitigation of damages requirement in this clause. (Some courts say that there is no longer an implied duty to mitigate damages once you have agreed to a liquidated damages provision, so it is important to always include a statement that the hotel must mitigate damages; that is, resell its rooms;) There is no duty placed on the hotel to document that it has suffered any loss 19

20 20 Lets Review Example A What was wrong with Example A? EVERYTHING!

21 21 Cancellation Fee Negotiation Tips There are good reasons to say NO to Cancellation Fees: University is in the market for the long term; The payment of cancellation fees makes any public entity very uncomfortable; The hotel will have a difficult time proving it suffered damages; A fair and balanced cancellation fee takes time and energy to negotiate.

22 22 Sample of Workable Cancellation Fee Calculation-Where to Start Start with University standard template cancellation language: UT System Event Contract and Standard Hotel Agreement, Option 2,Cancellation Provision UT Austin Hotel Template, Option 2 Cancellation Provision

23 23 Review of the Cancellation Provision in the Standard UT System Contracts The UT System Event Contract and Standard Hotel Agreement Cancellation Provisions are basically the same. Here are the three most important parts of the provision: 1. Mitigation Provision-Standard language 2. Damage Limitation and Documentation Provision-Standard language 3. Fee Formula-Not included-must be negotiated by the parties

24 24 Review of the Cancellation Provision in the Standard UT System Contracts The Mitigation Provision: If System cancels the event and/or room block for reasons other than those outlined above, and Hotel contends it has a right under this Hotel Event Contract to a cancellation fee, then Hotel must make a reasonable effort to mitigate its damages.

25 25 Review of the Cancellation Provision in the Standard System Contract The Damage Limitation and Documentation Provision: In no event will any cancellation fee owed by System to Hotel exceed Hotels lost net profit. If requested by System, Hotel will provide information and documentation verifying the cancellation fee due. Cancellation fees, if any, will be due and payable thirty (30) days after the meeting date. The cancellation fee will be Hotels sole remedy for cancellation by System.

26 26 Add a Cancellation Fee Formula to the UT System Contract-SAMPLE If System cancels the contract within 90 days of the event, the maximum cancellation fee is based on the number of rooms, less 20% slippage (allowable reduction in room block) multiplied by 75% of the group rate. This example is as basic as it gets, to be added to the Event Contract language, not as a substitute for any provision of the standard form

27 27 Add a Cancellation Fee Formula to the UT System Contracts-SAMPLE The variables to be negotiated in this sample are : Date that triggers cancellation fee liability Allowable slippage (reduction) in room block The per room profit (% of rate)

28 28 The UT System Contracts are Different Than the UT Austin Contract Since the Cancellation Provision in the UT System agreements differ from the UT Austin Standard Agreement, the following slides will provide guidance on completing the UT Austin Contracts Cancellation Provision.

29 Cancellation Fee Formula Using Standard UT Austin Hotel Contract When using the UT Austin Contract, be sure to add the following clarifying statement to the cancellation provision: In no event will any cancellation fee owed by University to Hotel exceed Hotels lost net profit. 29

30 Cancellation Fee Formula Using Standard UT Austin Hotel Contract UT Austin Standard Hotel Template provides a chart for calculation of the cancellation fee-see next slide Do not offer conference room, catering or other charges to be included in the cancellation fee The percentages shown in the chart are not mandatory, you can propose and agree to other percentages When using this chart, include a statement that the room block is net of any allowed slippage 30

31 Cancellation Fee Table in Standard UT Austin Hotel Contract-Option 2 31 Canceled # of Days Prior to the Event % of Lost Guest Room Revenue % of Lost Conf. Room, Catering, Equip., and/or Auxiliary Activities Revenue 181 days or greater0% 180 to 121 days20%10% 120 to 61 days40%20% 60 days to Event date 80%40%

32 POP QUIZ Cancellation Fee Provision-Example B: The University and Hotel Agree that the University will owe a cancellation fee based upon the anticipated revenue from 80% of the room block. The rate is $125 per night with 245 room nights blocked. What is the most the University must pay? 32

33 33 POP Quiz A. $30,625. B. $24,500 C. $22, D. Trick question, who knows E. None of the above And the answer is

34 34 POP Quiz B is the right answer, but is it a fair cancellation fee? List the other provisions this cancellation provision should include.

35 35 POP Quiz What are the main variables in the calculation of a cancellation fee? And the answer is:

36 36 Test Your Knowledge A. The costs of all rooms and food/beverage expenses; B. The date of the event; C. The date on which liability for the fee begins; D. The number of rooms that you can drop before the event; E. The profit percentage in each room F. A, B and C G. C, D and E

37 37 Test Your Knowledge G. C,D and E

38 38 Attrition Fee Provisions Definition: Fee charged because group did not fulfill their total event commitment (contract under-performance) Standard Agreements have Option 1-no fee and Option 2, allowing an attrition fee to be calculated and charged Hotels often ask for attrition fees on rooms and catering charges.

39 Special Attention To Attrition on Food and Beverage Attrition provisions can get complicated The risk to the University occurs when the food and beverage has been overestimated without adequate adjustment authority In order for the food and beverage attrition provision to work properly, negotiate the ability to adjust the final catering requirements close to the date of event 39

40 40 How to Reduce Attrition Fees on Guest Rooms Negotiate the ability to reduce the size of the room block by at least 20% as close to the event as possible The contract provision governing changes to the room block is called the Guest Room Guarantee found in the Guest Room Accommodations Exhibit for all university hotel agreements

41 41 Reducing Attrition Fees Always include a provision that limits any attrition fee to no more than actual lost profits The Standard UT System Agreements contain that limitation, the current UT Austin Standard Hotel Agreement DOES NOT, so it needs to be added to both the room block and catering attrition: In no event shall any attrition fee owed by University to Hotel exceed the Hotels lost net profit.

42 42 Negotiating Room Block Attrition Fees First, know the trigger: at what percentage of the room block guarantee will attrition fees be required? Hotel agreements often allow 20% slippage before attrition is triggered Therefore, the starting point for the calculation of attrition is some percentage less than the final adjusted room block-or event guarantee Hotel will want assurance that they can count on that 80% of the guarantee, but remember, the hotel can only claim actual damages

43 43 Negotiating Room Block Attrition Fees Here is the standard contract language on attrition fees, using a 20% slippage from the final room block total as the trigger: Should the actualized Room Block revenue be less than 80% of the Room Block Guarantee, the University agrees to pay the Hotel as Damages, and not as a Penalty the difference between the actualized Room Block revenue and __% of the Room Block Guarantee. What % should go in the blank?

44 44 Negotiating Room Block Attrition Fees The answer is: Well, lets discuss it first. If you put 80% in the blank, you have just agreed to pay all of the net profit of the hotel for the entire room block, regardless of how many rooms you use. If you want to limit your attrition to a lower amount, you need to insert less than 80% into the blank.

45 45 Negotiating Room Block Attrition Fees The best answer is anything under 80% This percentage is also subject to negotiation, and the cap of actual net profit has already been put into the agreement, so anything under 80% will generally accomplish the goal. The reason anything above 80% is disfavored is because 80% or more would allow the hotel to argue that its attrition fee recovery will be lost revenue, not a negotiated percentage of profit on each room.

46 46 Negotiating Catering Attrition Fees The risk of food and beverage attrition fees can be greatly reduced by including the authority to set the Event Guarantee very close to the event so that the hotel will only purchase the necessary amount of perishable items Food and beverage attrition should never include tax, service fee or other fees;

47 47 Negotiating Catering Attrition Fees 6. If the hotel refuses to allow substantial adjustment of the catering event guarantee close to the day of the event; or, 7. If the hotel requires a minimum food and beverage expenditure commitment, the standard form attrition provisions need to be evaluated and modified on a case by case basis. 8. The bottom line is that the provisions must be clear that the University will agree to compensate the hotel no more than their actual lost profits

48 48 Test your knowledge The following questions will test your knowledge of the information presented in this course.

49 49 1. The cancellation fee it intended to... A.Guarantee a hotels revenue from an event, even if the group does not show up B.Reduce business risks for the hotel C.Protect the university from having to pay all of the hotel charges when individuals do not attend the event D.Allow the hotel to make a profit even if the weather turns bad The answer is…

50 B.Reduce business risks for the hotel (ref. Slide #5) 50

51 2. When preparing a hotel agreement A.Use a template B.Review the general instructions provided with the template C.Contact OGC with any questions D.All of the above 51 The answer is…

52 52 D.All of the above

53 53 3. The best and preferred approach to cancellation fees and attrition fees is to convince the hotel they are not needed. True or False? The answer is…

54 True Cancellation fees are a harsh remedy and attrition fees can get complicated and hard for the hotel to prove. 54

55 55 4. The hotel should never be able to recover more than their actual lost profits in a cancellation fee or attrition fee. True or False? The answer is…

56 True 56

57 57 5. I can use the approved hotel agreement templates without making any changes in each transaction. True or False? The answer is…

58 False You should always be sure the agreement fits the transaction. The templates may require supplemental provisions and edits. 58

59 59 6. What do I need to know in order to calculate a cancellation fee A.The number of rooms and rate B.The number of rooms per night in the room block, the rate and the hotel profit C.The total adjusted number of rooms, the profit percentage and the room rate The answer is…

60 C. All that stuff 60

61 61 7. What is the purpose of an attrition fee? A.Same as the cancellation fee B.To establish the damages owed to the hotel because of the universitys under performance of the contract requirements C.Allow the hotel to make an extra profit on late arrivals The answer is…

62 The answer is B 62

63 Thank you for completing this training course. Office of General Counsel The University of Texas System


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