Hospitality Law: Trends, Unique Challenges And Risks - Practical And Legal Strategies For Protecting The Legal Rights Of Hotels

Thursday, February 1, 2007 - 01:00

From medieval times, the common law has placed uniquely high legal responsibility on the innkeeper. Fearful that innkeepers were working in conjunction with highwaymen who rob travelers, the law imposed strict liability on the innkeeper when a guest's property was stolen during his stay.

As the law has evolved, this doctrine has survived and affects the rights of hotel guests relating to premises liability, property theft and personal injury. This legal precedent holds hotels to much a higher standard when contrasted with the liability of other large real estate owners.

Hotels are truly a world in microcosm. The risk is daunting. Even with a full team of experts (the asset manager, hotel manager, security expert, and insurance broker) working full time to prevent being sued, it is a virtual certainty. In the book Don't Lose Your Hotel by Accident, author Anthony Marshall, former Dean of Florida International University, cites a few hundred litigation case studies which vividly illustrate the point: the hotel business is exciting and fast moving, but it is highly risky, sometimes overwhelmingly so.

Since its inception, John E. Osborn PC has served the hospitality industry. When a Manhattan hotel was unable to keep up with its mortgage payments, the bank obtained a court order placing the hotel under the direction of a receiver. For three years John E. Osborn PC served as general counsel to the receiver, advising the receiver on a multitude of legal issues, including hotel and restaurant renovation, insurance defense, commercial litigation, building code, health club leasing, premises liability, security, faade repairs, environmental law, and mechanic's liens.

John E. Osborn PC has a long track record of assisting hotels in troubleshooting legal issues with renovation while the hotel remains open for business. In other instances, the law firm has counseled hotels through extensive demolition and renovations during a complete shutdown of the hotel. On the construction projects, the firm negotiated the construction, design and environmental contracts, handled troubleshooting during the projects and at completion resolved mechanic's lien and other close out issues. In one instance, a contractor furnishing large chiller units to a Manhattan hotel experienced financial failure and defaulted. In the end, we worked with the contractor's bonding company to ensure that the equipment was delivered, installed, commissioned and that the appropriate warranties were delivered to the hotel.

In another instance, a fire in the basement of one of the firm's Manhattan hotel clients led to the meltdown of the cogeneration plant. In this instance, a settlement was accomplished, without litigation, under which the manufacturer, distributor and contractor paid for a replacement and upgrade of the cogeneration system.

In the past twenty years, the hotel industry has come to recognize that there are two distinct businesses incumbent in running a hotel: the "hotel business" and the "real estate business." It is now widely recognized that there is a significant advantage to hiring professional managers in each area. Sophistication, professionalism and expertise have increased markedly over the past two decades, as has the ability to appropriately address the multitude of legal issues which face hotels.

Management Agreements

The hiring of professional management companies has become prevalent and a clear definition of the role is essential. Although the bargaining power of the professional management company may allow it to dictate the terms, it is clear that a fairly complex management agreement may be anticipated with terms including incentives, detailed performance criteria, termination rights, prescribed accounting methods and technology requirements.

Franchise Agreements

The trend in the hospitality industry is that hotels are more likely to be operated under universally recognized "flags" and less often as independent hotels. This method of delivering the hotel product is known as franchising, and under this system hotels operate by a consistent set of guidelines for the business and physical plant and benefit from international as well as domestic booking opportunities through the franchisor's website and 800 number. In return, the franchisee's hotels must meet the criteria and quality standards of the franchisor's brand. When hotels reposition and change brands, significant renovations may be necessary to meet the franchisor's standards; repositioning may include renovation of a lobby, adding or upgrading a restaurant or refurbishing hallways and rooms.

Construction Contracts

Even when there is not a change in brand, hotels are constantly renovating, and, due to the finances involved, these renovations most often take place while the hotel remains open. Renovating a hotel while it is still in operation presents a brand new set of risks: guests may injure themselves by tripping over construction debris or be inconvenienced by construction dust, noise or an interruption of electric power or water.

The construction lawyer's role on the hotel project is significant, as the construction and design contracts must be tightly drafted to create an impetus for the design professional and contractors to meet schedules and to prevent the contractors from taking advantage of the hotelier's urgent need to achieve timely completion of the project. A recent trip to Las Vegas served as a reminder that even liquidated damages of over $10,000 a day and a proactive building department which is receptive to issuing approvals as the construction continues do not eliminate the risk of failing to meet scheduled opening dates. Because of this urgency, it is imperative that construction counsel have experience in effectively achieving troubleshooting solutions in the field. Having construction counsel with practical business skills and trial experience is essential if the hotel is to prevent contractors from extorting money in return for meeting deadlines. Troubleshooting and trial experience are helpful threshold credentials for lawyers representing hotel developers when the stakes are high.

Environmental Law

Environmental risk is a reality in the everyday operation of a hotel. Meeting ASHRAE standards for outside air intake, mold risks, asbestos management during renovation and maintenance, lead-based paint maintenance and leaking underground tanks are universal concerns. As environmental issues are regulated by federal, state and local laws and regulations, protecting the legal rights of the hotel means knowing these requirements and how to comply with them.

Sustainable Development And Building Green

Eco-friendly and LEED-certified hotels are now the norm today. Hotels are becoming leaders in energy savings, sustainable development practices and the use of environmentally friendly construction materials. Meeting legal requirements for obtaining approvals for development and renovation, applications for tax credits or reimbursement all require detailed knowledge.

Zoning, Building Code, Landmark And ADA Requirements

Hotel development in and of itself requires a full array of legal expertise in zoning, landmarks laws, environmental requirements, building codes, fire codes, scaffold laws, handicap accessibility laws and other local laws, regulations and administrative requirements. Development requirements quite often differ when it comes to a hotel as opposed to other types of properties and requirements vary widely from locality to locality.

Leasing

Leasing has increasingly become a significant component of hotel law practice. High end retail stores, restaurants and health clubs have seen the benefit of leasing space in luxury hotels. The more significant the revenue to be derived, the more essential it is for hotel lawyers to have leasing expertise to avoid being disadvantaged when dealing with sophisticated counsel for the retailer, restaurant or health club when the lease is negotiated.

Defense Of Insurance Claims

Insurance defense is an essential component of hotel law. It is clear that the hotel can recognize cost savings by incorporation of aggressive claim investigation and defense policies into day-to-day hotel operation. This being the case, it is remarkable that hotels are often placed in the position of feeling compelled to settle special claims for significant amounts to avoid potentially unfavorable trial results in personal injury, property damage and property loss cases.

Legal Liability Audits

Limiting or preventing claims relating to the hotel's premises can be accomplished by the conducting of a legal liability audit; lighting dimly lit areas and eliminating labyrinthine corridors or stairways will help prevent slip-and-fall cases and decrease liability due to inadequate security. Very often these changes can be made as part of a scheduled renovation at little or no additional cost. Frequently upgrading something as basic as lighting will significantly limit claims.

Counsel's Familiarity With The Hotel Business And The Locality

Defense of the insurance claim is most effective when defense counsel is familiar with the hospitality industry, the client and the locality; detailed knowledge of the hotel industry and its inner workings in personnel practices, hotel facilities management and recordkeeping goes a long way toward bringing about a favorable and minimal settlement. An inadequate security claim against a hotel requires the plaintiff to prove that the loss was foreseeable to the hotel. To defend against testimony that an injury was foreseeable, the hotel will be most likely to succeed when guided by counsel with a detailed knowledge of local law enforcement, local government and the local hotel industry.

Conclusion

To best serve the hospitality law client, proactive, hands-on measures are necessary. An in-depth knowledge of the hospitality industry and hotel operations, coupled with experience in commercial litigation, real estate, construction, environmental issues, leasing, real estate development, security, premises liability, insurance law, lien law and contract law allow the hotel lawyer to assist the hotel in coping with the day-to-day issues which are certain to arise.

John E. Osborn is a Partner of the New York City and Westchester law firm of John E. Osborn PC. Mr. Osborn is on the faculty of New York University's Preston Robert Tisch School for Hospitality, Tourism, and Sports Management where he has taught Hospitality Law since 1996. John E. Osborn PC is a member of the Hotel Association of New York, the American Hotel and Lodging Association and serves as the General Counsel to the Greater New York Construction User Council.

Please email the author at josborn@osbornlaw.com with questions about this article.