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Morris Manning & Martin, LLP

Temporary Suspension of Hotel Operations

04.02.2020

Authored by Catherine E. Morgen

Considerations and Checklist for Owners

This resource is to function as a checklist for owners contemplating temporarily suspending operations of a hospitality business during the COVID-19 pandemic. Please note, this list is not exhaustive and there may be a number of other considerations specific to your particular properties and business.

Key Notes:

  • Communication, communication, communication.  It will be imperative to have communication between owner, asset manager, and operator. Many third-party operators and franchisors have policies, procedures and guidelines for temporary closures – particularly as it relates to operational aspects of closing.
  • Follow all government instructions regarding “shelter-in-place” and other social distancing rules and requirements.
  • Develop an operational plan for closure and reopening with third-party manager. 

Review Agreements:

  • Review primary agreements – particularly with respect to the ability to suspend operations or continuous operation covenants.
      • Franchise Agreement
      • Hotel Management Agreement
      • Loan documents
      • Lease/License/Concession Agreements (for example, Starbucks license agreements)
      • Ground lease
      • Entitlements/tax abatements/PILOT leases for any requirement to operate or employment requirements
  • Review investor/fund agreements that may require notice of a suspension of operations.
  • Obtain and review any required temporary closure agreement from franchisor and related documentation. 
      • Confirm requirements for closing and reopening, but keep in mind that it is imperative to follow government directives first. Also, as with all agreements, look for force majeure language.
      • Confirm what franchise agreement requirements and payments are to be waived or deferred.
  • Hotel Management – Confirm agreement with hotel operator on what tasks will be performed by operator to cause the hotel closure, during the suspension of operations and for reopening the hotel and what fees will be associated with the same. Hotel manager fees are based on hotel revenues, so a force majeure event resulting in suspending operations may give an operator the right to terminate the management agreement (and virtually always tolls performance tests).
  • Loans – Review loan documents to determine what relief may be requested from the lender – operations covenants, debt covenants, franchise covenants, reserve requirements, PIP/renovation requirements.
  • Legislative Relief – Confirm what SBA or similar loan or grant programs you may want to apply for and confirm if closure of the hotel/termination of employees will impact eligibility.

Notification of Third Parties:

  • Review contracts and ensure that all necessary parties are contacted, which could include:
      • Landlord under ground lease
      • Security company – alarms and monitoring
      • Suppliers – goods and services
      • Utilities
      • Lender
      • Insurance companies
      • Governmental agencies – for example, to suspend liquor license.
      • Tenants/licensees/concessionaires under lease/license/concession agreements.
  • Insurance companies - Notify insurance companies of your temporary closure and update them on the new number of employees. Also, document all the actions you will have taken in the context of the closure. By being in contact with your brokers, they could review the policies, adapt them and, perhaps, save costs. That said, since a vacant building represents an additional risk for an insurer, they will appreciate being aware of what monitoring measures you have and will put forward during the temporary closure period. You should also carefully document these actions and costs saved vs. staying open in the event of any business interruption or other insurance claim, to fortify the mitigation of loss argument.
  • Leases – A hotel owner, as landlord, will need to be careful as it relates to closures that affect tenants and their access to their premises.

Employees and Customers:

  • The employer of the employees, whether owner or operator, should notify employees of the closure.
      • Note, you will want specific legal employment advice related to the termination or furloughing of employees.  
      • Unions – If there are union employees at your hotel, consult with labor counsel.
      • Ensure contact details for employees are up-to-date.
      • Company equipment – confirm what staff has company equipment and whether it needs to be returned during closure. Keep a list of employees that have keys and determine whether it is appropriate for that to continue.
      • Confirm who has access to systems and reassess access (e.g., payroll, servers, banking, etc.)
  • Determine responsibility to notify customers with reservations. An operator should be directed to no longer take bookings or reservations for periods after the suspension of operations, cancel any existing bookings for rooms and events to take place after closing (at least for the expected period of suspended operations), and to use good faith efforts to minimize the costs and expenses related to the cancellation of bookings and reservations.
  • Determine communication strategy for closure period and a plan for a reopening strategy.
  • Ensure that all rooms and public spaces are fully cleaned and all waste is disposed of.

Financial/ Books & Records:

  • Owner and operator should develop a budget for closure.
      • Costs of compliance with employee requirements, including severance and other costs related to the termination of hotel employees.
      • Outstanding fees under franchise agreement.
      • Payables invoiced after the closure date.
      • Termination payments under any service contracts to be terminated in connection with the closure.
      • Costs associated with cancelled bookings and reservations.
  • Confirm owner access to hotel accounts (including any reserves) during the closure period.
  • Remove all cash from premises and bank appropriately.
  • Owner and operator should coordinate to minimize expenses associated with operating the hotel prior to and during the closure period.
  • Confirm operator will continue to pay payables as and when due and continue to collect receivables.

Goods and Services:

  • The hotel operator should be instructed to incur no obligations for goods and services to be provided to the hotel for any period following the suspension of operations except for utilities, security services and as otherwise directed by the owner. 
  • The hotel operator should cancel the delivery or provision of goods or services scheduled to be provided after the suspension of operations except for utilities, security services and as otherwise directed by the owner.
  • The hotel operator should terminate, as of the closing of the hotel, all obligations and liabilities relating to all service contracts and vendor agreements as directed by the owner in accordance with their terms and shall promptly give notice to such parties of the impending suspention of the hotel’s operations. The owner should evaluate which contracts are necessary to maintain during the closure period and if the costs of termination and reinstatement following the closure period warrant retaining certain contracts. Also, some contracts may be able to be suspended for a period of time without cancellation.

Equipment:

  • Ensure computers and documentation is backed up and the hotel owner has access to the same.
  • Assess which necessary equipment that must remain on or operational, and which can be closed down/turned off and follow suggested shut down procedures.
  • Institute security procedures appropriate under the circumstances intended to prevent theft of FF&E, operating equipment, and operating supplies.

Food/Beverage:

  • Goods/products – Assess which goods you need to retain in storage and if there are any that you may be able to return to the supplier. Ensure those remaining in storage are stored properly.
  • Assess what food and other perishables need to be used immediately and consider what the plan will be for that.
      • Donation possibilities – employees, charitable organizations.

Physical Premises and Security:

  • Plan for security and maintenance
      • Ensure a human presence. It is recommended, during closing, to make sure that there are frequent patrols made during the day. A human presence on site proves to be a preventive action. Owners/operators should request on-site observation reports on a daily basis.
      • Ask for the cooperation of the police. Ask them to pass from time to time – especially at night – through the parking lot to make sure that no suspicious activity is taking place. 
      • Do not forget that the visual surveillance of the premises must include a visit to the mechanical rooms and technical rooms to ensure that everything is working normally and that no damage is occurring.
  • Plan for any in-process renovations.
  • Confirm if any form of access is required under retail leases, access agreements, easement agreements, or otherwise and plan for the same.

Re-Opening:

  • Plan for re-opening with operator and franchisor.