Protectable Interests in Management Agreements

I have heard certain lawyers representing hotel owners refer to a “litany” of cases supposedly allowing owners to terminate their Hotel Management Agreements at will without consequences. These cases, beginning with the 1991 Woolley case, reflect the common law principle of agency that principals (here, hotel owners) may terminate their agents (hotel managers) at any time, regardless of the terms of any agreement between them, unless the agent has an “agency coupled with an interest.”¹   

This view of the hotel owner/hotel manager relationship leads to such mischief as the attempted midnight takeover of the Four Seasons Residence Club Aviara and the successful, though short-lived midnight takeover of the Waikiki Edition, a Marriott International-operated resort in Honolulu.  

Now a “litany” is a prayer consisting of a series of invocations and supplications by the leader with alternate responses by the congregation. The Woolley case and its three meager progeny are a prayer with no longer any response. They deserve no response—particularly as applied to sophisticated HMAs, rather than to the ownership of a cow in the 17th century. 

Why have we seen no new Woolley case in more than 10 years? For one, HMAs themselves have become increasingly more sophisticated during the last 10 years—the time within which Woolley has seemed to disappear—and have become the dominant form for controlling hotel assets with more than 200 rooms. Since the 1990s, when the last of the Woolley line of cases was decided, the number of management contracts for the top management companies has increased more than three times, according to The Negotiation and Administration of Hotel Management Contracts. The absence of further Woolley decisions and the increased reliance upon hotel management agreements reflects the industry’s recognition of the substantial interests hotel management companies have in the properties they manage.

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Not traditional agencies 
Modern Hotel Management Agreements are not in any sense traditional agency relationships. 

An essential component of a principal-agent relationship is the right of control (as found in Woolley v. Embassy Suites, Inc., 227 Cal.App.3d 1520, 1531 (1991)). Under many modern HMAs for managed upper-upscale and luxury hotels, the manager has the exclusive responsibility and full control and discretion in the operation, direction, management and supervision of the hotel and its staff, for a term extending upwards of 80 years in some cases.  The manager will often have the sole right to do all things and take all necessary action for the operation of the hotel, including all labor relations functions. The owner will be afforded certain limited rights of approval, but never a right of discretion or control over any aspects of hotel operations whatsoever. For example, the manager might be required to submit an Annual Plan for owner’s approval. But if the owner disapproves the Annual Plan, an arbitration panel will decide the matter, not the owner unilaterally. Most HMAs provide that the owner may only terminate the HMA upon the occurrence of specifically enumerated events and generally only upon giving the manager notice and an opportunity to cure. The manager has the right to control all operations in order to ensure that its quality and brand standards are met—and some agreements specifically provide that such control is all to manager’s sole benefit. 

Some HMAs are accompanied by a companion License Agreement governing trademarks and intellectual property. Other HMAs embody such provisions in the HMA itself. Under these provisions, owners may not take any action that may preclude the hotel from being operated in accordance with the licensor’s (manager’s) policies and procedures. Under licensing provisions, the owner becomes the manager’s agent in the advancement and protection of the manager’s brand through the operation of the hotel. In terms of control and fiduciary responsibilities, the owner is as much the manager’s agent as the manager is agent of the owner.

A modern HMA will restrict an owner’s right to transfer or mortgage the property, imposing limitations on transferee identity. Generally, the owner’s granting of a mortgage is conditioned on the mortgagee entering into a Subordination and Non-Disturbance Agreement, typically a recorded agreement, with the manager insuring that the HMA will survive a foreclosure or a bankruptcy of the owner.  

Interests coupled to the agency
Even under a traditional (agency for the care of a cow) analysis, modern hotel managers have protectable interests coupled to their agencies that should prevent owners from ejecting them from a hotel without any contractual basis:

• First and foremost, all modern courts recognize that intellectual property is a protectable property interest—whatever blinders the Woolley Cases might have had to something so obvious. A clear example of this is the Starwood Hotels & Resorts Worldwide case against Hilton Worldwide relating to the alleged theft by Hilton and certain Hilton executives (former Starwood executives) of trade secrets and other intellectual property of Starwood relating to its W hotel brand.²
• A HMA often grants the manager the right of quiet enjoyment that bars the owner from unilaterally terminating the HMA. Quiet enjoyment developed in the context of leases in order to prevent the fee owner from exercising the right it had to enter property even though it was subject to a lease.³ Over time, the covenant came to be implied in every lease in California.⁴ In commercial cases, the covenant can be waived or modified by agreement.⁵ Understanding the history of the law in this area makes plain that entities like hotel managers can negotiate the scope of the covenant of quiet enjoyment to secure for themselves an enhanced right to possess the property undisturbed by the owner under what is a unique and modern commercial construct. By granting a manager the right to quiet enjoyment of a hotel, owners surrender the ability to unilaterally remove the manager and guarantee the manager’s right to remain in possession of the hotel for the duration of the HMA.
• A License Agreement, whether separate or embodied within the HMA, creates a cross-agency between owner and manager. All of the owner’s use of manager’s marks and IP will inure to the benefit of licensor (manager). The owner then becomes an agent of the manager, with fiduciary duties to the manager to protect the substantial value and goodwill of the manager’s name, reputation and intellectual property.
• The SNDA and any building restrictions in the HMA are property interests.⁶

The Woolley Cases, if a litany, are a prayer in a dead tongue. 

Forrest Hainline, a partner in the Goodwin Procter's Litigation Department, is one of the country’s most experienced trial lawyers. He has tried cases before courts and juries throughout the United States, as well as before the Federal Trade Commission and other administrative agencies in Washington, D.C. Mr. Hainline joined Goodwin Procter in 2006.

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