Legal Aspects of Franchising In The Lodging Sector

An Important Trend in court Decisions During Early 1999
By Robert Zarco, Esq.

AAHO Hospitality, A Magazine Dedicated to Asian American Hoteliers, August 1999

 This column is the first of a series of monthly articles addressing some of the most important practical and legal aspects of hotel and lodging industry and franchising issues.  In presenting these article, my objective is to alert AAHOA's members to significant issues which may arise during the relationship with their franchisors, and to inform the AAHOA community about recent court decisions affecting franchisees in the lodging sector of the hospitality industry.

The franchise relationship revolves around and is governed by the franchise or license agreement.  Therefore, it is critical that you be aware, and understand the significance of every term within your contract.  My future columns will discuss various, specific contract clauses.  However, I have sought to address with this first article the one issue which appears to come up most frequently in hotel franchising relationships: that is the issue of remodeling and renovations requirements.

Hotel franchise agreements typically permit the franchisor to require that the franchisee complete certain franchisor-identified improvements to the hotel property by a given date.  These improvements may be necessary because of normal wear and tear to the property, inadequate maintenance by the previous hotel owner, or the effects of a natural disaster, such as a hurricane.

Whatever the reason, if your contract allows your franchisor complete discretion to demand that certain renovations be made, and to fix the date by which they must be finished, you must take this requirement very seriously.  Franchisors have, and will terminate your contract if you do not comply: For example:

Inspectors for Days Inn gave a North Carolina franchisee a "pinch list" of improvements to bring the property up to Days Inn standards, setting a deadline for their completion.  One month before the deadline, Hurricane Ran struck eastern North Carolina and damaged the property even further.  Because of a dispute with its insurers, the franchisee was unable to make the repairs on a timely basis.  Although the franchisee ultimately repaired the damage, just fine months ago, a court approved Days Inn's termination of the franchise because the franchisee had not made the improvements by the given date.

A prospective New Jersey Travelodge franchisee lacked the necessary funds to make certain repairs designated by the franchisor.  The franchisor urged the franchisee to sing the franchise agreement anyway, and promised the franchisee that it could make the repairs as the hotel generated revenue, and allowed the franchisee to open the hotel for business.  Although the franchisor provided additional extensions of time, the franchisee never renovated the hotel property.  The franchisor filed a lawsuit.  In May 1999, a New Jersey court refused to allow the franchisee to continue doing business under the Travelodge Hotels trademarks because, among other things, it had never made the renovations.

In March 1999, a New York court approved Ramada's termination of an Alaskan franchisee, whose hotel did not comply with Ramada's system standards.  Ramada conducted several quality inspections, and the Alaskan property failed each of them.  The hotel sent the franchisee several notices, including a letter advising that Ramada could terminate the agreement at any time, without further notice to [the franchisee].  Five months later, Ramada terminated the contract for, among other things failing quality assurance scores and excessive guest complaints.  Critically, Ramada was able to terminate the contract, despite its failure to fulfill some of its own obligations.

What to do if you are in this situation:

• Do your best to make any reasonable renovations or repairs on schedule.
  
• If the repairs cannot be made for any reason, you should consult with an experienced franchise attorney to determine whether such reasons will be considered justified under the agreement.  For instance, are the requirements of the renovations unreasonable so as to require Hyatt Hotel quality-level renovations in a Days Inn?  It may be necessary to take the appropriate steps to obtain a written waiver of the requirement or an extension of time to make the repairs.  For example, the contract of the North Carolina Days Inn franchisee, above, contained a provision allowing the franchisee six (6) additional months after "casualties" (such as Hurricane Fran) to compete repairs, but the franchisee never requested an extension on that basis.  Importantly, you cannot rely upon oral promises from your franchisor regarding extensions or other waivers.  If it is not in writing, it will be virtually impossible to prove such a promise, as franchisors conveniently "forget" about such promises.
  
• If you insist on acting without an attorney, you should obtain the franchisor's written description of the required renovations as well as written approval of additional time to complete the renovations or repairs. However, be certain that the individual you are dealing with has the proper authority to grant extensions or waivers.  In certain instance, courts have held that it was not reasonable to rely on even written promises of representatives of the franchisor where the representative did not possess the appropriate authority to make promises on behalf of the franchisor.
  
• It is important that all improvements to the property be properly documented to avoid any disputes with the franchisor as to which and to when the repairs were made or whether they were made properly and pursuant to the franchisor's requests, reasonable standards and specifications.

Above all, you must act quickly, but cautiously.  Record the dates and content of all of your communications with your franchisor.  Do not assume that the franchisor's failure to remind you about the repairs means that the franchisor will not attempt to enforce their completion, or attempt to terminate the franchise agreements on that basis.  Remember you must take repair/renovation issues very seriously to preserve your substantial investment in your franchise.

Topics planned for future articles include:

What to Look For in a Franchisor Before You Invest in the System;

Clauses That Franchisees Want to Include in the Franchise Agreement;

The Ten Most Dangerous Contract Clauses;

Ten More of the Most Dangerous Contract Clauses;

Legal Considerations for Hotels Co-Branding Contract Clauses;

Liquidated Damages Clauses;

Ways Franchisors Attempt to Prevent You from Leaving the System; and

Considerations when Selling Your franchise.

Robert Zarco, Esq. is founding partner at the law firm of Zarco & Pardo, P.A., which is internationally recognized in franchise and commercial law.  Zarco & Pardo provides franchise consulting at the pre-contract state as well as during the franchise relationship.  The firm's legal services include review and negotiation of franchise agreements as well as litigation and trial services to domestic and international clients.  The firm's attorneys have an active practice in state and federal courts and have participated in arbitration and mediation forums both domestically and internationally, Frequently quoted in various newspapers, trade publications and magazines, the firm also has appeared in various nationally televised news and business program and has made appearances before various state legislatures providing expert testimony and advice in the area of franchise law.  Mr. Zarco may be contacted at: 100 Southeast Second Street, NationsBank Tower, Suite 2700, Miami, Florida 33131; by Telephone at (305) 374-5418; by Facsimile at (305) 374-3428; or by email at zarcopardo@zarco-pardo.com