While the Coronavirus has struck all aspects of the economy, hotels and motels are in a unique situation; they are considered an essential service and can stay open but more and more, the economics of staying open are simply not viable.
Before widespread implementation of ‘Stay at Home’ orders due to the COVID-19 pandemic, average hotel occupancy in February, according to CoStar Realty Information, Inc., was 62.2%, a slight increase over the February 2019 average. Due to travel restrictions, closure of non-essential businesses and other restrictions, March occupancy rates cratered; in the first two weeks of March, hotel occupancy dropped nationally by 32.5%., Unsurprisingly given their dramatic and pronounced responses, New York and California suffered some of the harshest declines with occupancy down more than 50% in March. As of early April, CoStar estimated that approximately 80% of hotel rooms across the country were empty. Moreover, although generally deemed an essential service under state executive orders, in certain localities hotels have been limited to accepting reservations from health care and essential workers. For example, in Miami-Dade County, Mayor Carlos Giménez on March 21, 2020 issued an executive order effectively shutting down hotel operations, except to house essential personnel and people unable to get back into their homes. Like other industries, hotels are facing significant disruptions in cash flow, employment related concerns, and challenges meeting their financial obligations, whether it be taxes, insurance, rent, or debt service.
As more hotel owners face the decline in occupancy and the uncertainty of the future, they now have to consider a number of factors when deciding whether to close their doors. Among the issues that owners have to contend with are:
- Franchise agreements and the corresponding liabilities and obligations to the ‘flag’;
- Management agreements;
- Loan obligations;
- Commercial tenant agreements;
- Employee and Union contracts;
- The impact on long-term booking contracts.
Closing the hotel may very well cause a default in many of the above contracts. It is common for franchise agreements; management contracts and loan documentation to require the continued operation of the hotel as a hospitality property at all times. Crucially, force majeure clauses, which have traditionally been interpreted narrowly by the courts, may not excuse performance under these contracts during the Coronavirus pandemic. Further, hotel owners may have to contend with state and federal law governing employment contracts and collective bargaining agreements, including but not limited to the Worker Adjustment and Retraining Notification Act and ERISA. An often overlooked aspect that requires additional consideration is liquor licenses or other entertainment licenses which could become invalid if the hotel is closed for a period of time or the use is changed in the short term.
Some hotels have been trying to ameliorate the effect of the Coronavirus by allowing the hotel to be used as housing for first responders or temporary medical facilities. Such owners must be very careful to review their agreements, loan documents and insurance as a change in use without obtaining the necessary consent(s) by the interest holder may be a default of the documents and have significant long-term consequences. Insurance policies may be invalidated, and alternative coverage may be required to protect hotel owners from losses as a result of damages or injuries during this alternative use. Moreover, local zoning and use restrictions should be reviewed to determine whether the alternate use of the property would be permitted under the circumstances.
Some owners have sought and obtained some relief through the SBA Paycheck Protection Loan Program (“PPP Loans”). It is imperative that hotel owners (and other business owners) which obtain PPP Loans obtain consent from their lender when required under the loan documents to avoid restrictions on permitted indebtedness that could lead to further liability, including personal recourse liability beyond that of any pledged collateral for all or part of the loan. Further, while PPP loans are subject to forgiveness, hotels are struggling with the requirement that 75% of the loan proceeds be used for payroll costs during the eight week forgiveness period (considering lack of work for employees or hiring/ employee retention difficulty). Others (including hotel owners with no employees that use a property manager), which are unable to make monthly loan payments but did not qualify for or receive an SBA Paycheck Protection Loan, have sought temporary forbearance or debt restructuring from lenders and the servicers of their loans. In such a situation, however, hotel owners should carefully review the loan documents in advance of such negotiations to avoid to the extent possible triggering any personal recourse provisions or cross-defaults under other agreements of the hotel (e.g., by admitting in writing an inability to pay debts as they become due).
While hotel owners hope that they, like the rest of the economy can weather this pandemic, they have very particular issues that need to be carefully reviewed before putting interim measures in place. With sound legal advice, the hotel industry can get through this period and look forward to the lifting of travel restrictions and the hope for a return to thriving status.
This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.