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Beware the trap of changing brand standards

Beware the trap of changing brand standards

Like all relationships, the relationship between branded hotel operators or franchise companies (the brand) and hotel owners needs ground rules. But what happens if the ground rules change? And what if one of the ground rules is that only one party can change the rules at any time? This is what can happen to hotel owners that agree, often for very good reasons, that a brand can change its standards for the hotel. 

The management or franchise agreement sets the ground rules and allocates risk between the hotel operator and the hotel owner. Negotiating the agreement, which will include “brand standards,” is one of the most important things hotel owners will ever do for their hotel investment.

Here is some advice from my partner Robert Braun.

The hotel market in the United States is dominated by brands. And whether associated with a brand or not, hotels are commonly measured against established brands. The ability to finance a property may be determined by the availability of an established and successful brand, and the ultimate success of a hotel may depend on the strength of the reservation system, marketing and other support provided by the hotel brand.

Consistent to all brand management or franchise agreements are “brand standards.” They are designed to provide the common feeling or identification that allow all hotels under a common name to be recognizable as part of the brand, eliminating inconsistencies and providing for a reliable guest experience, which should, in turn, create loyalty to the brand. From the owner’s point of view, these standards provide stability and are key to determining the proper brand — a developer or purchaser selects a brand largely based on whether that brand will meet the market for which the hotel has been designed.

But what happens if the brand changes its standards?

How can brands change their standards?

The answer is simple — the brands put it in their franchise and management agreements. While the exact wording may differ from agreement to agreement — a “system” in one agreement may be a “standard” in another — every agreement provides that the brand may change its standards, and the owner must comply with those new standards. 

Why change standards? 

Brands usually have good reasons for changing their standards and systems. Doing so can be key to achieving the goal of a consistent guest experience and guest loyalty. If individual hotels were to make decisions as to amenities, a guest would never know what kind of hotel he or she would be visiting and would have less reason to prefer one brand over another. 

In addition, standards for different classes of hotels tend to evolve over time, and modifying standards may be essential to remaining competitive. A hotel that may have been considered “midscale” 10 years ago would only be a competitive midscale hotel today if it incorporated the technological and other changes that have been adopted by other hotels in its class. For example, few, if any, hotels had internet access or flat-screen televisions 20 years ago; those are now standard marketing tools for brands. 

What can go wrong? 

It all sounds good, but it’s not always a happy story. Sometimes, a brand may choose to make broad changes to its standards that force owners to face an expensive dilemma. They must either spend large, sometimes extravagant funds to remain in compliance with the brand standards, or violate the terms of the franchise or management agreement, risk termination and pay even more expensive termination fees. 

Changing classes

The problem can also come up when a brand makes a conscious decision to upgrade, or downgrade, the status of its brand from one class to another. When that happens, the owners’ dilemma is even greater. Not only must they consider the viability of implementing significant upgrades, they need to consider whether the new classification, which will inevitably change the economics of the flag, is consistent with their business plan. 

Why does this happen? 

Owners should remember that decisions about brand standards are made without regard to the individual hotels in the portfolio; they are made on a brand basis, with the overriding goal of maximizing the value of the hotel brand, not the hotels that make up the brand. While hotel brands typically do respond to their franchisees and property owners, they clearly retain the last word and will impose their decisions.

What can I do? 

While brands are very protective of their ability to modify their systems and standards, there are a few basic steps an owner, or prospective owner, can take to guard against these results.

If you are already signed up with a brand, you should diligently follow brand developments. Take advantage of owners’ groups and respond to indications that a brand may be preparing for a meaningful change.

Anyone thinking about a hotel franchise agreement or management agreement should consider these steps: 

  1. Consult with hotel franchise attorneys with lots of experience in dealing with the brands. It may be possible to negotiate limited — but meaningful — concessions, such as an agreement not to change the classification or scale of the brand, limit changes that would require structural revisions to the property or require the brand to take into account the particular location and circumstances of the property.
  2. Get someone with experience and practical judgment. You want someone who knows where to spend the “political capital.” There is no sense in fighting over provisions you will never be able to change, and you need reasonable positions and fallbacks.
  3. Most importantly, consult your hotel attorney EARLY in the process — BEFORE you start exchanging term sheets or drafts of the letter of intent. Once that process has started, it will be very difficult to get any material changes in terms, even when your negotiations and term sheets are “non-binding.”
Negotiating a hotel management or franchise agreement is one of the most important things hotel owners will ever do for their hotel investment. The terms of the agreement will have a significant impact on critical areas that affect profitability: operating costs, financing and the value of your hotel.
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