In this video, you’ll learn about the concept of lowest rate parity when it comes to your group’s contract with the hotel. Understand why rate parity can be important to a lot of groups and hear how hotels need to manage this kind of request.
Overview
“Lowest rate” or rate parity” addresses a circumstance in which the hotel would offer room rates over the contracted dates which are lower than the Group’s rate.
Group Perspective
The hotel contract must contain all material terms which include a stated room rate or a stated room rate with a method of calculating a confirmed room rate if the meeting is many years in the future.
There are many variations on this provision. Some state that the hotel cannot offer a lower rate during the contracted dates. Others state that the hotel cannot offer a lower rate to another group of comparable size, revenue spend, etc. Most also include exceptions for corporate volume rates and airline crew rates. Further, most provisions don’t guarantee that lower rates will be sold by third-party wholesalers such as Priceline, Hotels.com.
The strength/weakness of the clause is dictated by current market conditions.
If it is a “seller’s market”, Groups will likely see a clause that is tied to no lower rates offered to a “comparable group” over the contracted dates.
If it is a “buyer’s market”, Groups may be able to negotiate a clause which states that the Hotel will not offer any lower rates over the contracted dates.
Regardless of the provision, it is important to state what happens if the Hotel offers a lower rate in violation of the provision.
The provision should state that the Hotel will either terminate the offering of a lower rate or provide Group’s attendees with the lower rate. Often it’s stated as “at Hotel’s option” or “Group’s option” as to which of the above actions will take place.
Hotel Perspective
Hotels have no obligation to accept lowest rate clauses. If a hotel has 500 rooms and a group has reserved 100, the hotel has the right to sell its other inventory at whatever rate it chooses.
Having the lowest rate clause may invalidate the entire agreement. If the rate clause requires the hotel to reduce the group rate to the lowest rate offered in the hotel, then there is no set minimum rate in the contract. Since the rate is a material term of the contract, if there is no rate set, the contract may be unenforceable.
Hotels suggest that instead of trying to control the hotel’s rates, the group should try to control the attendee booking process. If the attendees are required or incented to book in the group block at the agreed rate, it will not matter if there are lower rates available at the hotel.
Understanding Third Party Commission Payments in Your Hotel Contracts
In this video, you’ll learn what commission payments in hotel contracts mean and why they are used. Understand how hotels view third-party commission payments work and learn how groups should approach third-party commissions. You’ll also learn about how to structure commission agreements and how to avoid the most common commission issues with hotels.
Overview
In hotel contracts, room rates are often stated as “net, non-commissionable” or “commissionable at a rate of XX% to Group’s designed agent, [NAME].” Commissions are typically only paid on rooms sold at the Group rate or higher. Commissions are typically not paid on rooms sold at rates lower than the Group rate, staff rooms, and rooms sold which are commissionable to another party. Also, commissions are not paid on attrition or cancellation fees. Commissions are typically paid after the Group pays its master account bill.
Some hotels require that the agent of record have an International Air Transport Association (IATA) number in order to be paid a commission.
Group Perspective
If you are working with a third party agent of record, ask the agent whether they will be compensated by a commission paid to it by the hotel, a fee paid to it by the Group or a combination thereof.
Make sure Group has a written agreement with the agent of record.
If the Group has not yet designated an agent of record but will do so in the future, the commission language should reflect that a commission will be paid to Group’s agent as designated to the hotel in writing.
If the agent of record is specified in the hotel contract as the recipient of a commission, the agent is a designated beneficiary of rights under the hotel contract. What that means is that if the Group changes agents after the hotel contract is signed, the commission cannot be changed to the new agent without the prior written consent of the agent specified in the hotel contract.
Hotel Perspective
Be sure to let the hotel know as early as possible (i.e. in RFP, or initial sourcing communications) that the rates will be commissionable. The commission is a cost of doing business that the hotel factors into the rates and concessions offered, so it is important for the hotel to know about the commission before it makes its proposal.
Some third parties ask the hotel to guarantee that the room rate is not impacted by the commission. The hotel should only agree to such language if it is true. The hotel is then earning less revenue than it could have if the rate were non-commissionable, therefore the business may be less desirable to the hotel.
Hotels do not want to be placed in the middle of disputes between customers and their third-party agents. Hotels should not be asked to cancel a contract and then re-issue a new one for the same event that “cuts out” the third party.
The concept of commission is that the third-party is being compensated for bringing business to the hotel in the group block. If attendees reserve rooms outside the block through other methods, or the group owes performance/attrition or cancellation damages, the third party has not generated that revenue by bringing business to the hotel, therefore no commission is usually paid on those amounts.
In this video, you’ll learn what rebates are in hotel contracts and why hotels are sensitive to making sure the group discloses the rebate to their attendees.
Overview
A rebate is typically a set dollar amount that’s part of the hotel room rate. Often, it’s paid or calculated on a per night basis, although sometimes you do see rebates based on a per reservation basis.
Group Perspective
Rebates can be a technique by which the group can offset some of their meeting expenses within the hotel contract for use in other areas.
It’s important to understand what that dollar amount is
Hotels often want groups to disclose the rebates to their attendees and it’s always a good idea for the group to let attendees know that a portion of their room rate will go back to the organization to offset costs.
Often commissions and rebates coexist in a hotel contract. Often commission is a portion of the room revenue. In other words, the rebate is subtracted from the group’s room rate before commissions are calculated.
Bottom line, rebates can be a very effective tool to generate additional revenue but there may be other concessions that groups could seek in hotel contracts. Which may have more benefit to the group long term as well
Hotel Perspective
Hotels are very sensitive about rebates
The rebate is usually added on top of the negotiated group rate. And that can be a problem in this time when people are rate sensitive and the internet allows people to find other available rates so easily. If the rate is artificially inflated to include a rebate, it may mean that people aren’t interested in booking within the official group room block, leading to attrition claims and then the hotel is told, ‘Well there are the people reserved outside the block,’ because the rate was too high. And the hotel’s response is the rate was too high because you wanted us to add a rebate.
From the hotel’s perspective, they would much rather have the group add whatever the value of the rebate is to their registration fee.
Hotels prefer groups to educate their attendees about those costs that are involved in the event.
Tip: Communicate to your attendees, it costs money to have the shuttle bus taking everybody from the hotels to the convention center or whatever the case may be.
Build that into the registration fee and then you don’t have those rebates.
If you do think a rebate is necessary, it is very critical that it is properly disclosed. Depending on the state law that applies, if a portion of the room rate is being paid to the group sponsoring the event and it is not disclosed to the person who’s paying that rate, it could be considered commercial bribery.
Since commercial bribery law varies from state to state, but since most major events have people coming from all over the country, you don’t want to be in a position of trying to evaluate what state’s law might apply and who might make claims.
From the hotel’s perspective, they’re most likely going to put in a clause saying, ‘That if there’s a rebate or a commission, that it is up to the group to determine the extent to which they have to disclose that and to make that disclosure if it is required.’
Again, the preference for hotels would be to have the rebate simply added to the registration fee. But if not, that disclosure is a key element.
A Legal Guide to Liquidated Damages in Hotel Contracts
In this video, you’ll learn about liquidated damages in your hotel contracts, how liquidated damages are defined, and how they are executed in the event of a breach in your hotel contract.
Overview
The legal elements of a liquidated damage clause are that the parties agree:
One party will be injured if the other does not fully perform;
It would be difficult to determine the amount of the loss suffered; and
The parties agree on an amount or formula for determining the damages that will be paid, rather than requiring the injured party to prove its actual loss.
In a liquidated damage clause, the amount that would be owed should be either expressly listed, or capable of calculating at the time the contract is signed.
The amount agreed upon should be a reasonable estimate of the loss that would be suffered and should take into consideration the injured party’s ability to reduce or mitigate its loss.
Therefore, under the law, a liquidated damage clause does not require the injured party to prove its actual loss or the extent to which it may have mitigated that loss.
The amount owed is “damages,” not a penalty. It is designed to be fair compensation for the loss suffered.
Liquidated damages are used for both cancellation of the entire event, and when the event is held but the customer does not fill all the rooms reserved (commonly called “attrition” or “performance” damages).
Group Perspective
Cancellation fees should be based on a “sliding scale” – the farther out the meeting, the lower the cancellation fee; the closer the meeting, the higher the fee.
Specific date parameters should used in the “sliding scale”, e.g. September 1, 2020 vs 180 days prior to the start of the meeting.
Specific dollar amounts or a formula to calculate the cancellation fee should be included.
If the contract is later amended to change the meeting dates or to reduce the room block, the parties should evaluate whether the cancellation and/or attrition fee provisions should be amended accordingly.
As noted above, “penalties” are not enforceable. As such, groups should refrain from referring to cancellation and attrition fees as “penalties” and instead, refer to them as “fees” or “liquidated damages”.
In addition to considering whether the clause should provide credit to the group for resold rooms, groups should also consider adding a provision which allows the group to rebook another meeting at the hotel (contract signed and meeting to occur within a particular time frame).
Groups should address the possibility of the hotel cancelling the agreement for reasons other than Force Majeure. In such an event, the preferred approach is to refer to the types of damages the group may recover from the hotel as a result of the cancellation such as direct damages (e.g., fees and expenses to secure an alternate hotel for the meeting, to revise marketing materials and website) as well as attorneys’ fees.
Hotel Perspective
While resale credit is not required under the law, if a customer insists upon it, the clause must have an agreement on how “resale” is calculated and what credit will be given.
The damage amounts are negotiable. If the customer thinks the hotel will resell unused guest rooms, negotiate the amount of damages down, rather than adding “resale.”
Hotels would rather receive a lower amount of damages at the time of cancellation than wait months or years for the event dates to pass to calculate resale.
Avoid complicated formulas for determining damages. Agree on dollar amounts.
Damages do not have to be based on “profit.” If it was easy to determine lost profit, there would be no reason to use liquidated damages.
“Mutual” damage clauses, in which the hotel pays the same amount for cancelling the customer as the customer would pay for cancelling the hotel are inappropriate. The damages that the customer suffers if the hotel cancels the event are completely different from what the hotel loses if the customer cancels it.
Attrition clauses may either allow the customer to release some rooms from the block without liability (usually by a certain date) or may allow the customer to use and pay for a reduced percentage of the total block (70, 80, 90%, etc.) These allowances are a concession that the hotel is not required to give.
If the event is cancelled, the attrition allowance does not apply, as it was only offered if the event was held.
Understanding Food & Beverage Minimums in Hotel Contracts
In this video, you’ll learn why food and beverage can be important for groups to focus on for receiving the benefits of concessions, discounts, and function space. Understand how hotels account for F&B revenue differently than room revenue and much more!
Overview
The way most food and beverage provisions work is that if you don’t meet your minimum, you pay the difference between the minimum and the amount that you actually spent.
Group Perspective
Food and beverage are an essential component of any meeting and event, and it’s a particularly important component both to the groups and to the hotel. It’s also one of consternation as hotels will often require a certain food and beverage minimum amount that the group needs to spend to get benefits of concessions and rate discounts as well as function space.
Groups also need to understand that when that dollar amount is stated. It doesn’t include taxes, gratuities, service charges. So, it’s important to make sure you’re understanding that number and you’re comfortable with it.
Tip: You often hear people say plus-plus or they’ll use those terms in the contract and that’s not a good idea. Always remember in any contract provision, you want it to be written so that a third party who knows nothing about your arrangements or your business, knows what that means. And a judge or a jury doesn’t know that plus-plus usually means taxes, service charges, and gratuities. It’s usually taxes, service charges, and gratuities. So, spell that out or at least define it the first time you use it so that that’s clear in the contract what your obligation is going to be.
If your organization has sponsors or affiliates that do functions at your meeting, you’d like to capture that revenue toward your total which needs to be included in the provision. Sometimes referred to as “in conjunction with” or as “ICW revenue”.
Hotel Perspective
When discussing the food and beverage minimum Using “In Conjunction With” depends on how that “In Conjunction With” event occurs. If the event is sponsored by a sponsor and it’s held in the group’s meeting space, then yes, you should get credit for that. But if another group comes to the hotel in conjunction with your event and they enter their own catering contract for their own space in the hotel, they’re going to have their own minimums. So, they aren’t going to be counted towards the main group’s food and beverage commitment because it’s a separate contractual agreement.
When it comes to hotels and budgets and line items the food and beverage service and the catering banquet revenue is a different line item in the hotel’s budgets and profit and loss. So, they’re going to treat the food and beverage commitment separately from the room revenue commitment.
When hotels are evaluating your business, they are looking not just at that room revenue but also the food and beverage revenue. If you’re only willing to commit to $100,000 in food and beverage, you’re going to get different guest room rates and concessions than if you’re willing to commit to a $200,000 food and beverage minimum.
Tip: The important thing to keep in mind is it should never be a situation where you’re ending up paying damages for not meeting your food and beverage goal. Meaning, you should work with a hotel as you’re in the final planning stages for your event and say, ‘Based on our menus based on our guarantees are we going to hit our minimum?’ And if it’s not going to hit your minimum, then change your menus. Go from chicken to lobster. You might as well get the benefit rather than simply paying cash to the hotel. The hotel would rather serve you that food than collect that cash.
Another thing that often comes up is that groups will ask for a discount on food and beverage and the hotel may or may not agree to that. But you need to clarify whether that discount in some way reduces that minimum, usually it doesn’t. So, it allows you to enhance your menus rather than having a lower minimum spend.
Most of the time the hotel is going to say that your service charge and gratuity are going to be based on the regular retail prices rather than the discounted prices. And that’s fair and reasonable. Because those servers that are working on the event didn’t agree to a discount on their pay. So, usually, the price is based on the retail amount.
Tip: If the group does go for a food and beverage discount and the hotel is willing to offer it, make sure you’re benchmarking your prices. If your contract isn’t for two or three more years and you’re going to get a 15% discount on food and beverage prices for those years, and you don’t know what the current year’s prices are, you’re agreeing to a discount on an amount that you don’t even know.
How to Structure Your Hotel Event Deposits and Credits
In this video, you’ll learn about how to approach your event deposits with your hotel partner. Learn about what it means for a planner to have a master account with a hotel, how to structure your deposit schedule with your hotel partner and why getting your hotel partner to agree to accept your deposit be placed into an escrow account might be difficult.
Overview
Establishing credit at a hotel so that they don’t have to make a deposit, or they don’t have to pay in advance for the master account charges. Deposits are used to pay for all or a portion of event prior to the event taking place.
Group Perspective
It’s not uncommon for groups to establish credit at a hotel so that they don’t have to make a deposit or they don’t have to pay in advance for the master account charges.
However, credit is tough nowadays across the board, so it’s not unreasonable for hotels to ask for a credit application from the group sooner than later after the contract has been signed.
Even if the group has had established credit with that property before. The other thing to be mindful of as well are deposits. Many groups are accustomed to not paying deposits when you have established credit. And yet, deposit schedules are becoming more popular.
The better solution is to have deposit schedules that both parties can live with and understand where that money is going to go and what’s going to happen with it.
Deposit schedules can be a point of negotiation for the group
Tip: One strategy groups might consider is whether they are willing to pay more deposits closer upfront versus right before the meeting, and you might get an edge in negotiating concessions.
Hotel Perspective
If a contract can’t go forward, due to a true Force Majeure, of course, those deposits do need to be returned.
When a hotel gets a deposit from a group, it doesn’t keep it in a separate account. It uses it to fund its cash flow and its operations.
Hotels are going to be very reluctant to place the deposit in an escrow account (meaning set aside and held for application only to that group’s account).
Reason being,
If the money is put into an escrow account, that means the hotel can’t use that money for its cash flow which will make operations very difficult.
There’s also a cost for having an escrow account
When you have an escrow, it’s required under the law that you have an escrow agreement that describes:
Where the money will be placed?
What interest will be paid?
Who gets the benefit of that interest?
Who controls when the money is released or not released?
all kinds of other factors.
Tip: Look to negotiate the dates on which the deposits are due, Hotels are willing as well to negotiate on deposits.