7 May 2020

COVID-19 and the Hotel Industry

The ongoing COVID-19 pandemic continues to have a devastating effect on the hotel industry, with some commentators suggesting that it could take upwards of five years for the sector to fully recover. Hotels are truly multi-faceted businesses, often involving property interests and construction arrangements, commercial contracts, and underlying financial arrangements, as well as employing many people in various roles. What are the key legal issues hoteliers should consider during these uncertain times?

Construction projects

Developers and contractors have been assessing the potential implications of COVID-19 on construction projects.

The position from the government in the early stages of the lockdown was confused, and contractors already on site were suspending works and/or making claims for additional time and money. However, government guidance now seems clear that construction works should continue where it is safe to do so and most construction sites are operational again in some form. Nevertheless, the question of who bears the cost of delays to the project remains outstanding.

For those about to enter into building contracts, contractors are requiring express wording to deal with the pandemic and there have been various ways in which the parties have agreed to deal with matters, both commercially and legally. It would seem that, just like the disputes that will arise in the aftermath of COVID-19, clauses in building contracts addressing the consequences of the pandemic will remain open for discussion for a long while after the lockdown has been relaxed.

Contracts and commercial arrangements

Many hotels are operated under Hotel Management Agreements (HMAs), and parties may find themselves in default due to the current crisis. This could be due to a specific inability to perform obligations due to government legislation, or a failure to meet agreed performance targets. Hotel owners may find themselves under funding obligations at a time when they want to preserve cash, or divert it to other parts of the business to ensure its long term survival. HMAs should be reviewed and any applicable provisions, together with any consequences, identified so that parties can attempt to mitigate their loss, or understand the extent of their obligations.

Owners and operators may have rights to terminate contracts with third parties, but the relevant contracts need to be reviewed carefully to determine whether terminating will trigger any penalties or payment of liquidated damages. Some contracts may also contain specific indemnities which could be triggered with significant financial consequence. Guest bookings may have to be cancelled or booked events rearranged, and although some hotels are offering guests the ability to rebook at a later date, this may not always be possible or financially viable.

Given the continued government guidance regarding social distancing and the circumstances in which people should be travelling to work, many hoteliers are also having to consider non-performance by suppliers, when the parties may interpret guidance regarding "essential" work differently – particularly in the context of maintenance and security contracts.

Contracts will often contain Force Majeure clauses, which in broad terms apply to situations which are outside a party's control, such as fire, flood or civil unrest, and often allow suspension of performance for a period of time. A party would need to demonstrate that the relevant event was specifically covered (i.e., the clause refers to "pandemic", "epidemic" or government intervention which prevents a party from complying with its obligations). Whether or not a force majeure clause can be relied on depends on the particular drafting of the clause, the specific circumstances and whether any notification requirements are correctly complied with.

If parties to contracts are trying to negotiate a temporary suspension, care should be taken to ensure that a party does not inadvertently agree to a formal waiver or variation which it would not want to govern the relationship in the longer term.

Finance arrangements

Banking facility documentation should be carefully considered. As a result of hotel closures and the ongoing uncertainty it is likely that hotel businesses will need to approach their lenders for financial covenant holidays, interest or amortisation deferrals, waivers of cessation of business defaults and any other defaults and events of defaults that may be triggered as a result. These waivers should be formalised in a waiver letter. The key is dialogue with the lender straight away and ongoing and open communications with the lenders.

Employment

The pandemic presents numerous HR and employment law challenges for hoteliers, with new guidance and legislation being brought into effect over a very short period of time resulting in massive changes to peoples’ working practices.

For hotels that remain open, they will face issues such as ensuring that health and safety obligations in respect of staff are complied with, and they will need to consider what steps to take to satisfy the government’s guidance on social distancing measures. They will also need to deal with matters such as pay for those staff members who contract coronavirus or need to self-isolate. For others, consideration will need to be given to staffing requirements: amending terms of employment, lay-offs and redundancies are all being considered by hotels at present.

The government has introduced the Coronavirus Job Retention Scheme, which allows employers (normally with the consent of the employees) to put employees on furlough leave (leave of absence) and, subject to satisfying certain criteria, reclaim up to 80% of salaries (and the related pension and employer’s national insurance contributions) from the government.

How Forsters can help

Forsters is well-placed to advise and assist you with all of your hotel-related queries and concerns. We have a dedicated Hotels team which includes members from many of our main practice areas who all have a deep and thorough understanding of the sector.

We are fully aware of the various issues which have come to the fore as a result of COVID-19 as well as the new legislation and guidance which has been published, whether these relate to construction, commercial, banking or employment matters. Our team is determined to help our clients navigate their way through these complex and unprecedented times.

Andrew Parker is a Partner in the Hotels and Leisure team.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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