30 April 2020

The hotel industry: responding and adapting to unprecedented times

The coronavirus pandemic has, without a doubt, reshaped our personal and professional lives. All industries and sectors have been affected in one way or another and are responding in different ways. Some areas of the hotel industry have taken steps which no-one could have foreseen just a few months ago. So, how is the hotel industry responding to the crisis, what measures and arrangements are being put in place and what are the longer term considerations for it?

Examples of how the hotel industry has responded to the pandemic

Current government guidance in the UK states that, as part of the measures to prevent the spread of the coronavirus, certain venues, including hotels, must close (although there are a number of exceptions, including the provision of accommodation to key workers and vulnerable people), whilst in some other jurisdictions, government bodies are looking to hotel owners to ease the strain placed on the healthcare industry with some hotels being transformed into temporary quarantine facilities.

Key workers and the homeless

Hotel businesses are teaming up with the government and local authorities in order to provide rooms to key workers and the homeless. According to the Ministry of Housing, Communities and Local Government, 90 per cent. of the homeless have been invited to stay in hotels, in order to protect rough sleepers during this time, with the rooms being paid for by the government.
The details of such arrangements have not been made public but it is understood that they are offered at substantially discounted rates.

If hotel businesses have not already done so, and they have appropriate properties for the proposed use, they may wish to reach out to the government and local authorities to explore the ways in which their vacant hotels may be able to assist during the current crisis by providing accommodation to key workers and/or the homeless. Demonstrating a positive and practical example of coming together as a country in this way may help cement stronger relationships with customers and suppliers into the future.

Hotel or hospital?

As the infection took hold in the UK, the need for hospital beds became an urgent priority and there was much discussion concerning the possibility of converting hotels into hospitals. At the time of writing, the evidence suggests that the social-distancing measures are having a positive impact on the number of hospital admissions. However, given the rapidly evolving nature of the pandemic, such strategies may well be considered again in the future. Whether this is a suitable interim strategy for a business will need to be considered in the context of the specific hotel property, the works required in order to convert the hotel into a hospital and whether, given the speed at which they will be required, it is feasible.

That said, hotel businesses, particularly those located within close proximity to hospitals, may wish to open up dialogue with healthcare providers to consider whether they might be able to form an alliance in the coming months.

Quarantine facilities

In other jurisdictions, such as Dubai, hotels have collaborated with the healthcare sector to transform empty hotels into quarantine facilities for patients who are either asymptomatic or suffering from only mild coronavirus symptoms. Such partnerships aim to free up much needed hospital beds, whilst at the same time, providing an effective isolation environment away from the individual's family unit, for those who know that they are infected but are not yet completely free of the virus. The information available suggests that under such arrangements, the healthcare provider manages the hotel through an agreement with the government.

The transformed quarantine facility hotels are manned entirely by medical staff and not the hotel's employees. Each patient has a private room and is provided with food, free wifi and access to laundry services. Nurses and doctors monitor the vital signs of the patients on a regular basis throughout the day.

The French hotel group, Accor, has also said that it intends to open a number of its hotels in France as quarantine centres, along the lines of those in Dubai. However, this model may not be something that is possible in the UK until testing becomes more widely available.

Interim considerations for hotel businesses

Maintain communication with landlords

With regard to leases, hotel businesses would be well advised to maintain regular contact with their landlords. Some landlords have indicated a willingness to offer short rent waiver periods during the current crisis, whilst others may be willing to defer rent payments (in whole or in part) in the short term.

Review hotel management agreements

Hotel owners and operators should carefully review the terms of their management agreements and other documentation to ensure that any interim measures are properly agreed and documented between the parties, having considered the terms currently in place. For example, the interim measures which focus on healthcare may see operators providing very limited operating services with certain options requiring a wholesale handover of the hotel and operations to healthcare providers.

Further, whilst legal rights (such as asserting force majeure or frustration or termination of a contract due to circumstances beyond the parties' control) may be available under the terms of such agreements, such action may prove detrimental to business operations and relations in the longer term.

Review financials

Hotel operators should ensure that they keep detailed operating accounts during the current period of uncertainty. For businesses that were performing well prior to the onset of the crisis, such accounts and records will reveal a clear distinction between the pre- and post-coronavirus condition of the business and could serve as a valuable tool in any discussions with stakeholders.

Owners and operators should maintain an open dialogue to ensure that both parties can assess the liabilities of the hotel and how they impact upon each of them, bearing in mind that hotels may also face significant re-opening costs when restrictions are lifted. As ever, liabilities should be reduced where possible and there may be a strong incentive for owners to engage in discussions with operators regarding terms once the market show signs of recovery.

It is likely that any KPIs/performance tests contained in contracts will not be met during the current period of uncertainty. Owners are likely to ask managers to provide amended budgets and forecasts to see how hotel operators intend to weather the current storm, paying close attention to matters such as operating costs, cash flow, liquidity, asset maintenance costs and projections for the remainder of this year and in to 2021.

Review under-performing third party contracts

It is also worth mentioning that should a business have any contracts that were not performing in the way in which they had hoped prior to the onset of the crisis, now may be the time to examine the terms of such contracts and consider whether there is any scope to renegotiate, or even terminate, those contracts.

The future

Owners and operators will also be looking to the future as much as possible and considering how the current pandemic may affect their business and guest behaviour going forward:

  • It may be that additional measures are added to a hotel's health and safety procedures, which could include staff wearing masks, testing being conducted on admittance to the hotel, and the adoption of further measures to allow people to continue practising social-distancing, such as increased room service offerings and minimising interaction between staff and guests, where possible. Extra training for staff will also be required in connection with such measures and procedures.
  • Guest behaviour may see a shift in the market towards aparthotels and serviced apartments to enable them to maintain social-distancing more easily.
  • In terms of operational measures, hotels should consider engaging with their health and safety advisers and cleaning contractors on a more frequent basis, as regular, deep cleaning will be required.
  • Occupancy levels are likely to be affected in the short to medium term, as rooms may not be available for consecutive occupation if hotel businesses adopt measures such as leaving rooms vacant between guests for at least 72-hours to allow any viable traces of the virus to reduce, in accordance with government guidance.

Conclusion

Guided by history, it would be logical to conclude that the global markets and economies of the world will ultimately recover from the COVID-19 pandemic. Governments around the world will work to make the downturn as short and shallow as possible but, whatever the duration, it appears likely that the current economic uncertainty will continue for some time.

For now, the focus for the hotel industry is cash conservation and immediate liquidity needs and an open dialogue between owners, operators and landlords to ensure that any temporary measures are clearly documented between the parties. As the pandemic evolves, business owners must be ready to adapt to an ever-changing market.

How the market will evolve will largely depend on how long social-distancing measures are required and the ability of the industry to rebound once the quarantine measures are lifted. Experts are predicting that once markets recover and social-distancing measures are relaxed, the rebound in the hotel sector will be strong and quick. When it happens, hotel owners and operators must be ready to make the most of the opportunities that arise in the reshaped market, whatever that reshaped market looks like.

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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