Key Takeaways:
- Hotel event agreements can seem like low-risk arrangements, but they can have severe financial consequences if they are not negotiated correctly.
- The top three most important clauses to negotiate are attrition, cancellation, and force majeure.
- Understanding industry standards within the hotel events industry is also key to negotiating good hotel event agreements.
Isn’t it exciting to hold an in-person event for your organization?! You’ll have speakers, exhibitors, and sponsors. And hopefully lots and lots of guests! Of course, your guests will need a place to stay. So you’ll need to reserve a room block at a local hotel. To do this, you’ll have to sign a Hotel Event Agreement (sometimes referred to as a Group Sales Agreement (GSA)).
In a GSA, the hotel agrees to hold a set of rooms (i.e., a room block) for your guests. You agree to supply guests – via your event – who will pay for those rooms.
GSAs are deceptive. You usually don’t pay anything when you sign the contract (perhaps just a small deposit), so they seem like low-risk transactions. And while you may not want to imagine what may happen if your event doesn’t go as planned, it’s a possibility you need to consider.
To negotiate a Hotel Event Agreement or GSA that properly accounts for the realities of event planning, focus on three key contractual clauses: attrition, cancellation, and force majeure.
Clause #1: Attrition
An attrition clause describes the fees you’ll pay to the hotel if you don’t supply enough guests to fill your room block.
How It Works:
The hotel is holding a block of rooms for you and it expects revenue when your guests book those rooms. If you don’t supply enough guests to fill those rooms, they’ll sit empty. The hotel doesn’t want to lose out on that revenue, so it will expect you to pay.
The good news is the hotel doesn’t expect you to use 100% of the rooms you reserved. It will allow a shortfall. This is called attrition, and it’s expressed as a percentage.
A hypothetical using simple numbers is helpful. Suppose your hotel block consists of 100 rooms for 1 night. If the hotel allows for 75% attrition, you can supply 75 guests and you won’t have an issue. But if you fail to supply at least 75 guests, you’ll have to pay attrition fees for every guest less than the 75-guest threshold.
Under most GSAs, attrition fees are calculated as liquidated damages. Hotels claim that it’d be difficult to determine their damages if you don’t fill your room block, so they usually insist on liquidated damages. Most GSAs calculate liquidated damages as the revenue the hotel expects to receive from your room block. For example, one way to calculate attrition fees is by multiplying the average room rate by every room that you fell short.
In our example, if you supply only 50 guests, you fell short by 25 guests. If the average room rate is $300, you’d be responsible for $7,500 in attrition fees (25 x $300).
This hypothetical uses small numbers for convenience. But attrition fees can add up quickly. If you have a larger event spread over multiple days, your room block could be 1,000 total room nights. In cities where hotel rooms are in demand, your attrition percentage may be higher (e.g., 85%). If you don’t supply as many guests as you had hoped, you could be looking at substantial attrition fees for rooms you didn’t even use.
Because attrition fees can be so severe, you should try to negotiate the attrition clause.
How to Negotiate It:
Here are items to negotiate with an attrition clause:
- Ask for a better attrition percentage. Filling 85% of your room block is harder than filling 65% of your room block. The more shortfall you’re allowed, the easier it will be to avoid attrition fees.
- Limit attrition fees to the hotel’s actual lost profits, not liquidated damages. If some guests don’t show up, the hotel doesn’t get the revenue from those rooms, but it also doesn’t have to incur expenses like staff overhead to service those empty rooms. Also push to exclude ancillaries like surcharges and service charges.
- Require the hotel to mitigate its damages by trying to resell any unused rooms. If the hotel resells rooms that were reserved for your guests, it should credit that revenue against any attrition fees you’d owe.
- Add language confirming that, if you pay any attrition fees, the hotel won’t seek any other damages or lost profits as a result of your failure to fill your room block. You want attrition fees to be an exclusive remedy.
Clause #2: Cancellation
A cancellation clause describes the scenarios when a party can terminate the GSA.
How It Works:
When a GSA is terminated, the hotel will release your room block to the general public. But the hotel has been holding your room block and expecting revenue from your guests. So if you cancel, that revenue disappears. Thus, the hotel will expect you to pay cancellation fees.
As with attrition, cancellation fees are usually presented as liquidated damages. But whereas attrition fees were based on the number of guests that you fell short, cancellation fees are based on timing. The earlier you cancel (i.e., the more time there is until your event), the more time the hotel has to try to resell your unused rooms. But the longer you wait to cancel, the less time the hotel has, and the harder it will be to replace the revenue it lost when you canceled.
For this reason, cancellation fees apply a tiered timeline. For example, if you cancel 90+ days before your event, you’ll owe 50% of the hotel’s expected revenue. If you cancel between 30 and 90 days, you’ll owe 70%. And if you cancel with less than 30 days, you’ll owe 90%.
Like attrition, cancellation fees can be severe. You’re canceling your entire room block, so 6- or even 7-figure cancellation fees are possible. This is why it’s a good idea to negotiate the cancellation clause.
How to Negotiate It:
Here are items to negotiate with a cancellation clause:
- As with attrition fees, limit cancellation fees to the hotel’s actual lost profits. Similarly, push for the hotel to mitigate its damages by trying to resell your room block and credit any revenue against any cancellation fees. Also, confirm that if you pay any cancellation fees, you won’t be responsible for any other damages or lost profits due to your cancellation. If you must use the hotel’s liquidated damages approach, reduce the percentages. Hotels will usually accept reasonable adjustments (e.g., 70% to 60%).
- Propose that cancellation fees be payable promptly after the last date of your originally scheduled event. GSAs usually require you to pay cancellation fees at the time you give notice of cancellation. This disincentivizes the hotel from trying to mitigate its damages.
- Propose that cancellation fees be waived if you hold another similarly-sized event at the hotel in the next 12 months. This proposal works well if your business regularly holds events and is likely to return to the city for another event.
Some GSAs make cancellation clauses mutual. Thus, if the hotel cancels your room block, it will pay your damages. The downside is that GSAs calculate all damages based on the hotel’s expected revenue, not your actual damages. So while your liability for cancellation won’t exceed the hotel’s expected revenue, the hotel won’t be liable to you for more than that amount either. Of course, that amount has no relation to how much it may cost you as you desperately scramble to book an alternative hotel. Thus, a mutual cancellation clause is unlikely to benefit you.
Clause #3: Force Majeure
A force majeure clause excuses a party’s obligation to perform because of circumstances beyond that party’s control.
How It Works:
As COVID-19 (Covid) showed, sometimes the unforeseeable happens. When it does, you may have to cancel your event. When you do, your guests won’t be staying at the hotel, so the hotel may lose out on its expected revenue. The question is whether your cancellation triggers cancellation fees described above, or whether you can avoid cancellation fees under the force majeure clause.
No clause has seen more attention since Covid than the force majeure clause. For almost 2 years, every in-person event was canceled. Hotel room blocks were no longer needed, and many GSAs were terminated under force majeure clauses. Hotels saw their revenues evaporate almost instantly. Now, hotels are much less willing to negotiate their force majeure clauses.
Still, a good force majeure clause can help you avoid thousands or even millions of dollars in cancellation fees, so it’s important to negotiate if you can.
How to Negotiate It:
Here are items to negotiate within a force majeure clause:
- After Covid, everybody includes the word “pandemic” in their force majeure clauses. That’s a good idea, but it is more important to ensure that force majeure contemplates any event beyond a party’s reasonable control, even if the specific calamity is not named.
- Force majeure clauses in GSAs differ from force majeure clauses in standard commercial contracts in one key respect. In a typical commercial contract, force majeure may apply if it “materially adversely affects performance” (or similar flexible language). But in GSAs, force majeure clauses are restricted. Most GSAs limit force majeure only to the extent that performance is made “illegal or impossible.” Those words are interpreted literally, so it’s a very high standard. Very few things are literally illegal or impossible to overcome. For example, during Covid, many hotels would not recognize force majeure unless there was a formal governmental order, such as a ban on mass gatherings. Push hard to include words like “inadvisable” or “commercially impractical,” which give you more flexibility. You may also be able to negotiate a trigger based on a do-not-travel advisory or an official pronouncement from health agencies like the CDC. Keep in mind that if you can’t cancel your GSA under the force majeure clause, you’re likely liable to pay cancellation fees under the cancellation clause. For this reason, you want your force majeure rights to be as broad and flexible as possible.
- Watch out for a requirement that you notify the hotel within a certain period after the force majeure occurs (e.g., 5 days). As Covid showed, it’s not only hard to plan for an unforeseeable event, it’s even harder to respond when you’re dealing with the actual circumstances of the force majeure itself. In actual force majeure situations, a short, fixed time for notice can be difficult to meet, so propose to give notice “promptly” or “without undue delay.”
GSAs can seem like low-risk arrangements, but they can have severe financial consequences. Fortunately, now you know how to negotiate three key clauses to ensure you are adequately protected and not exposed to significant risk.
