Lowest Rate Clause In Your Hotel Contracts

The information provided in this video does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information in this video may not constitute the most up-to-date legal or other information. Readers of this website should contact their attorney to obtain advice concerning any particular legal matter.

In this video, Sean Whalin (Co-founder and CEO of HopSkip) sits down with Barbara Dunn (Partner at Barnes & Thornburg LLP, representing groups) and Lisa Sommer Devlin (Devlin Law Firm, P.C. representing hotels) to discuss why the lowest rate clause can create problems and steps planners can take to achieve the same result.

Lowest Rate Contract Clause In Your Hotel Contracts

TL;DR:

• The lowest rate clause can create problems with contract enforceability, and due to the many factors that play into a hotel’s rate, it is suggested to avoid using the lowest rate clause in your hotel contracts.
• Groups can build in language to address this issue by agreeing to adjust rates on mutual agreement.
• Instead of focusing on the lowest rate, groups should negotiate for credits towards room attrition and earned concessions.
• Educating attendees on the benefits of staying in the designated hotel block and the impact it can have on registration fees is critical
• Site selection based on the hotel’s market should be considered to help drive attendees toward the designated hotel.
  
  

Video Transcript:

00:00 Lisa Sommer Devlin
The best way for me to address this question is to compare it to the airlines. The airlines, like hotels, have perishable inventory, that's volume inventory, but with a limit on the total list. Let's pretend that you want to go on a nice trip and you decide you don't want to pay for baggage fees. You'd like to have a couple of cocktails on the planner. You'd like some more space at your feet, and you want to check in early. You're probably going to pay for a first-class ticket even though you're paying a little more. You're getting something for that. You book it six months in advance because you want to make sure that you've got exactly the seat that you want on the flight, that you want on the day with it that you want. You get on the plane and you find out that some guy's in the back of the plane, right in front of the restroom, and he had to pay to check his luggage.

00:50 Lisa Sommer Devlin
He has a seat that's half the size of yours. He probably doesn't even have the option to buy alcohol on planes anymore, and he paid half of what you did. Would you go to the airline and say, I want a refund because he paid less than I did? Of course not, because you're buying two different things. The same is true in the hotel business. The flip side would be the same. You get on your first-class flight and you find out that the guy next to you who bought his ticket the day before because it was a last-minute business trip, paid more than you. If the airline came to you and said, well, this guy paid more than you, now you have to pay more for your ticket because yours is a first-class ticket too. You'd say you're crazy, but that's what the lowest rate clauses are doing in the hotel business.

01:35 Lisa Sommer Devlin
These things started back during the 2008 recession when people were scared about rates, what rates were going to be, and they started building in these clauses, and they're still asking for them today, and they make zero sense. The fact that your event, that you book years in advance to have on specific dates with specific terms, you get one per 40 comps, which used to be one per 50. You get free meeting space, you get $100,000 worth of concessions. You get all these other things, and then you think that your rate should be reduced to match the rate of whatever the lowest rate in the house is that somebody gets at the last minute that doesn't get any of those things that you get. You may think, well, that's great, I want to do that. That's good for me as a group. The point is that hotels aren't going to be interested in doing this.

02:26 Lisa Sommer Devlin
Hotels have to have real business in the book. Hotels need to know the rate for this event is going to be $300, not $300 or whatever, the lowest rate we sell the last room and house for. Those are the kinds of things I was talking about earlier; customers are still coming to groups in this market and saying, I want these clauses that we used to have years ago when the economy was terrible, and things were difficult. Hotels in this compressed market are going to say; I'm not interested in doing that. Not only that, these clauses, in my opinion, create problems with the enforceability of your contract because one of the key points of a contract is you have to have an agreed room block and an agreed price. If you have the lowest rate clauses, you don't have an agreed price. If the hotel decides that they've got a better piece of business and they're going to cancel your contract, and you want to go to a judge and say, enforce this contract, the judge is going to say, I can't.

03:23 Lisa Sommer Devlin
I have no idea what you were supposed to pay, and therefore there's no contract. This is the kind of clause that I'm still seeing all the time, virtually every day. When hotels push back, customers are saying, well, we expect this. We've been getting it. This is the kind of thing that in this market is just really not going to fly because hotels are learning we're giving customers something for that rate that they're paying, and we shouldn't have to get them the lowest rate in the house. That doesn't get all of the other things. So, Barbara, I know you're going to want to jump in and comment here.

03:53 Barbara Dunn
What do you think? Yeah. NSO Lisa, I agree with you. You have heard me say over the years that I questioned the utility of these clauses because it had come to be that there were so many exceptions that you could drive a Mack truck or two through them. The likelihood of enforceability was always called into question. That said, among the comments that I'm seeing in the chat, and I hear from clients frequently, is it isn't so much of the offering of the rates, it's the fact that if folks do come in the hotel at different rates, those are going to get credit toward things like room attrition earned concessions and the rest. I think that continues to be a negotiating point, and I certainly think that's something that groups will continue to push. We could certainly talk about that separately in terms of this integrity concept.

04:44 Barbara Dunn
From the group's perspective, the reason, among others, that these clauses were important is that the group didn't want to look bad to its members. I'll use association, for example, association. You're a bad negotiator. You got this crazy high rate. I just picked up the phone and called the hotel, and I got a text, right? So that was among the things. Of course, now we know, fast forward, it isn't always the hotel offering the lower rates online. It can be a zillion wholesalers nowadays. The fact of the matter is the way people book rooms has expanded in exchange and as a result, the demand and pricing changes. Again, on the group side, getting credit is important. Think about education from the group to attendees about why it's important to stay in the block continue. At least we've talked and debated the point over the years about having one-stop registration for meetings that includes a room.

05:38 Barbara Dunn
Certainly, we could talk about that separately too. I think at the end of the day, educating folks on why they want to stay at this hotel and what comes along with that, and how it might impact their registration fee for the meeting, all of that I think, is a good strategy. The other comment I'll say, and I've said this over the years, many of you heard me say the biggest issue with raise isn't this particular hotel. That is, whatever hotel you're negotiating with, it's the city, it's market, it's the destination. So go back to site selection. Are you picking a hotel in a city where there are lots of other options nearby that are going to help drive folks away from that hotel? That may be okay. It may not be okay. Thinking about that ahead of time is important. The one final comment I'll say on this is a lot of customers and clients, and you've seen this lease as well as clauses that have addressed economic conditions in the area, right, the metropolitan area.

06:35 Barbara Dunn
I understand because you and I agree that we want to have confirmed prices and contracts so as to be enforceable the need potentially that what I think is a good rate in City X in six years. When it comes to year four, and I'm two years out, maybe that rate isn't good. What's the hotel going to do? Or is it going to be adjusted to be commensurate? Or if we're going to build these escalators in, what are we going to tie them to? We all know that CPI isn't always a great tie-in. I think that is a realistic expectation and concern. I do think in those instances, there are ways to get at some language that would work both for the hotel and the group that would address this economic conditions piece. I know Lisa, and you said it over the years, too, you'll agree to these charges only if the rates go up; the hotel can charge more.

07:30 Barbara Dunn
No one's ever taking you up on that. Right, right.

07:33 Lisa Sommer Devlin
I would add to that, but Barbara's right. I see these clauses about, oh, if the economy changes, you're going to adjust our rate down. I always say, okay, but if prevailing rates are higher, and in today's market, transient rates are often higher than the group rates that were negotiated years ago. I've never had a customer say, yes, we'll pay higher rates if the economy improves. Why would the hotel agree that we will reduce your rates if the economy goes down? Now, having said that, as my friend Barbara always says, if you want something, you have to give something. If that's something you're worried about, you can build it into your contract because we're booking six years out, and we will adjust the rates on mutual agreement. In exchange for that, you have to give back concessions, or you have to give back comp rooms, or you have to give something to offset the economic hit that the hotel is taking as a result of negotiating those lower rates.

08:29 Lisa Sommer Devlin
Seldom do I see that in those closets. They'll just say, we'll evaluate the rates, and you have to adjust them. Why would the hotel agree to do that when they still have to give you $100,000 worth of concessions? So, again, it's a discussion, but it should work both ways.

08:44 Barbara Dunn
Yeah, and I'll just say to wrap it up in both. There's no reason why, no matter where you end up on the discussion, the groups shouldn't get credit, at least for purposes of attrition and for earning concessions. Again, I know that's a whole issue of debate, but often I think if groups focus on that aspect of it, the language, the need for the lowest rate clause, goes away. It isn't there, or it's there, but it's not as important as you said, as it might be with other clauses.

The information provided in this video does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information in this video may not constitute the most up-to-date legal or other information. Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.