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.
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 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.
Check out what Barbara Dunn (Partner at Barnes & Thornburg LLP, representing groups) and Lisa Sommer Devlin (Devlin Law Firm, P.C. representing hotels) have to say in Legalease With the Ladies- powered by HopSkip!
Barbara: Hi, I'm Barbara Dunn, an attorney that works with groups in connection with their meetings travel and hospitality contracts.
Lisa: And I'm Lisa Sommer Devlin an attorney that represents hotels and resorts regarding convention related matters.
Barbara: Together we're Legalese with the Ladies powered by HopSkip. Thank you for joining us. Today's topic is going to be on commission payments in hotel contracts. Commissions are often paid to third parties, that is not either the group or the hotel. But to a separate party for placing business at a hotel. It's typically paid out of the rate and it's typically paid as a percentage of the room revenue that's generated from the contract. One key aspect about commissions is that they do need to be stated in the contract. Not only in terms of that amount, but also in terms of the payee who is going to receive the commission. And this becomes a very tight difficult subject for a lot of groups, because they may have been working with one agent at the time, they negotiate their hotel contract. And then say many years go by when the time of the meeting comes and they're working with a different agent.
So, many times the group might contact the hotel and say, ‘We want to change the commissionable party from party A to party B,’ That's okay right. And Lisa, you've been on the receiving end I’m sure of a lot of these inquiries on behalf of the hotel, that isn't always okay or perhaps isn't ever okay.
Lisa: Yes, from the hotel perspective, they don't have a lot involved in the commission situation. They're happy to pay the commission that's helping the group put together their event and they are compensating the third party for bringing business to the hotel or what we like to say heads in beds. So, it's important in your commission clause not only to say who's going to get the commission but what is going to be commissionable. Is it just rooms was reserved within the group block? That's typical, sometimes commissions can be paid on rooms reserved outside the room block. Sometimes third parties request that commissions be paid on no show fees or early departure fees.
I will tell you that most hotels don't like to do that, because again they want to pay commission on rooms that are occupied and paid for within the group block. Because they're making money on those rooms and they're not making money on no shows or early departure fees. But in terms of what Barbara said, I agree. Hotels don't want to be in the position of determining who's going to receive that commission. If you designate A as your third party for the commission at the time the contract is signed, A is what's called a third-party beneficiary of that contract. A, has enforceable contractual legal rights and you can't just take those rights away because the group decides they want to work with somebody else.
So, a hotel is going to say to you, ‘Look we're happy to pay a commission but we're only going to pay one and so you have to work it out between A and B as to who that's going to be and we'll pay that person accordingly.’ Usually, they're going to require that they get something in writing from both A and B saying we agree that this is the party that's going to be paying the commission. Barbara, how do you handle that with your clients when that comes up?
Barbara: Well, the first thing I do in asking the client is whether they had a contract with party A. Did they have a contract with party A for example to provide contract review, negotiation, services and connection for a commission, or didn't they have a contract at all? They might not have had a contractor, that's not uncommon. It always seems unsettling when someone might approach you and say, I'll do this for free. You probably think that the good old saying that there is no such thing as a free lunch. In this case, sometimes groups are approached by third parties uh to get placement for contracts, searching for properties negotiating rates etc. And then the contracts don't state a commission.
That was certainly a common practice many years ago the so-called blind commissions and contracts. Where a third party was getting a commission, but the group wasn't aware of it. So, fast forward in the age of transparency certainly commissions should be stated in the contract. Where I find the most issues arise is between the group and the agent when they haven't been clear about the services that are to be provided and how the agent is going to be compensated. So, the key is often that it's the fact that there isn't an agreement between the group or that the agreement between the group and the agent doesn't specify how the agent is to be paid and that's really the main issue.
So, often the groups will come they want to switch the agent. They think it's just a quick fix in the contractor request, once you make it known about the third-party beneficiary that does change things. And so, it really caution groups that's not to say don't work with a third party. It's to say that if you do work with a third party, make sure you have a contract. Make sure it's clear on the services to be provided and how that individual or how that agency is to be compensated. Those are the two key elements. And then going forward,, if you did want to change agent of record in a contract, then, you might have the ability to do so and avoid the circumstance where you're trying to get the hotel drawn into that. Certainly, it's nothing that you'd want to do on the path going forward.
Lisa: Another thing you need to think about is how long those commissions are going to be due. Something that I see often in long-term commitments. Such as airline crew rows is that the third-party agent will want the hotel and the customer to sign an agreement that says, commissions will be due as long as that airline is still using that hotel even if the third-party agent is no longer representing the airline. Now that can be kind of tricky, because the airline has a right to decide that they're no longer going to work with that third party. The hotel by the same token has a right to work directly with the airline if the airline is no longer represented by the agent.
It sometimes those terms are slipped in there and neither party realizes that that's what's going on. So, when you're doing these commission agreements, it's very important again to emphasize what rooms are going to be commissionable at what rate, and how long? When does that commission obligation end for either of the parties and how can they even? As Barbara said, the third party should have a written agreement with the company that they're working for that specifies when and if that commitment can be terminated then you're going to avoid those disputes.
Barbara: Yes, Lisa and one final comment is that there are a lot of groups that like to receive the commission themselves. In other words, there is no party A or party B, it's simply paid to the group. We'll be talking about rebates which is really akin this particular situation when commissions are paid to group, is really akin to a rebate we'll be talking about that in another video. But it is something to think about if the group is to seek to get the commission. It's something that you've got to ask for up front. And many hotels will pull back or push back I should say on paying a commission if in fact the group isn't the third-party agent isn't a member of the IATA organization and have an IATA or travel agent number to tie it to.
So, it is something to think about. From a group's perspective, you may be having better negotiation strategy with using a rebate or other concessions. So, commission may not be the best route when you're using without a third-party agent, so just something to think about.
Thanks Lisa and thanks for joining us today for Legalese with the Ladies powered by HopSkip. Please leave your questions and comments in the comment box below. Thank you.
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.