The University of Texas System

Hotel Contract Cancellation and Attrition Fees

Office of General Counsel

The University of Texas System

January 2011

This training should take approximately 1 hour to complete.

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What is the purpose of this training?

This training will provide general introductory information about the legal consequences of cancellation and attrition fees in hotel contracts.

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Who can answer questions regarding System hotel contracts?

Mark Gentle, OGC Attorney

512/499-4502, mgentle@utsystem.edu

Amy Mitchell, Travel Services

Administrative Assistant, 512/322-3728

amitchell@utsystem.edu

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What will you learn in this training?

You will learn the definitions and objectives of cancellation and attrition provisions.

You will learn how to minimize the risk of losing money through cancellation and attrition fees.

You will learn techniques regarding how to negotiate these clauses.

You will learn the basic differences between the System and UT Austin Agreements

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Stop and Read the Contracts

The University of Texas System Travel Services Office has compiled links to all of the Pre-Approved System Hotel Contract Forms and other valuable information on its Off-site Meeting and Planning web page: http://www.utsystem.edu/travel/meet.html

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Stop and Read the Contracts

For the remainder of the training you will need to print and read the following contracts that are found on the Travel Services web page:

The UT System Event Contract Template (for use with the Master Hotel Agreements)

The UT System Hotel Agreement Template (over $25,000) and…..

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Stop and Read the Contracts

You will also need to print and read the

UT Austin Hotel Agreement (plus Cancellation Option 2) found at http://www.utexas.edu/business/vp/contracts_agreements/contract_std_agrmnt.html

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What is a cancellation fee?

Hotels may require their groups to guarantee some portion of the hotel’s expected profit, even if the guests cancel the visit, in exchange for holding a block of rooms. This reduces the hotel’s business risks.

Under the law, the cancellation fee paid by the guest who cancels the contract is considered “liquidated damages.”

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Cancellation Fee Best Practices

Avoid to the greatest extent possible Develop a formula in the contract to minimize

the cost of cancellation Avoid pre-payment by deposit or otherwise Base fee on hotel’s lost profits not lost revenue Never include any taxes in fee calculation

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What’s the Big Deal-The Event is Going to Happen?

• A poorly worded cancellation provision is the single biggest risk in any hotel contract

• Your program budget can get wiped out even if you just need to change the date

• As a state agency, our duty to protect public funds requires the highest level of diligence

• The unexpected happens, just when you don’t expect it

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What’s the Law on Cancellation Fees

• The law does not allow the hotel to get more from a guest’s cancellation than from the guest’s performance of the contract-in other words, the hotel can only ask for actual damages

• The hotel has a legal duty to “mitigate” its damages-in other words, the hotel needs to make all reasonable efforts to resell the rooms

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Cancellation Fee Provision:What Are My Options

The UT System Event Contract, UT System Hotel Agreement and the UT Austin Hotel Agreement provide optional cancellation provisions:• Option 1 allows the University to cancel without

paying a fee-this is the preferred provision• Option 2 allows the hotel to charge a fee and allows

the authorized University official to negotiate the cancellation fee

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How to Negotiate a Cancellation Fee

• Agree to a cancellation fee only after the hotel has refused Option 1- no fee

• Option 2 in UT System Event Contract• Requires approval by Department Head• Does NOT provide a formula for calculation of

cancellation fees• Limits cancellation fees to Hotel’s documented

lost net profits on rooms

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How to Negotiate a Cancellation Fee

• What is a reasonable cancellation fee?• The decision to accept a cancellation fee is a

business decision• If you accept a cancellation fee, be prepared to

pay it• Compare the value of securing the facility to the

risk of the event being cancelled• Limit cancellation fees to room block charges, do

not include food and beverage charges

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How to Negotiate a Cancellation Fee

• What is a reasonable cancellation fee?• Base cancellation fee on lost profit of hotel, not

100% of lost revenue• The industry average profit margin on a hotel

room is between 70% to 80% of the rate• If your event does not occur, the hotel does not

incur the related costs, so when the hotel asks for 100% of revenue for cancellation, it is attempting to achieve more than actual damages

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Examples of Cancellation Fee Contract Provisions-EXAMPLE A

“Cancellation fee is based on total revenue including anticipated guestroom revenue, food, beverage and meeting room rental. If the contract is cancelled 90 days or less prior to the event, University owes 100% of all anticipated revenue.”

Take the Test on Next Page

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Test Your Knowledge

Why should the University NOT agree to the Cancellation Fee in Example A?

And the answer is..

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What is Wrong With Example A?

• The hotel would make more than their actual damages under this Cancellation Fee provision; actual damages would only be the lost profit. Profit on a hotel room is typically between 70% and 80% of the room rate

• Food and beverage lost profit is much less; on average about 30%-40% of the charges, so the University is being penalized and the hotel is trying to profit from the cancellation

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What is Wrong With Example A, continued?

• There is no “mitigation of damages” requirement in this clause. (Some courts say that there is no longer an implied duty to mitigate damages once you have agreed to a liquidated damages provision, so it is important to always include a statement that the hotel must mitigate damages; that is, resell its rooms;)

• There is no duty placed on the hotel to document that it has suffered any loss

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Let’s Review Example A

• What was wrong with Example A?

• EVERYTHING!

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Cancellation Fee Negotiation Tips

There are good reasons to say NO to Cancellation Fees:

• University is in the market for the long term;• The payment of cancellation fees makes any

public entity very uncomfortable;• The hotel will have a difficult time proving it

suffered damages;• A fair and balanced cancellation fee takes time

and energy to negotiate.

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Sample of Workable Cancellation Fee Calculation-Where to Start

Start with University standard template cancellation language:

UT System Event Contract and Standard Hotel Agreement, Option 2 ,Cancellation Provision

UT Austin Hotel Template, Option 2 Cancellation Provision

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Review of the Cancellation Provision in the Standard UT System Contracts

The UT System Event Contract and Standard Hotel Agreement Cancellation Provisions are basically the same. Here are the three most important parts of the provision:

1. Mitigation Provision-Standard language2. Damage Limitation and Documentation

Provision-Standard language3. Fee Formula-Not included-must be negotiated

by the parties

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Review of the Cancellation Provision in the Standard UT System Contracts

The Mitigation Provision:

“If System cancels the event and/or room block for reasons other than those outlined above, and Hotel contends it has a right under this Hotel Event Contract to a cancellation fee, then Hotel must make a reasonable effort to mitigate its damages.”

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Review of the Cancellation Provision in the Standard System Contract

The Damage Limitation and Documentation Provision: “In no event will any cancellation fee owed by System to Hotel exceed Hotel’s lost net profit. If requested by System, Hotel will provide information and documentation verifying the cancellation fee due. Cancellation fees, if any, will be due and payable thirty (30) days after the meeting date. The cancellation fee will be Hotel’s sole remedy for cancellation by System.”

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Add a Cancellation Fee Formula to the UT System Contract-SAMPLE

• “If System cancels the contract within 90 days of the event, the maximum cancellation fee is based on the number of rooms, less 20% slippage (allowable reduction in room block) multiplied by 75% of the group rate.”

• This example is as basic as it gets, to be added to the Event Contract language, not as a substitute for any provision of the standard form

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Add a Cancellation Fee Formula to the UT System Contracts-SAMPLE

The variables to be negotiated in this sample are :

• Date that triggers cancellation fee liability• Allowable slippage (reduction) in room

block• The per room profit (% of rate)

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The UT System Contracts are Different Than the UT Austin Contract

Since the Cancellation Provision in the UT System agreements differ from the UT Austin Standard Agreement, the following slides will provide guidance on completing the UT Austin Contract’s Cancellation Provision.

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Cancellation Fee Formula Using Standard UT Austin Hotel Contract

• When using the UT Austin Contract, be sure to add the following clarifying statement to the cancellation provision:

“In no event will any cancellation fee owed by University to Hotel exceed Hotel’s lost net profit.”

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Cancellation Fee Formula Using Standard UT Austin Hotel Contract

• UT Austin Standard Hotel Template provides a chart for calculation of the cancellation fee-see next slide

• Do not offer conference room, catering or other charges to be included in the cancellation fee

• The percentages shown in the chart are not mandatory, you can propose and agree to other percentages

• When using this chart, include a statement that the room block is net of any allowed slippage

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Cancellation Fee Table in Standard UT Austin Hotel Contract-Option 2

Canceled # of Days Prior to the

Event

% of Lost Guest Room Revenue

% of Lost Conf. Room, Catering, Equip., and/or

Auxiliary Activities Revenue

181 days or greater 0% 0%

180 to 121 days 20% 10%

120 to 61 days 40% 20%

60 days to Event date

80% 40%

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POP QUIZ

• Cancellation Fee Provision-Example B:

“The University and Hotel Agree that the University will owe a cancellation fee based upon the anticipated revenue from 80% of the room block.”

The rate is $125 per night with 245 room nights blocked.

What is the most the University must pay?

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POP Quiz

• A. $30,625.• B. $24,500• C. $22,968.75• D. Trick question, who knows• E. None of the above

• And the answer is

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POP Quiz

• B is the right answer, but is it a fair cancellation fee?

• List the other provisions this cancellation provision should include.

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POP Quiz

• What are the main variables in the calculation of a cancellation fee?

• And the answer is:

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Test Your Knowledge

A. The costs of all rooms and food/beverage expenses;

B. The date of the event;C. The date on which liability for the fee

begins;D. The number of rooms that you can drop

before the event;E. The profit percentage in each roomF. A, B and CG. C, D and E

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Test Your Knowledge

G. C,D and E

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Attrition Fee Provisions

• Definition: Fee charged because group did not fulfill their total event commitment (contract under-performance)

• Standard Agreements have Option 1-no fee and Option 2, allowing an attrition fee to be calculated and charged

• Hotels often ask for attrition fees on rooms and catering charges.

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Special Attention To Attrition on Food and Beverage

Attrition provisions can get complicated The risk to the University occurs when the

food and beverage has been overestimated without adequate adjustment authority

In order for the food and beverage attrition provision to work properly, negotiate the ability to adjust the final catering requirements close to the date of event

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How to Reduce Attrition Fees on Guest Rooms

• Negotiate the ability to reduce the size of the room block by at least 20% as close to the event as possible

• The contract provision governing changes to the room block is called the “Guest Room Guarantee” found in the Guest Room Accommodations Exhibit for all university hotel agreements

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Reducing Attrition Fees

• Always include a provision that limits any attrition fee to no more than actual lost profits

• The Standard UT System Agreements contain that limitation, the current UT Austin Standard Hotel Agreement DOES NOT, so it needs to be added to both the room block and catering attrition:

• “In no event shall any attrition fee owed by University to Hotel exceed the Hotel’s lost net profit.”

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Negotiating Room Block Attrition Fees

• First, know the trigger: at what percentage of the room block guarantee will attrition fees be required?

• Hotel agreements often allow 20% slippage before attrition is triggered

• Therefore, the starting point for the calculation of attrition is some percentage less than the final adjusted room block-or “event guarantee”

• Hotel will want assurance that they can count on that 80% of the guarantee, but remember, the hotel can only claim actual damages

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Negotiating Room Block Attrition Fees

• Here is the standard contract language on attrition fees, using a 20% slippage from the final room block total as the trigger:

“ Should the actualized Room Block revenue be less than 80% of the Room Block Guarantee, the University agrees to pay the Hotel as Damages, and not as a Penalty the difference between the actualized Room Block revenue and __% of the Room Block Guarantee.”

What % should go in the blank?

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Negotiating Room Block Attrition Fees

The answer is:

Well, lets discuss it first. If you put 80% in the blank, you have just agreed to pay all of the net profit of the hotel for the entire room block , regardless of how many rooms you use. If you want to limit your attrition to a lower amount, you need to insert less than 80% into the blank.

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Negotiating Room Block Attrition Fees

• The best answer is anything under 80%• This percentage is also subject to negotiation,

and the cap of actual net profit has already been put into the agreement, so anything under 80% will generally accomplish the goal.

• The reason anything above 80% is disfavored is because 80% or more would allow the hotel to argue that its attrition fee recovery will be lost revenue, not a negotiated percentage of profit on each room.

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Negotiating Catering Attrition Fees

• The risk of food and beverage attrition fees can be greatly reduced by including the authority to set the “Event Guarantee” very close to the event so that the hotel will only purchase the necessary amount of perishable items

• Food and beverage attrition should never include tax, service fee or other fees;

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Negotiating Catering Attrition Fees

6. If the hotel refuses to allow substantial adjustment of the catering event guarantee close to the day of the event; or,

7. If the hotel requires a minimum food and beverage expenditure commitment, the standard form attrition provisions need to be evaluated and modified on a case by case basis.

8. The bottom line is that the provisions must be clear that the University will agree to compensate the hotel no more than their actual lost profits

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Test your knowledge

The following questions will test your knowledge of the information presented in this course.

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1. The cancellation fee it intended to. . .

A. Guarantee a hotel’s revenue from an event, even if the group does not show up

B. Reduce business risks for the hotel

C. Protect the university from having to pay all of the hotel charges when individuals do not attend the event

D. Allow the hotel to make a profit even if the weather turns bad

The answer is…

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The answer is…

B. Reduce business risks for the hotel

(ref. Slide #5)

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2. When preparing a hotel agreement

A. Use a template

B. Review the general instructions provided with the template

C. Contact OGC with any questions

D. All of the above

The answer is…

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The answer is…

D. All of the above

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3. The best and preferred approach to cancellation fees and attrition fees is to convince the hotel they are not needed.

True or False?

The answer is…

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The answer is…

True

Cancellation fees are a harsh remedy and attrition fees can get complicated and hard for the hotel to prove.

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4. The hotel should never be able to recover more than their actual lost profits in a cancellation fee or attrition fee.

True or False?

The answer is…

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The answer is…

True

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5. I can use the approved hotel agreement templates without making any changes in each transaction.

True or False?

The answer is…

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The answer is…

False

You should always be sure the agreement fits the transaction. The templates may require supplemental provisions and edits.

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6. What do I need to know in order to calculate a cancellation fee

A. The number of rooms and rate

B. The number of rooms per night in the room block, the rate and the hotel profit

C. The total adjusted number of rooms, the profit percentage and the room rate

The answer is…

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The answer is…

C . All that stuff

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7. What is the purpose of an attrition fee?

A. Same as the cancellation fee

B. To establish the damages owed to the hotel because of the university’s under performance of the contract requirements

C. Allow the hotel to make an extra profit on late arrivals

The answer is…

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The answer is

B

Thank you for completing this training course.

Office of General Counsel

The University of Texas System