Like all industries, franchisor-franchisee relationships in the hotel industry often lead to disputes. Franchisors often over-promise and under-deliver, and franchisees often find themselves struggling to remain solvent due to factors beyond their control.
Several different types of issues can lead to these scenarios. As a franchisee, it is important to be aware of these issues and to take proactive measures to protect your franchise when possible. But, in some scenarios, the only option will be to react, and this will involve evaluating your options with the help of an experienced franchise attorney.
Common Disputes Between Hotel Franchisors and Franchisees
What are some examples of common issues for hotel franchise owners? Here are seven examples of issues that can (and frequently do) lead to disputes between hotel franchisors and franchisees:
1. Territory Encroachment
Territory encroachment is a significant concern for hotel franchisees. By the time you learn that your franchisor (or another franchisee) is encroaching on your territory, the franchisor (or franchisee) may have already invested a substantial amount of money in the offending location. This can make it difficult to convince them to simply walk away, and they may argue that they aren’t encroaching—even if your franchise agreement clearly says otherwise.
2. Use of Advertising Fund Contributions
Hotel franchisors typically reserve the right to use franchisees’ advertising fund contributions in their discretion. This includes choosing where to focus their advertising expenditures. As a result, many hotel franchisees—and especially those in smaller markets—never see any of their advertising fund contributions reinvested in promoting the brand in their territory.
3. Enforcement of Brand Standards
Branding is a key facet of any franchise system, this tends to be especially true in the hotel industry. Travelers who choose a particular brand of hotel often have very specific expectations, and franchisors want to make sure their franchisees meet these expectations every single time. As a result, hotel franchisors will often vigorously enforce their brand standards, and they will often rely on vague franchise agreement language (i.e. an obligation to operate in a “first-class” manner) to do so.
4. System-Wide Changes
While uniformity is important, so is the ability to adapt to changing consumer preferences. In the franchise relationship, the decision of how and when to adapt to changing consumer preferences rests with the franchisor. If a hotel franchisor decides to undertake a major rebranding initiative, franchisees will often have little choice but to comply (at their expense). When franchisees disagree that a substantial investment is in their best interests—or when they cannot afford the investment required—this will often lead to disputes as well.
5. Wrongful Refusal to Renew
Many hotel franchisees rely on their ability to renew in order to become profitable. When their franchisors refuse to renew, this can also lead to contentious disputes.
While some refusals to renew are justified, wrongful refusals to renew are also common. Franchisors may assert a number of supposed grounds, from non-compliance with system standards to failure to timely cure past violations. For hotel franchisees, the threat of non-renewal can present substantial risks—not only under their franchise agreement but under their other commercial contracts as well.
6. Wrongful Refusal to Approve a Transfer
Hotel franchisees can also run into issues at the transfer stage. For many hotel franchisees, the goal is to build a sustainable business that they can sell before moving on to their next business venture. Thus, if their franchisor refuses to approve a transfer, this can prove extremely costly. Similar to renewal, franchise agreements typically impose several conditions on franchisees’ right to transfer, and franchisors may choose not to approve their franchisees’ proposed transfers for various reasons. If a franchisor’s refusal to approve a transfer is wrongful, the franchisee may have no choice but to take legal action.
7. Wrongful Termination
Along with wrongful refusals to renew and approve transfers, wrongful termination is another significant concern for hotel franchisees. Not only can the loss of the franchise have significant financial consequences, but enforcement of the franchise agreement’s post-termination covenants (i.e., a liquidated damages or “lost future royalties” clause) can further add to franchisees’ losses. Unfortunately, wrongful franchise terminations are not uncommon, and franchisors will often have ulterior motives for attempting to remove certain franchisees from their systems.
What Are Your Rights if You Encounter These Issues as a Franchisee?
As a hotel franchisee, what are your rights if you encounter any of these issues (or any other issue) with your franchisor? As is so often the case, the answer depends—at least in part—on the terms of your franchise agreement.
Most hotel franchise agreements include mandatory alternative dispute resolution (ADR) provisions that require franchisees to mediate or arbitrate before going to court. While these provisions are ostensibly neutral (although franchisors’ ADR obligations are often subject to various exceptions), in practice they tend to favor franchisors in various ways.
For example, franchisees will usually need to attend mediation sessions or arbitration hearings in the city where the franchisor’s headquarters are located. This alone can add considerably to the cost of asserting franchisees’ rights. Combine this with the fact that franchisees may still need to go to court after pursuing mediation or arbitration, and the costs and risks involved can quickly become prohibitive.
Even so, hotel franchisees can successfully pursue claims against their franchisors. Doing so requires a strategic approach, and this requires experienced legal representation. If you own a hotel franchise and are facing a dispute with your franchisor, you should discuss your situation with an experienced franchise attorney promptly. In many cases, the sooner you act, the more options you will have available.
Discuss Your Situation with Franchise Attorney Jeffrey M. Goldstein in Confidence
Franchise attorney Jeffrey M. Goldstein has more than 30 years of experience representing franchisees in disputes with their franchisors. He has particular experience in the hotel industry. If you are facing a dispute with your franchisor and would like to speak with Mr. Goldstein in confidence, please call 202-293-3947 or contact us online to arrange a free initial consultation.
