Knowing hotel’s perspective enables planners to mitigate financial damages
Since 2011, the meetings and events industry has seen a strong and steady run, which mirrors the economy as a whole. But many veteran planners and hoteliers vividly remember the difficulties they faced in 2009 and 2010, when a sudden hit to the economy brought about the cancellation of countless meetings and events along with significant financial losses. Unfortunately, some groups whose planners were either uninformed or complacent about cancellation terms in their contracts were surprised by the extent of their liability.
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Given the inevitability of economic cycles, planners should always make sure to negotiate cancellation terms in a way that gives them opportunity to minimize financial damages regardless of the economic climate. To accomplish that objective, planners must understand the perspective of their hotel counterparts.
“First, recognize that a contract is a futures agreement: You have purchased a portion of a hotel’s inventory on specified dates, and that inventory is perishable,” says Lisa Sommer Devlin, an attorney at Phoenix-based Devlin Law Firm P.C., which represents hotels in contract negotiation and litigation. “If your group doesn’t show up and the hotel can’t refill that inventory, they lose that revenue forever.”
As a result, hotels want a guarantee in each contract that they will receive a percentage of the meeting’s anticipated revenue in the event of cancellation. That percentage becomes higher as the dates of the event draw nearer: Canceling nine months out might require a 20 percent payment; six months out, perhaps 40 percent; three months out, the figure could be as high as 67 percent of the hotel’s anticipated revenue from the event.
Size & Time Matter
On the other hand, planners can negotiate these percentages depending on the size of the meeting and the time of year it’s being held.
“A 400-person meeting at a 600-room hotel has much more impact than a 75-person meeting at that hotel,” Sommer Devlin says. “And if that smaller meeting is booked six weeks out, it’s basically found money for the hotel. So the hotel would probably be more lenient on cancellation terms.”
But even for the 400-person meeting, booking it during a lower-demand period at that hotel might help the planner secure lower percentages for damages to be paid for a cancellation. Even better, the planner could likely negotiate a favorable attrition clause so that he or she can reduce attendee head count at a lower cost, rather than cancel the meeting and get zero value for the money.
While many planners try to negotiate rebook-credit and resale-credit terms as part of event-cancelation clauses, Sommer Devlin says that hotels generally resist those because of the uncertainty and complication they create. “Rebooking the event at a later date is nice, but it doesn’t make up for the hotel’s loss over your original dates,” she says.
In some situations, though, rebook credit is possible. When Ann Lohry Smith, CMP, information systems analyst and meetings specialist at Wells Fargo, was planning hundreds of training events each year at another firm, she required that her venues agree to a clause stating that she could rebook an event within one year and that any cancellation fee would be credited toward the rebooking.
“Working for a large national employer, it wasn’t too difficult to negotiate this into the contracts,” she says. “The hotels we worked with valued our partnership and recognized it could mean many more future bookings.”
As for the resale-credit option: It’s possible that the property can refill much of the room inventory and event space for the canceled dates—but accounting for that activity would draw out the resolution process for months. “A hotel would much prefer to accept a lower percentage of the meeting’s value with no resale credit, rather than receive a higher percentage but then have to track resale credit over time,” Sommer Devlin says.
Think Outside the Box for Other Remedies
If the prospect of cancellation arises ahead of a meeting, a planner can propose creative solutions that are not mentioned in the contract.
“If you cancel an October meeting, that’s peak season, so a business hotel has a good chance of refilling those rooms and space,” Sommer Devlin notes. “If you offered to bring that same meeting or another one to the property during a slow week in December, then you might have some leverage to negotiate the liquidated damages for the October event. That’s where your relationship with the hotel sales rep comes into play.”
Another possibility is to place a different meeting from within your organization into the contracted dates.
If a group cancels, it could use meetings-industry chat forums or other avenues to find another organization that might fill the rooms and space. A new contract would be required, and it’s the hotels choice whether or not to contract with the new group. If it does work out, though, the original meeting group could negotiate with the hotel to pay reduced liquidated damages.
Don’t Forget the Flip Side
What if a hotel decides to cancel on your group? “One of my most important contract clauses is ‘cancelation by hotel,’” says Stacy Weber, CMP, meeting and procurement manager at Moss Adams LLP in Seattle. She uses language stating that if the hotel cancels, it must help find a comparable alternate location and pay any difference in cost, including additional transportation. Some hotels resist this during negotiation, but Weber knows it’s a necessity.
Such a clause helped Weber when one hotel tried to bump her group for a larger piece of business, and when another venue went under renovation. Sommer Devlin notes that even without such a clause, the hotel would owe damages to the group if it cancels. But specifying the damages in writing makes such a situation easier to settle amicably.
Lisa Sommer Devlin will lead a Smart Meetings webinar on How to Improve Negotiations with Suppliers on Nov. 8. Register at smartmeetings.com/webinars