Advising the hotel industry in a stay-at-home world

With vacation plans on indefinite hold, the attorneys of the hospitality practice at Jeffer Mangels Butler & Mitchell LLP are helping their hotel clients weather the shutdown.

Travelers spent $1.1 trillion across the nation in 2019, according to statistics provided by the U.S. Travel Association, generating a total of $2.6 trillion in economic output over the course of last year. But it's clear now COVID-19 has knocked 2020 significantly off course, Jeffer Mangels' Los Angeles-based founding partner Jim Butler said Wednesday.

"We've got a teacup for a tidal wave on all fronts," Butler said. "The travel industry has just been decimated, from airplanes to hotels, in markets that have year-in, year-out and all season long been [major] markets."

As chairman of the firm's global hospitality practice, Butler and his team have advised clients on more than $87 billion in hotel purchases, sales, financing, and other transactions involving more than 3,900 properties worldwide. In recent weeks, however, their efforts have shifted to helping clients endure a sudden rush of labor, compliance and regulatory issues amid an unprecedented economic downturn.

"It's not just the rent or the mortgage. It's employees, the food, the beverages, the operating expenses, the utilities -- there's a huge fixed overhead, and suddenly the switch has been flipped, and everyone's been told to stay at home," Butler said. "There's overwhelming, disrupting uncertainty, and it's creating a domino effect down the chain, where a hotel can't pay its employees and the employees can't pay their own bills."

In the short term, Butler said his team has been helping hotel clients close shop and shape up operations in compliance with state and federal guidelines. While the immediate projected threat to clients can vary from market to market, Butler said, there are significant costs to owning and managing a hotel even when its operations are entirely shuttered.

"You have to keep flushing the toilets; you can't let mold start growing," Butler said. "There are systems that need to be in place to mothball things properly and slow down what goes down at a hotel."

Shutting down service can also generate contract disputes with brands, franchisees and others with agreements that depend on a hotel's operation. In situations where the potential contract disputes are too great, the operational costs are too high, and the economic prospects aren't great, Butler said he's been advising clients about potential exits.

Jim Butler

"You either deal with those issues, [or] you can contractually modify, but it's putting some people into extreme situations," he explained. "They have to ask, 'Is this time to turn the hotel into a senior living center or an apartment house?' There's a lot of rethinking."

But in situations where fight is preferable to flight, Irvine partner Mark S. Adams said the firm's already filing with the courts. The Jeffer Mangels litigation team works on hotel-specific matters involving franchise agreements, joint ventures, financings, land use and employment matters.

In addition to hospitality litigation, products liability, corporate and partnership disputes, Adams' practice focuses on contract disputes. And like many business litigators as of late, he said he's recently reckoning with clients in contracts with unclear or insufficient force majeure terms.

"We all learned about them in the first year of law school, and they've been mostly boilerplate for a long time. People haven't paid much attention to them," Adams said. "Those chickens are now coming home to roost."

Similar to the firm's transactional side, Adams said the pandemic and related government orders have created a domino effect of disputes with brands, franchisees and others. At the same time, Adams said the pandemic hasn't seemed to have much of an impact on the firm's defense-side representation of hotel clients in matters like accessibility.

"People are filing lawsuits, though there's no expectation that any of them are seeing the light of day until 2021," Adams said.

With early speculation placing the first major steps back toward normalcy in the late summer or early fall, Adams said the breaches generated in the meantime will generate litigation for years to come.

If there's any point of optimism for the hospitality industry at the moment, Adams said hotels and travel can expect to come back in a big way once all this is over.

"This whole coronavirus thing has created an informality to business meetings that didn't exist before," Adams said. "Whereas before, I might not have taken that long weekend because I had a one-hour meeting on a Friday. Now I'd probably do it."

After all, Butler added, who won't need a vacation after all this?

"That's the beauty of hotels," Butler said. "And the sooner a revival comes, the easier it will be."