Ace in the Hole: NY Court Gives Hotel Owner New Way to Oust Hotel Manager and (Re)Claim Management of the Property

by Dechert LLP
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photo of Krystyna M. BlakesleeA recent decision of the New York state appellate court has given hotel owners a new way to override contract provisions in long-term property management agreements and oust hotel managers from managing the property. In Marriott Int’l, Inc., et al. v. Eden Roc, LLLP, 104 A.D.3d 583 (N.Y. App. Div. 2013), the appellate court vacated a lower court’s imposition of an injunction requiring Eden Roc, LLLP (“Eden Roc”), the hotel owner, to allow Renaissance Hotel Management Company, LLC (“Renaissance”), the (now former) hotel manager and subsidiary of Marriott International Inc. (“Marriott”), to perform its role as manager of the hotel in accordance with the management agreement.

Before we continue, let us set the stage: In 2005, Eden Roc purchased the Eden Roc Renaissance Hotel (the “Hotel”), located in Miami, Florida, originally designed in 1956 by Morris Lapidus, who also designed the famous Fontainebleau Hotel, and known for being host to Hollywood celebrities such as Elizabeth Taylor and Katharine Hepburn. In connection with the purchase, Eden Roc assumed the existing management agreement with Renaissance. This agreement, among other things, entitled Renaissance to manage the Hotel for 30+ years. The relationship soured.

After sending a January 18, 2012 notice of default and giving Renaissance until February 28, 2012 to cure, on March 30, 2012, Eden Roc terminated the hotel management agreement, effective June 29, 2012, citing Renaissance’s mismanagement of the Hotel after Eden Roc had invested more than $300 million in the Hotel, including a $240 million renovation, and claiming that “[u]nder Marriott’s management, Eden Roc lost market share despite its exceptional amenities and legendary reputation”. Shortly thereafter, on April 2, 2012, Eden Roc commenced an action in NY Supreme Court (Eden Roc, LLLP v. Marriott Int’l, Inc., et al., NY Supreme Court, Index No. 651027/2012 (the “Eden Roc Action”)) against Renaissance, Marriott and Marriott International Design & Construction Services, Inc. (collectively, the “Marriott Entities”), asserting, among other things, that the Marriott Entities have cost Eden Roc more than $75 million in damages, have “irreparably dragged the reputation of the Hotel through the mud” and have mismanaged the Hotel as evidenced by, among other things, allegedly (a) refusing to pay to Eden Roc the amount of $285,000 (representing an amount that was allegedly stolen by a Renaissance employee) and (b) extending a $350,000 line of credit to a guest without Eden Roc’s consent (which amount was never paid back). According to Eden Roc’s amended and restated complaint, in an April 12, 2012 letter, the Marriott Entities claimed that no default had occurred entitling Eden Roc to terminate the management agreement and “announced that they have “no intention of cooperating with the transition of the hotel to a new management company””.

Following a second notice of default, on May 23, 2012, Eden Roc sent a second notice of termination of the management agreement, effective as of August 10, 2012. Thereafter, the Marriott Entities refused to recognize the termination and vacate the Hotel, forcing Eden Roc, in the predawn hours of October 14, 2012, to attempt a coup complete with uniformed security guards spread throughout the Hotel to take back the Hotel. The Marriott Entities were able to thwart Eden Roc’s takeover attempt by obtaining a temporary restraining order permitting the Marriott Entities to continue to manage the Hotel while a New York court considered the merits of the parties’ arguments.

Later, on November 7, 2012, a NY supreme court denied Eden Roc’s motion to vacate the temporary restraining order and instead converted said order into a preliminary injunction to maintain the status quo during the pendency of the ongoing litigation. The lower court rejected Eden Roc’s argument that the management agreement was a personal services contract, which would allow Eden Roc to easily remove the Marriott Entities as hotel manager because of the general rule (rooted in the 13th Amendment’s prohibition against slavery and indentured servitude) against enforcement of personal service contracts. The judge reasoned that “[h]istorically, the distinctive features of a personal service contract is that it must follow the person with the skill at the root of the contract,” whereas here, the management agreement did not “rely on services rendered by any specific person or group of persons . . . but rather create[d] a long-term commercial relationship between corporate entities.” Additionally, the lower court found that there was no principal-agency relationship between Eden Roc and the Marriott Entities as Eden Roc failed to “exercise the degree of control over the day-to-day functions of [the Marriott Entities] that would give rise to an agency relationship”. Finally, citing language in the management agreement making specific performance available as a remedy, the lower court refused to decline to enforce the specific performance remedy without controlling law to the contrary.

On March 26, 2013, a NY appellate court reversed the lower court’s ruling, and held that the parties’ management agreement is a “classic example of a personal services contract that may not be enforced by injunction”, as the management agreement gave the Marriott Entities full discretion to execute tasks that cannot be objectively measured. Further, the appellate court noted that the Marriot Entities were not agents of Eden Roc given their unfettered discretion in managing the Hotel.

The NY appellate court’s decision makes it clear that hotel owners now have two bases—principal-agency relationship and personal services contract arguments—for terminating long-term hotel management agreements and blocking managers’ attempts to commandeer the hotel owners’ property. But, this decision does not free hotel owners from liability for breaching the management agreement. Accordingly, the decision whether to terminate the hotel management agreement needs to be closely examined and the risks of terminating v. not-terminating assessed, as in some cases the financial cost of terminating may be extraordinarily high. And, this decision does not resolve the Eden Roc Action….the parties agreed to extend the stay of the Eden Roc Action (which was originally implemented by agreement of the parties and so ordered by the court on February 26, 2013 to be coterminous with the NY appellate court action discussed above) until April 19, 2013 (as of publication, nothing new has appeared on the docket) and the deadline for the Marriott Entities to serve their reply in support of their motion to dismiss is extended until May 10, 2013 (for the full docket click here).

 

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