Contractual deposit, cancellation and attrition clauses, which some hoteliers waived or relaxed in the buyer's market of the past four years, once again have become contentious points of negotiation as hotels become less flexible on meeting and group contracts. Hoteliers said they can now afford to set contract terms that protect their financial assets, but buyers aren't giving up negotiating power so easily.
"There is a lot that is being done in the contractual area that is not what I consider to be good business practices, and that's being perpetuated just out of sheer lack of time or laziness," said Doris Schultz, assistant vice president and travel services manager for Alliance Capital Management Corp. "Most hotels want deposits anywhere from six months or more ahead of time, anywhere up to 50 percent."
Schultz said good-faith deposits have become one-sided in favor of hotels and that putting deposits directly into hotel pockets creates the impression that they have become a hotel revenue stream.
"They're seeing cancellation as a revenue as opposed to a means of managing their costs," Schultz said.
Tony Pastor, site and contract specialist for McKinsey & Co., said when he is required to pay a deposit he counters by asking hotels to pay 18 percent interest on the money paid ahead of time—the same annual rate the hotels charge for late payments.
"They want 18 percent if I'm late in paying," Pastor said. "Why shouldn't I get 18 percent if I'm early in paying? I'm always agreeable to paying money where hotels are going to be ordering food and other things on your behalf, but that said, deposits are probably one of the more easily negotiated things in contracts. I almost never pay deposits," Pastor added.
Pastor said buyers shouldn't be paying deposits if they have a continuing relationship with a hotel. However, non-chain and international hotels are more aggressive about deposits, he said, because going to court to collect an unpaid bill can be more expensive than the money owed.
Some buyers use purchasing cards to argue against deposits. "If I'm going to pay for a meeting on the corporate credit card and if the hotel did the credit authorization, there should be absolutely no reason why I have to pay a deposit. In that respect, I almost always take it out," said Roxane Sobanski, meeting and event planner for JohnsonDiversey Inc.
Sobanski admits it's getting tougher to force hotels to take out deposits and limit attrition and cancellation clauses. During the past two months, hotel vendors "have made a mess" of JohnsonDiversey's standard two-page addendum to hotel contracts that limits the company's responsibility for cancellations and attrition, she said.
"Prior to that, I'd get them signed and sent right back," Sobanski said, "but in the past couple of months, hotels have crossed almost everything out."
Hotel sales executives said buyers should expect less flexibility in contract negotiations this year, especially in big-city markets such as New York City, Orlando, and Washington, D.C.
"We won a lot of business by being flexible during some very difficult times. Now the market has rebounded," said Mike Fegley, vice president of global sales for InterContinental Hotels Group. "We're not waiving deposits. If someone says they never pay deposits, then that person is not going to be able to stay in just any hotel, because there are going to be some hotels that demand it. You're going to have to work on their terms if you want their space."
InterContinental, which in early 2003 eliminated cancellation and attrition fees for meetings booked in that year
(Meetings Today, Feb. 10, 2003), today is in a far different position, Fegley said. "We are a different company and this is a different industry then it was in the winter of 2001. Those days are gone," he said. "The hotel industry has pretty much fully recovered and there's a lot of demand out there. Supply has not grown like demand has and hotels can be selective on who ties up their hotels."
Alliance Capital's Schultz suggested meeting buyers should band together to insist on more reasonable hotel contracts. Deposits, if absolutely required, should not be put automatically into room revenue, she said, and cancellation/attrition clauses should be limited.
"The hotels are supported in their contract terms by meeting planners who don't really want to sign it but don't have time to argue," Schultz said. "It's being perpetuated by the busy-ness of the industry and a perception of helplessness."
Attrition and cancellation fees have even become a "revenue stream" for hotels, Alliance Capital's Schultz claimed. Although some compensation for blocking off rooms is reasonable, she said, some hotels argue that they never recover all of their lost revenue in a cancellation, even if they resell the rooms.
"We never recover everything. The hotel is very deserving of those fees, because they took it off the market," according to InterContinental's Fegley. "Every day, our product perishes. If it's not sold that day, it's not going to get sold."
Pastor said attrition and cancellation clauses are necessary, and even beneficial to meeting buyers who might otherwise be fully liable for cancelled rooms, but said the clauses must make sense for both sides. Commissions and bonuses to sales staff, and huge capital investments into properties combined with the perishable nature of the product force hotels to protect their projected revenue, he said.
"Hoteliers are making very exact budget projections to their investors and their ownership or top management. They've got to produce heads in beds, that's what the name of the game is," Pastor said.
By year-end, the Convention Industry Council expects to release best practices for meetings contracts as part of its Accepted Practices Exchange initiative. Juli Jones, CIC vice president and Apex project director, said every event is unique and so every contract must be unique, but that the group is working to come up with some guidelines and standard language
(Meetings Today, Jan. 17).Avoiding attrition/cancellation fees and lost deposits by fulfilling room blocks can satisfy both vendor and buyer, though Schultz said there are few inducements for a hotel to spend time reselling rooms.
Various third-party services have been launched to match meeting buyers with room blocks cancelled by other corporations, but a secondary industry of bargain room block listings has yet to develop.
JohnsonDiversey's Sobanski said she has approached some meetings technology providers about the possibility of creating a meetings industry calendar, through which companies could cooperate to fulfill contracted room blocks. "If there were some sort of calendar out there and then whatever software company I use would blast out to all the companies they work with and say: 'JohnsonDiversey just cancelled this space in L.A., who else can use it?' I think that would be very helpful," Sobanski said.