Attrition Clauses - A Conferon Perspective It’s no surprise to most hoteliers or planners to hear that contracts are getting longer and more complex to interpret. There are many reasons that these contracts are growing, but the primary two are: Hotels are trying to protect themselves from previous mistakes that have cost them money. Times are good! Convention hotels are experiencing record breaking occupancy, profits, and annual rate increases. Reports indicate that rates are rising in excess of 6% per year, more in some of the major convention markets. Here are a few additional reasons that performance related clauses are becoming more the rule, rather than the exception: Owner demands are increasing. Not so long ago, owners purchased hotels for real estate investment and tax write-offs. Today, many of the hotel chains and ownership groups are publicly traded and need to deliver a return to their shareholders. Hotels now are competing not only against each other, but also against other investment opportunities. Additionally, the better the hotel chain’s performance, the greater their ability to attract management contracts with hotels wishing to fly their flag. Availability is shrinking. The demand and growth in our market has outpaced the building of convention hotels. Many of the newly built hotels fall in the limited service segment. The limited service segment has proven to produce a better bottom line profit than the convention hotel segment. Recoup investment from renovations. Many hotels invested tremendous amounts of capital to improve their product through renovations in the 1990’s. They need a return on this investment. Guest rooms are perishable. A guest room empty tonight cannot be sold tomorrow. (Enter, the buzz word yield management). Given the fact that hotels’ goals are to maximize revenue and occupancy, hotels now must ask themselves the critical question: “Can we afford to take a piece of business that is unprotected ?” What Conferon looks for in an attrition clause Contracts that include multiple performance clauses tied back to room pick-up (i.e., contracts that include attrition and a meeting room rental sliding scale). We encourage our Account Executives to narrow down room pick-up liability to one clause; no double jeopardy. We attempt to get clauses that encourage both parties to manage the room block. Room block review and adjustment established at eleven, four, and two months prior to arrival works for many groups. This usually will allow hotels sufficient time to offer released rooms to other groups. Many hotels will expect a proportionate reduction in meeting space, to help them sell the rooms. Customers are encouraged to release meeting space to potentially lessen their liabilities wherever possible. We ensure that attrition fees should be due after the meeting is concluded. This is the same time the hotel would receive revenue from an occupied guest room and allows time to review the hotel’s actual loss. We make sure that the term “penalty” is not used in contracts. Penalties constitute unfair, unequal financial payment and may be frowned upon by a court. If a group needs to pay an attrition fee, most contracts include a clause that allows us to work with the hotel to see if all rooms occupied by their attendees are properly coded to that group. We need a registration or attendee list in order to do this comparison. If there is no attrition clause in the contract, we include a clause stating that there will be no liability for guest room slippage. If there isn’t a clause, it does not mean exemption from liability if the hotel suffers a loss. Computing attrition damages For any room block reductions or room pick-up deficits that exceed the agreed upon scale, we encourage the inclusion of a very clear and concise formula to determine the damages due. This should be a formula that all parties can interpret, calculate, and get the same answer. It needs to take into consideration making the hotel “whole” for the actual damages. A provision including the hotel’s duty to attempt to mitigate, or lessen, the damages is recommended by Conferon. No hotel should receive more room revenue through collecting on an attrition fee, than they would have received had they run full. If you have any comments or recommendations on Conferon’s views on attrition clauses, please contact your Account Executive or a representative of our Contracts Department. We are continually looking for ways to make improvements in this area and to meet the goals of the contracting parties.