HM Exclusive: Why AAHOA Wants A New Clause in Franchise Agreements

AAHOA revised its 12 Points of Fair Franchising during its annual convention in early April, specifically Point 12, which addresses selling a franchise system hotel brand. This revision was prompted by recent mergers and acquisitions among major hotel chains, including Marriott's acquisition of Starwood, Wyndham's acquisition of La Quinta, and Choice Hotels' acquisition of Radisson Americas.

Key Changes in Point 12

AAHOA now recommends including a "Change of Control" clause in franchise agreements to protect franchisees in case of a sale, acquisition, or merger of hotel brands. This clause would allow franchisees to assess the impact of changes and potentially leave without facing significant penalties if the terms are unfavorable. Franchisees are often locked into long-term agreements, typically lasting 20 years, which complicates the process of changing brands after a major acquisition.

Impact of Hotel Franchising

Laura Lee Blake, president and CEO of AAHOA, explained that hotel franchising involves substantial investments in real estate and infrastructure, with franchisees committing to brand standards, systems, and a long-term relationship with the franchisor. Mergers and acquisitions can significantly disrupt this process, leading to increased costs, new systems, and a shift in brand culture. These changes can have negative financial consequences for franchisees, with some facing penalties if they want to terminate their agreement early.

Details of the Change of Control Clause

The revised Point 12 calls for a grace period of one year after the finalization of a brand sale or merger, allowing franchisees to evaluate the new terms. If the new terms are unsatisfactory, they can leave without paying the full liquidated damages typically required for early termination. The clause outlines various scenarios for a "Change of Control," such as the sale of more than 50% of the franchisor's voting stock or a significant transfer of assets.

Challenges and Future Implications

While the revised 12 Points of Fair Franchising aim to educate the industry and improve fairness, they are not binding documents, and franchisors may not always agree to the suggested terms. Blake noted that Change of Control clauses are not standard in the hotel sector, even among franchise-friendly industries. The long-term impact of including these clauses in more contracts is uncertain, but it could affect the dynamics of large-scale mergers and acquisitions.

Read the Hotel Management article

Read AAHOA’s press release