Selected Privacy Laws - University of Texas System

The University of Texas System
Hotel Contract Cancellation and
Attrition Fees
Office of General Counsel
The University of Texas System
January 2011
This training should take approximately 1 hour to
What is the purpose of this training?
This training will provide general introductory
information about the legal consequences of
cancellation and attrition fees in hotel contracts.
Who can answer questions regarding
System hotel contracts?
Mark Gentle, OGC Attorney
512/499-4502, [email protected]
Amy Mitchell, Travel Services
Administrative Assistant, 512/322-3728
[email protected]
What will you learn in this training?
You will learn the definitions and objectives of
cancellation and attrition provisions.
You will learn how to minimize the risk of losing
money through cancellation and attrition fees.
You will learn techniques regarding how to
negotiate these clauses.
You will learn the basic differences between the
System and UT Austin Agreements
Stop and Read the Contracts
The University of Texas System Travel Services
Office has compiled links to all of the PreApproved System Hotel Contract Forms and
other valuable information on its Off-site
Meeting and Planning web page:
Stop and Read the Contracts
For the remainder of the training you will need
to print and read the following contracts that are
found on the Travel Services web page:
The UT System Event Contract Template (for
use with the Master Hotel Agreements)
The UT System Hotel Agreement Template
(over $25,000) and…..
Stop and Read the Contracts
You will also need to print and read the
UT Austin Hotel Agreement (plus Cancellation
Option 2) found at
What is a cancellation fee?
Hotels may require their groups to guarantee
some portion of the hotel’s expected profit,
even if the guests cancel the visit, in
exchange for holding a block of rooms. This
reduces the hotel’s business risks.
Under the law, the cancellation fee paid by
the guest who cancels the contract is
considered “liquidated damages.”
Cancellation Fee Best Practices
Avoid to the greatest extent possible
Develop a formula in the contract to minimize
the cost of cancellation
Avoid pre-payment by deposit or otherwise
Base fee on hotel’s lost profits not lost revenue
Never include any taxes in fee calculation
What’s the Big Deal-The Event is Going
to Happen?
A poorly worded cancellation provision is the
single biggest risk in any hotel contract
Your program budget can get wiped out even if
you just need to change the date
As a state agency, our duty to protect public
funds requires the highest level of diligence
The unexpected happens, just when you don’t
expect it
What’s the Law on Cancellation Fees
The law does not allow the hotel to get more
from a guest’s cancellation than from the
guest’s performance of the contract-in other
words, the hotel can only ask for actual
The hotel has a legal duty to “mitigate” its
damages-in other words, the hotel needs to
make all reasonable efforts to resell the rooms
Cancellation Fee Provision:
What Are My Options
The UT System Event Contract, UT System Hotel
Agreement and the UT Austin Hotel Agreement provide
optional cancellation provisions:
• Option 1 allows the University to cancel without
paying a fee-this is the preferred provision
• Option 2 allows the hotel to charge a fee and allows
the authorized University official to negotiate the
cancellation fee
How to Negotiate a Cancellation Fee
Agree to a cancellation fee only after the
hotel has refused Option 1- no fee
Option 2 in UT System Event Contract
Requires approval by Department Head
Does NOT provide a formula for calculation of
cancellation fees
Limits cancellation fees to Hotel’s documented
lost net profits on rooms
How to Negotiate a Cancellation Fee
What is a reasonable cancellation fee?
The decision to accept a cancellation fee is a
business decision
If you accept a cancellation fee, be prepared to
pay it
Compare the value of securing the facility to the
risk of the event being cancelled
Limit cancellation fees to room block charges, do
not include food and beverage charges
How to Negotiate a Cancellation Fee
What is a reasonable cancellation fee?
Base cancellation fee on lost profit of hotel, not
100% of lost revenue
The industry average profit margin on a hotel
room is between 70% to 80% of the rate
If your event does not occur, the hotel does not
incur the related costs, so when the hotel asks
for 100% of revenue for cancellation, it is
attempting to achieve more than actual damages
Examples of Cancellation Fee Contract
Provisions-EXAMPLE A
“Cancellation fee is based on total
revenue including anticipated guestroom
revenue, food, beverage and meeting
room rental. If the contract is cancelled
90 days or less prior to the event,
University owes 100% of all anticipated
Take the Test on Next Page
Test Your Knowledge
Why should the University NOT agree to the
Cancellation Fee in Example A?
And the answer is..
What is Wrong With Example A?
The hotel would make more than their actual
damages under this Cancellation Fee provision;
actual damages would only be the lost profit.
Profit on a hotel room is typically between 70%
and 80% of the room rate
Food and beverage lost profit is much less; on
average about 30%-40% of the charges, so the
University is being penalized and the hotel is
trying to profit from the cancellation
What is Wrong With Example A,
There is no “mitigation of damages” requirement
in this clause. (Some courts say that there is no
longer an implied duty to mitigate damages once
you have agreed to a liquidated damages
provision, so it is important to always include a
statement that the hotel must mitigate damages;
that is, resell its rooms;)
There is no duty placed on the hotel to
document that it has suffered any loss
Let’s Review Example A
What was wrong with Example A?
Cancellation Fee Negotiation Tips
There are good reasons to say NO to
Cancellation Fees:
• University is in the market for the long term;
• The payment of cancellation fees makes any
public entity very uncomfortable;
• The hotel will have a difficult time proving it
suffered damages;
• A fair and balanced cancellation fee takes time
and energy to negotiate.
Sample of Workable Cancellation Fee
Calculation-Where to Start
Start with University standard template
cancellation language:
UT System Event Contract and Standard Hotel
Agreement, Option 2 ,Cancellation Provision
UT Austin Hotel Template, Option 2
Cancellation Provision
Review of the Cancellation Provision in
the Standard UT System Contracts
The UT System Event Contract and Standard
Hotel Agreement Cancellation Provisions are
basically the same. Here are the three most
important parts of the provision:
1. Mitigation Provision-Standard language
2. Damage Limitation and Documentation
Provision-Standard language
3. Fee Formula-Not included-must be negotiated
by the parties
Review of the Cancellation Provision in
the Standard UT System Contracts
The Mitigation Provision:
“If System cancels the event and/or room block for
reasons other than those outlined above, and Hotel
contends it has a right under this Hotel Event
Contract to a cancellation fee, then Hotel must
make a reasonable effort to mitigate its damages.”
Review of the Cancellation Provision in
the Standard System Contract
The Damage Limitation and Documentation
“In no event will any cancellation fee owed by
System to Hotel exceed Hotel’s lost net profit. If
requested by System, Hotel will provide information
and documentation verifying the cancellation fee
due. Cancellation fees, if any, will be due and
payable thirty (30) days after the meeting date.
The cancellation fee will be Hotel’s sole remedy for
cancellation by System.”
Add a Cancellation Fee Formula to the
UT System Contract-SAMPLE
“If System cancels the contract within 90 days
of the event, the maximum cancellation fee is
based on the number of rooms, less 20%
slippage (allowable reduction in room block)
multiplied by 75% of the group rate.”
This example is as basic as it gets, to be added
to the Event Contract language, not as a
substitute for any provision of the standard form
Add a Cancellation Fee Formula to the
UT System Contracts-SAMPLE
The variables to be negotiated in this sample
are :
Date that triggers cancellation fee liability
Allowable slippage (reduction) in room
The per room profit (% of rate)
The UT System Contracts are Different
Than the UT Austin Contract
Since the Cancellation Provision in the UT
System agreements differ from the UT
Austin Standard Agreement, the following
slides will provide guidance on completing
the UT Austin Contract’s Cancellation
Cancellation Fee Formula Using
Standard UT Austin Hotel Contract
When using the UT Austin Contract, be sure to
add the following clarifying statement to the
cancellation provision:
“In no event will any cancellation fee owed by
University to Hotel exceed Hotel’s lost net profit.”
Cancellation Fee Formula Using
Standard UT Austin Hotel Contract
UT Austin Standard Hotel Template provides a
chart for calculation of the cancellation fee-see
next slide
Do not offer conference room, catering or other
charges to be included in the cancellation fee
The percentages shown in the chart are not
mandatory, you can propose and agree to other
When using this chart, include a statement that
the room block is net of any allowed slippage
Cancellation Fee Table in Standard UT
Austin Hotel Contract-Option 2
Canceled # of
Days Prior to the
% of Lost Guest
Room Revenue
181 days or greater
% of Lost Conf.
Room, Catering,
Equip., and/or
Auxiliary Activities
180 to 121 days
120 to 61 days
60 days to Event
Cancellation Fee Provision-Example B:
“The University and Hotel Agree that the University
will owe a cancellation fee based upon the
anticipated revenue from 80% of the room
The rate is $125 per night with 245 room nights
What is the most the University must pay?
POP Quiz
A. $30,625.
B. $24,500
C. $22,968.75
D. Trick question, who knows
E. None of the above
And the answer is
POP Quiz
B is the right answer, but is it a fair
cancellation fee?
List the other provisions this cancellation
provision should include.
POP Quiz
What are the main variables in the
calculation of a cancellation fee?
And the answer is:
Test Your Knowledge
The costs of all rooms and food/beverage
The date of the event;
The date on which liability for the fee
The number of rooms that you can drop
before the event;
The profit percentage in each room
A, B and C
C, D and E
Test Your Knowledge
G. C,D and E
Attrition Fee Provisions
Definition: Fee charged because group did not
fulfill their total event commitment (contract
Standard Agreements have Option 1-no fee and
Option 2, allowing an attrition fee to be
calculated and charged
Hotels often ask for attrition fees on rooms and
catering charges.
Special Attention To Attrition on
Food and Beverage
Attrition provisions can get complicated
The risk to the University occurs when the
food and beverage has been overestimated
without adequate adjustment authority
In order for the food and beverage attrition
provision to work properly, negotiate the
ability to adjust the final catering
requirements close to the date of event
How to Reduce Attrition Fees on Guest
Negotiate the ability to reduce the size of the
room block by at least 20% as close to the
event as possible
The contract provision governing changes to the
room block is called the “Guest Room
Guarantee” found in the Guest Room
Accommodations Exhibit for all university hotel
Reducing Attrition Fees
Always include a provision that limits any
attrition fee to no more than actual lost profits
The Standard UT System Agreements contain
that limitation, the current UT Austin Standard
Hotel Agreement DOES NOT, so it needs to be
added to both the room block and catering
“In no event shall any attrition fee owed by
University to Hotel exceed the Hotel’s lost net
Negotiating Room Block Attrition Fees
First, know the trigger: at what percentage of
the room block guarantee will attrition fees be
Hotel agreements often allow 20% slippage
before attrition is triggered
Therefore, the starting point for the calculation
of attrition is some percentage less than the
final adjusted room block-or “event guarantee”
Hotel will want assurance that they can count
on that 80% of the guarantee, but remember,
the hotel can only claim actual damages
Negotiating Room Block Attrition Fees
Here is the standard contract language on
attrition fees, using a 20% slippage from the
final room block total as the trigger:
“ Should the actualized Room Block revenue be
less than 80% of the Room Block Guarantee,
the University agrees to pay the Hotel as
Damages, and not as a Penalty the difference
between the actualized Room Block revenue
and __% of the Room Block Guarantee.”
What % should go in the blank?
Negotiating Room Block Attrition Fees
The answer is:
Well, lets discuss it first. If you put 80% in the
blank, you have just agreed to pay all of the
net profit of the hotel for the entire room
block , regardless of how many rooms you
use. If you want to limit your attrition to a
lower amount, you need to insert less than
80% into the blank.
Negotiating Room Block Attrition Fees
The best answer is anything under 80%
This percentage is also subject to negotiation,
and the cap of actual net profit has already
been put into the agreement, so anything under
80% will generally accomplish the goal.
The reason anything above 80% is disfavored is
because 80% or more would allow the hotel to
argue that its attrition fee recovery will be lost
revenue, not a negotiated percentage of profit
on each room.
Negotiating Catering Attrition Fees
The risk of food and beverage attrition fees can
be greatly reduced by including the authority to
set the “Event Guarantee” very close to the
event so that the hotel will only purchase the
necessary amount of perishable items
Food and beverage attrition should never
include tax, service fee or other fees;
Negotiating Catering Attrition Fees
If the hotel refuses to allow substantial adjustment
of the catering event guarantee close to the day of
the event; or,
7. If the hotel requires a minimum food and beverage
expenditure commitment, the standard form
attrition provisions need to be evaluated and
modified on a case by case basis.
8. The bottom line is that the provisions must be
clear that the University will agree to compensate
the hotel no more than their actual lost profits
Test your knowledge
The following questions will test your knowledge of
the information presented in this course.
1. The cancellation fee it intended to. . .
A. Guarantee a hotel’s revenue from an event,
even if the group does not show up
B. Reduce business risks for the hotel
C. Protect the university from having to pay all of
the hotel charges when individuals do not attend
the event
D. Allow the hotel to make a profit even if the
weather turns bad
The answer is…
The answer is…
B. Reduce business risks for the hotel
(ref. Slide #5)
2. When preparing a hotel agreement
A. Use a template
B. Review the general instructions provided with
the template
C. Contact OGC with any questions
D. All of the above
The answer is…
The answer is…
D. All of the above
3. The best and preferred approach to
cancellation fees and attrition fees is to
convince the hotel they are not needed.
True or False?
The answer is…
The answer is…
Cancellation fees are a harsh remedy and
attrition fees can get complicated and hard for
the hotel to prove.
4. The hotel should never be able to recover more
than their actual lost profits in a cancellation fee
or attrition fee.
True or False?
The answer is…
The answer is…
5. I can use the approved hotel agreement
templates without making any changes in each
True or False?
The answer is…
The answer is…
You should always be sure the agreement fits
the transaction. The templates may require
supplemental provisions and edits.
6. What do I need to know in order to calculate
a cancellation fee
A. The number of rooms and rate
B. The number of rooms per night in the room
block, the rate and the hotel profit
C. The total adjusted number of rooms, the profit
percentage and the room rate
The answer is…
The answer is…
C . All that stuff
7. What is the purpose of an attrition fee?
A. Same as the cancellation fee
B. To establish the damages owed to the hotel
because of the university’s under
performance of the contract requirements
C. Allow the hotel to make an extra profit on
late arrivals
The answer is…
The answer is
Thank you for completing
this training course.
Office of General Counsel
The University of Texas System