AAHOA 2008 Progress Report on Choice Hotel 'Fair Franchising' Compliance

Every month, for the past year, I have reviewed each of AAHOAs 12 Points of Fair Franchising and reported on them on the Hotel Interactive website.  At the recent AAHOA Convention in San Antonio (March 26-29), AAHOA released its long-awaited Performance Appraisal Report (PAR) which evaluates the franchise agreements of five leading franchise companies including Accor, Carlson, Choice, La Quinta and Wyndham.  The object of this report is to determine how they complied with the 12 Points of Fair Franchising.

Why is this important? Since AAHOA members own approximately 13,500 franchised hotels and have long-term franchise agreements with their franchisors, fair franchising is an essential factor in profitable operations.

In preparing its PARs, AAHOA utilized the Uniform Franchise Offering Circulars (UFOCs), actual franchise agreements and related business policies and procedures.

Following preparation of draft versions of the Performance Appraisal Report, AAHOA provided each franchisor with a copy of the report and an opportunity to comment on it.  The comments received by AAHOA were considered and, if pertinent, were integrated into the Performance Appraisal Report.

This long-awaited (and some would say long-overdue) report enables franchisees to better understand the provisions of the franchise agreements so that they can make informed decisions before signing a franchise agreement and committing to a long-term franchise relationship.

Here is a summary of the performance appraisal of Choice Hotels International as compared to AAHOAs 12 Points:

Point 1:  Early Termination and Liquidated Damages1(a) Most franchisors assess liquidated damages at unfair and punitive rates often 36 to 60 months of royalty fees.  AAHOA states that franchisees should only have to pay 6 months of royalty fees.CHOICE POSITION:  Although Choice admits that it routinely negotiates discounts to liquidated damages with franchisees seeking an early termination, it does not provide for such consideration in writing in its UFOCs.

1(b) Windows Provisions -  Most franchise agreements contain “window” or additional termination right provisions which allow the parties to terminate the agreement on specific anniversary dates (e.g. on the fifth, tenth or fifteenth anniversary) without having to pay liquidated damages.  Unfortunately, many franchisors have included “gotcha” clauses in their franchise agreements which prevent early termination if the franchisee encountered monetary or operational problems at any time after the opening of the facility.

CHOICE POSITION:  Choice allows its franchisees to exit on the 5th, 10th and 15th anniversary dates and has not adopted any of the unfair “gotcha” clauses referred to above.1(c)  Early Termination for Underperforming Properties -   Franchisors should allow a franchisee to terminate the agreement without penalty if the property operates at 50% or less occupancy for a period of 12 months.CHOICE POSITION:  Choice does not include any provisions in its franchise agreements that allow underperforming properties to exit without penalty.  Although Choice identifies a hotel’s historical performance as a factor that might be considered in determining the amount of liquidated damages which will be due.  Choice’s UFOCs do not contain any written assurances that an underperforming property will be allowed to exit without penalty.2.  Impact/Encroachment/Cross Brand Protection   All franchisors should grant each of their franchisees (over the term of the agreement) contractual rights to a geographic “area of protection” (AOP) in which the franchisor will not allow another property to operate with the same or similar brand name as the franchisees hotel.CHOICE POSITION:  Choice generally does not grant an exclusive area of protection to its franchisees except for Cambria Suites and Suburban Extended Stay Hotels.Choice permits an existing franchisee to request an impact study when they receive an application for a proposed franchise in the same market area.  The impact study must be done by a consultant on Choice’s approved list and paid for in advance by the existing franchisee.  If the impact study denies the application, Choice will reimburse the existing franchisee.3.  Minimum Performance & Quality Guarantees   If a franchisee’s hotel is not able to maintain certain occupancy levels over a designated period and has not received a minimum level of reservations, franchisee should be able to terminate the agreement without penalty.CHOICE POSITION:   Choice does not offer any commitments concerning the performance or quality levels of its brand name hotels or the number of reservations that will be delivered through its system.4.  QA Inspections/ Guest SurveysCHOICE POSITION:   Choice has adopted a policy that provides for fair and impartial quality assurance (QA) inspections and an appeals process if there is a dispute.5.  Vendor ExclusivityCHOICE POSITION:  In its UFOCs, Choice offers an explanation concerning its endorsed vendor program, and the manner in which it handles the revenues it receives from such vendors.Further, in response to the PAR, Choice stated that it “does not generally mandate that franchisees source products or services from a particular vendor.  Instead, certain standards and specifications are mandated for the purpose of maintaining brand consistency and quality.  Generally, Choice solicits feedback from the elected members of the franchisee associations before implementing new brand standards or vendor requirements.  In addition, Choice typically attempts to identify 3 or more vendors who are capable of meeting most brand standards.”6.  Disclosure and Accountability  CHOICE POSITION:   Choice provides its Franchise Advisory Councils (FACs) with audited financial statements concerning the expenditure of marketing and reservation fees, consults with the FACs on the marketing campaigns and spends a relatively small amount of the fees on “general and administrative costs.”7.  Maintaining Relationships with FranchiseesCHOICE POSITION:  Choice’s Franchise Advisory Councils are independent and elected by franchisees themselves. In addition, over the past several years, Choice has been very responsive to AAHOAs concerns and has worked with AAHOA to address disputes involving its members.8.  Dispute Resolution   Franchisors should agree to participate in a non-binding mediation.  If mediation is unsuccessful, the dispute should not be submitted to binding arbitration unless all the parties agree to do so.If binding arbitration is not agreed upon, any party should be free to pursue its claims in a court of law.  There should be no waiver of the right to a jury trial, no caps on the amount of damages or punitive damages.CHOICE POSITION:   Choice mandates that all disputes be resolved through final and binding arbitration.  AAHOA urges Choice to eliminate its mandatory arbitration provisions and offer franchisees fair and reasonable methods of resolving disputes.9.  Venue and Choice of Law Clauses   The party pursuing its claims in a court of law should do so in the country and state in which the subject facility is located.CHOICE POSITION:  Choice mandates that the parties submit to binding arbitration and that the arbitrator will apply the substantive laws of Maryland.10.  Franchise Sales Ethics and Practices   All franchisors should mandate fair and honest selling practices among their salespersons and agents.  It is unfortunate that many first-time franchise applicants do not fully understand that the agents of the franchisors will sometimes make oral promises that are not included in the franchise agreement.CHOICE POSITION:  Although Choice states that all of its associates are subject to a corporate ethics policy that mandates “good faith and fair dealing” in all corporate transactions, Choice does not include a “good faith and fair dealing” provision in its franchise agreements concerning its franchise sales ethics and practices.11.  Transferability

• Transfer fees should be fair and reasonable (i.e., generally no more than $1500).
• There should be no fees for a transfer to a spouse, child, parent, sibling, niece, nephew,  descendent, spouse’s descendent or other family member.
• There should be no fees for a franchisees buyout of other shareholders or partners.
• In the event of a requested transfer, the franchisor should not demand an extensive renovation of the hotel.  Any required renovations should be limited to those specific items identified in the last two Quality Assurance inspection reports issued prior to the requested transfer.

CHOICE POSITION:  AAHOA believes that Choice has been in the process of working with its franchise advisory councils to revise its fair franchising policy.  In the most recent draft dated January 2008, Choice added a new provision entitled “Family Transfers” in which it stated that if Choice does approve a transfer to a close family member, Choice will waive its standard transfer fee.12.  Sale of the Franchise System Hotel Brand   The new franchisor should maintain the same or higher level of quality as the prior franchisor owners and offer assurances that the transition is an smooth as possible.

CHOICE POSITION:  Choice provides in its UFOCs and franchise agreements that it can sell the subject franchise system to any person or legal entity and it does not offer any assurances that it will attempt to work with the new franchisor owner to ensure that the transition is as smooth as possible or to protect the rights of its franchisees.

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Related readings:

• Fair Franchising: Venue and Law Clauses, Part 8
• Fair Franchising: Dispute Resolution, Part 7,
• Fair Franchising: Maintaining Robust Relations, Part 6
• Fair Franchising: Disclosure & Accountability, Part 5
• Fair Franchising And Vendor Exclusivity, Part 4
• Fair Franchising Is Not An Oxymoron, Part 3
• Fair Franchising Is Not An Oxymoron, Part 2
• Fair Franchising Is Not An Oxymoron, Part 1

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Stanley Turkel, MHS, ISHC, is a New York-based hotel consultant specializing in hotel franchising issues, asset management and litigation support services. He is also available for due diligence studies for an acquisition, a third-party audit of a marketing or operational problem, an expert review of a management contract or a franchise agreement, or litigation support. Mr. Turkel is a member of the International Society of Hospitality Consultants and can be reached at 917-628-8549 or email at stanturkel@aol.com