Attrition Damages – What is the Right Calculation?

Lawyers love to share their opinions. We thrive on controversy too. With this in mind, I welcome the opportunity to blog about tough issues facing the meeting industry. Some of these issues have right or wrong answers, but most do not. My goal is to discuss the pros and cons of each situation, and to make meeting professionals think about what’s fairest for you and your industry partners.

Damages for guest room attrition are calculated several ways. The most common in meeting contracts is a formula where the host pays a per-room amount for each empty room in the room block below the minimum commitment. Sometimes the host is obligated to spend a certain minimum dollar amount on rooms and F&B, and must pay the hotel for every dollar below minimum spend.

So far, so good. An issue arises, however, when we consider exactly how much a host must pay for that empty room, or when she doesn’t meet the F&B minimum.

There are two different scenarios. Some meeting contracts call for the host to pay the entire room rate for that empty room–so the attrition fee for that $200/night room would be $200. Other meeting hosts and hotels agree that only a portion of the room rate–often 70 percent–would be charged for that same room. Or, if attrition is determined based on a minimum rooms spend, only 70 percent of the amount by which the rooms revenue misses that minimum spend.

Which option is right? And aren’t the parties free to negotiate whatever they want into their contracts?

The answer to the latter question is yes and no. A meeting host and hotel may agree on whatever they wish, and it will hold up so long as no one complains, but if a dispute goes to court then a judge may think differently.

Attrition damages are the meeting industry’s remedy for breach of contract. The group did not perform by filling its contractual room block, so it must pay. The amount of damages is compensatory, meaning that the money paid should be the amount required to make the hotel whole so it suffers no loss. On the other hand, the payment should not make more money for the hotel than if the empty rooms were occupied by group guests.

So which is right–100 percent of the room rate, or 70 percent or another percentage? It’s probably the percentage method. If a hotel room isn’t filled, the property saves money on expenses such as housekeeping, water, electricity, and other resources used by overnight guests. When the entire room rate is charged for an empty room, the property saves these expenses but still gets paid in full, so the hotel ends up with more in its pocket than it would otherwise earn.

Some properties defend a 100% charge by claiming that an empty room loses more than just the room rate for the hotel. A canceling guest also doesn’t spend on dining, the spa, and other amenities. That may be true, but counting those charges is only appropriate if they are included in the room rate or reserved in advance–which is not usually the case. Otherwise these charges aren’t mandatory for a group guest, and shouldn’t be charged to the group if the room goes empty.

So what should a planner and hotelier do?  From a legal standpoint the “percentage of the room rate” method is easier to enforce. Can you agree by contract to pay more? Of course. The challenge is defending that contract in court. Both parties might sign the contract and use legal terms like liquidated damages to make the attrition payment look more legitimate. Still, a judge may ask the hotel to show that it’s entitled to 100% of the room rate. And unless the hotel can prove that it saved no expenses when the room went empty and didn’t rebook, that can be difficult to prove.

Final Note: This blog is not “legal advice”; rather, it’s a discussion intended to make you think and draw your own conclusions. Legal advice can only be rendered after a discussion of your particular circumstances with an attorney competent in meetings law.
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