SHERIDAN, WYOMING – Mar. 5, 2025 — The hospitality industry has become increasingly crowded as brand companies continue expanding through mergers, acquisitions, and organic growth. While this expansion provides hotel owners and consumers with more choices, it also brings an unintended consequence: multiple brands within the same company often share similar room counts, amenities, and price points, leading to internal competition. Despite this overlap, such competition may not necessarily violate the area of protection (AOP) provisions in franchise or management agreements. As a result, hotel owners face potential revenue reductions, raising questions about the effectiveness of AOPs in shielding them from intra-company competition.
The Role and Limitations of AOPs
AOPs are designed to assure hotel owners that the company behind their brand will not introduce a competing property within a predefined area. However, the effectiveness of these provisions is increasingly being called into question due to several key factors:
- Brand-Specific Limitations: AOPs are typically restricted to the subject hotel's specific brand, rather than encompassing all brands under the parent company. This leaves hotel owners vulnerable to competition from newly introduced brands targeting the same market segment and price range.
- Chain Acquisition Loopholes: AOP language often allows companies to acquire entire hotel chains, even if these properties fall within an existing hotel’s AOP. This provision enables companies to expand their footprint without violating contractual protections.
- Impact Study Challenges: When an owner challenges a new hotel development, the company may conduct an impact study. However, these studies are often performed by consultants with ongoing relationships with the brand, leading to concerns about bias. Additionally, owners may be required to pay for these studies but might never receive access to the full report or an opportunity to contest its findings.
- Limited Legal Recourse: Hotel owners face significant hurdles in proving AOP violations. Litigation is generally prohibited, and arbitration often favors the company. Even when owners win, determining the appropriate remedy remains complex.
Enhancing AOP Protections
Given the rapid pace of brand proliferation, AOPs must evolve to provide hotel owners with stronger protections. Several measures could improve the effectiveness of these provisions:
- Broader Brand Protections: AOPs could be expanded to restrict the development of any new hotels within the company that share key characteristics with the existing property, such as room count, amenities, target market, and chain scale price points.
- Stronger Owner Safeguards: Conditions could be added to the chain acquisition exception, requiring the company to present proposed acquisitions to an owner advisory council. This council could have the authority to impose obligations on the company, such as compensation for affected hotels.
- Transparent Impact Studies: Owners should have a role in selecting impact study consultants, and studies should be conducted jointly by the owner and the company, with costs shared equally. Additionally, owners should have the opportunity to review and challenge study findings before they are finalized.
- Termination Rights and Liquidated Damages: AOPs could include an owner’s right to terminate the agreement or claim liquidated damages (LDs) if a competing hotel is introduced. LDs could be calculated based on lost revenue, diminished hotel value, or a fixed compensation model.
- LD Waivers for Voluntary Termination: If a competing hotel opens within the AOP, the LDs typically required for an owner’s voluntary termination of the agreement could be reduced or waived, providing a more balanced approach to brand expansion.
While brand companies naturally aim to grow their portfolios, many existing AOPs no longer fulfill their original purpose of protecting hotel owners from intra-company competition. However, rather than discarding AOPs entirely, the industry should consider revising these provisions to ensure fairness and mutual benefit for all stakeholders. By implementing stronger safeguards, greater transparency, and enforceable remedies, AOPs can better serve hotel owners while allowing companies to expand responsibly.
For more information, please visit.