Mark Pestronk
Q: My agency signed a contract with a hotel for 100 rooms for a group that we handle every year for a convention at the hotel. In years past, the group had no trouble filling the rooms, but this year only 60 rooms were reserved. In our contract with the hotel, there is a cutoff date that is 30 days before arrival. The cutoff date clause states, "Reservations by attendees must be received on or before Jan. 9, 2017 (the cutoff date). At the cutoff date, the hotel will review the reservation pickup for the event, release the unreserved rooms for general sale and determine whether or not it can accept reservations based on a space-available basis at the group rate after this date." On that date, the hotel took the 40 unreserved rooms out of our room block, and we assumed that we would not have to pay for them because they were "released." Now the hotel is sending us invoices for $40,000 for the unsold rooms. Do we owe this money? Does it matter if the hotel was sold out on the dates in the contract?
A: You have to examine any attrition and cancellation clauses in the contract to see whether "released" means that you don't owe penalties. However, if the contract is like most standard hotel-issued contracts, you do indeed owe the money.
I assume that the contract is between your agency and the hotel and that the group itself is not a party to the contract. This makes your agency liable for any applicable penalties. I also assume that the contract does not state expressly that you are signing as an agent for the group. If it did, then the group would be liable for the penalties instead of your agency.
Most hotel contracts have both attrition and cancellation clauses. "Attrition" means reduction in numbers, and an attrition clause covers what happens if you don't have enough group members to fill all the rooms but still want to go ahead with the rooms you have.
A typical attrition clause states that you will owe the room rate including tax for each unused room below a stated percentage of the group of rooms, which is typically called the "room block." For example, one contract from my file states, "If your actual usage is less than 80% of the room block, you agree to pay, as liquidated damages and not as a penalty, the difference between 80% of the room block and your actual usage, multiplied by the group room rate, plus applicable taxes."
Some contracts do not have an attrition clause, and your liability for unused rooms would be found in the cancellation clause. The clause may simply state that you will owe the room rate and taxes for all unused rooms, including a case where all of the rooms are unused.
An important principle of contract interpretation is that all parts of the contract must be considered together in order to interpret a single part. Here, for example, the attrition clause would apply to all rooms, released ones as well as unreleased ones. The attrition penalties are liquidated damages, which means that they apply regardless of actual damages as long as the formula was a reasonable estimate of the hotel's potential loss when the contract was signed. So if the hotel is sold out, the penalty still applies even though the hotel has no loss.
In the future, if you want to ensure that the attrition clause does not apply to released rooms, try to revise the agreement to specify that "released rooms will be deducted from the room block for purposes of the attrition and cancellation clauses in this agreement" or simply "the group will have no liability for released rooms."