Luxe Hotels in a Battle for Control

Jonathan D. Glater|The New York Times

It is not often that luxury hotel owners find themselves locked out of their own properties, but that is what the lawyers for owners say has happened at the Four Seasons Resort Aviara, north of San Diego.

Four Seasons Avaria

This month, Four Seasons added security, including personnel at checkpoints, to head off owners and their representatives. The owners have accused Four Seasons of mismanagement, tried to fire the company and named a replacement operator — who so far has not set foot on the property.

The two sides seem to agree on only one thing — that, as Elizabeth Pizzinato, vice president for brand communications at Four Seasons, put it, “this has really been unprecedented.”

But there are almost certainly going to be more such hotel wars. Owners and operators are fighting more often and more intensely as the economic downturn reduces the number of guests and forces down rates while owners struggle to cope with debt payments on their multimillion-dollar properties, say industry analysts.

The disputes have usually not become public because contracts between hotel operators and owners require arbitration, but some have grown so contentious that, like the one involving the Aviara resort, they have ended up in open court.

“There are things that brand managers do that really annoy owners,” said Bjorn Hanson, associate professor of hospitality and tourism management at Preston Robert Tisch Center for Hospitality, Tourism and Sports Management at New York University.

For example, luxury hotel operators typically do not want to reduce their rates because doing so may hurt the brand’s image, Mr. Hanson said. Nor do they want to reduce costs by cutting back on amenities — even though keeping multiple restaurants open 24 hours a day, for example, may be very expensive — because such services justify the brand’s premium.

The economic downturn has affected high-end resorts far more than less costly hotels. In the first three months of the year, occupancy at luxury hotels was down 16.3 percent from a year ago, compared with a 10.9 percent decline for the industry as a whole, according to Smith Travel Research, a private research firm that tracks the lodging industry.

Those declines have put pressure on owners of luxury hotels, usually investment groups, wealthy individuals or companies specializing in lodging. Many owners took out loans to buy, finance or remodel their properties when occupancy rates were higher and credit was easy, but now loan payments can be crushing and borrowing difficult.

To add insult to injury, in the current climate no business traveler wants to put the name of a high-end resort on an expense report.

The economic problems for luxury hotels are compounded by the competing interests of property owners and operators, who are tied together by contracts that can span decades and that may give the operators little incentive to cut costs.

The contracts are supposed to give owners the benefits of a hotel operator’s reputation and its marketing and management prowess. But provisions in those operating agreements also usually require owners to cover the costs of operating the hotels, in addition to paying the hotel manager a fee, often a percentage of gross revenue.

“It gives the operators all the benefits of ownership with none of the burdens,” said James R. Butler Jr., a lawyer at Jeffer Mangels Butler & Marmaro in Los Angeles. “It pushes to the owner all of the costs — the capital costs of buying, maintaining and operating the property — and lets the managing companies take most of their money off the top.”

Such an arrangement may give the hotel management company little reason to worry about keeping costs down, Mr. Butler said, or about how much is left in profit to owners. But without that profit, owners who borrowed to pay for their properties may have a hard time repaying loans.

Owners have been emboldened to sue management companies by judges’ favorable decisions in owner-operator disputes in the last decade, said Hushmand Sohaili, a lawyer in the Los Angeles office of Akin Gump Strauss Hauer & Feld.

“The balance of power in the relationship has shifted to owners and lenders and away from management companies,” he said.

The owners of the Turnberry Isle Resort and Club in Aventura, Fla., filed a lawsuit in April against their operator over nearly $1.3 million in what they called “unsubstantiated” fees.

More conflict

Stuart Z. Grossman, a lawyer for the owners, said that instead of providing information to back up the fees, the operator, Fairmont, started an arbitration proceeding. Now the operator and the owners are engaged in a battle over who will preside over that proceeding; the next hearing is scheduled for June 4 in federal court in Miami, where a judge will interview prospective arbitrators.

“We don’t feel that they are marketing, managing, doing the things that it takes to make the hotel successful,” Mr. Grossman said.

The owners invested $133 million in upgrading the resort, which they bought in December 2005, but the hotel still lost about $13 million in 2007, according to the owners’ complaint, and the hotel “materially underperformed its competition.”

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A spokesman for Fairmont declined to comment, citing company policy.

But the dispute between Turnberry’s owners and managers has not escalated to the point of the battle over the Aviara. The owners of the Aviara resort started an arbitration proceeding against Four Seasons in March, according to court documents, and then tried to terminate Four Seasons as hotel manager. (The hotel also has time-share properties separate from the resort, but those are not part of the dispute, according to owners’ representatives.)

The owners accused Four Seasons of “failing, among other things, to operate the hotel in a financially efficient and cost-effective manner.” They also claim that Four Seasons blocked access to the hotel’s books and financial records.

“Four Seasons sent guards to literally blockade the doors to the offices where the books and records are maintained,” said William A. Brewer III, a lawyer at Bickel & Brewer, representing the hotel’s owners. “I’ve never seen anything like it.”

According to Four Seasons, the real issue in this case is that the owners took on too much debt. Ms. Pizzinato said that the company has been properly managing the Aviara resort.

“The brand stands for a certain level of quality and service, and we don’t compromise on that,” Ms. Pizzinato said. “But we also believe we’re very prudent financial managers because we are managing on behalf of somebody else.”

A hearing on the dispute is scheduled for Wednesday.