A peek at a sub-par PIP performance

Pen on a business contract
Before signing any legal agreement, a hotel must ensure they will actually be able to follow though on whatever that contract requires. Photo credit: SARINYAPINNGAM / iStock / Getty Images Plus

The Indianapolis Airport Authority (hereinafter “the authority”) owned property with a hotel near the airport. It leased the facility to Indiana Hotel Equities (the hotel). The rent was based on gross income from room rentals and alcoholic beverages. The hotel was obligated to make certain improvements and to contract with a national chain of its’ choosing that met a three-star minimum quality level.

The required renovations included “well-appointed rooms; decorated lobby area; sit-down restaurant offering breakfast and dinner; a full-service bar or lounge area serving beer, wine and distilled liquor; fitness center; and swimming pool.” Additionally, the lease included a product improvement plan to prepare the facility to qualify for a national franchise. The PIP included numerous additional upgrades such as repairing ceiling tiles, carpets and parking areas, installing new artwork and decorative lighting, ensuring a certain level of internet access, updating signage, and installing new bedding and mattresses. The agreed completion date was Dec. 31, 2016.

As of New Year’s Eve, the hotel had failed to install a full-service bar or lounge or a swimming pool, nor had it completed the PIP or obtained national branding. The airport authority sent a lease cancellation notice to the hotel that included a period of time to cure the defects. The hotel still did not make the necessary renovations, prompting the authority to seek an eviction in court.

Despite the legal proceedings, the hotel continued to pay rent. The authority used a remittance processing service that required rent checks to be deposit to a lock box maintained by Chase Bank. The authority tried to reject the checks but the bank was unable procedurally to do so.

In court, the hotel contested the forfeiture of the lease, claiming it had made most of the upgrades and the unfulfilled obligations were not sufficiently significant to justify termination. Gong! The court rejected that argument saying the hotel’s deviations from the required renovations “go to the heart of the lease,” particularly the failure to obtain national branding. Further, the court surmised that a swimming pool likely would have enlarged occupancy rates and alcohol sales, thus increasing the amount of rent.

The hotel also argued that the authority waived its right to end the lease by accepting the rent checks. Gong! Not surprisingly, the lease contained a clause that stated acceptance of checks following default by the hotel would not constitute a waiver of the default. Further, the authority’s attempt to stop receiving the checks disproved any intent of overlooking the default.

Upshot: The hotel has to pack its bags.

The lessons are clear. Contracts have consequences. The terms are legally binding. Don’t promise what you can’t deliver.

Karen Morris is a lawyer, municipal judge and distinguished professor at Monroe Community College in Rochester, N.Y., where she teaches hospitality law. Contact her at [email protected]