FRANCHISE LAW
Similarly to the United States, Canada has pre-sale franchise disclosure laws in six of the 10 provinces in the country, each of which require that a “franchise disclosure document” or “FDD” be provided to a prospective franchisee at least 14 days before a franchise agreement is signed or any consideration is paid in respect of the franchise. Due to the broad application of franchise laws, certain relationships, including licensed or managed hotel arrangements, may be considered “franchises” under Canadian law, even if not so intended as such or characterised under American law. Consequences for failures or errors of disclosure include statutory misrepresentation and rescission, including the right to sue for losses. Canadian franchise laws are historically strictly construed against franchisors, with case law supporting large damage awards against hotel franchisors because of technical errors in disclosure. While the substance of disclosure is relatively similar in both countries, Canadian disclosure obligations include an overriding “materiality” concept which can require a FDD to be modified on a deal-by-deal basis to account for deal-specific facts, including, in some instances, the content of a PIP, as well as an ongoing disclosure obligations in respect of “material changes” between the provision of the FDD and the execution of a franchise agreement. Certain exemptions exist from the obligation to make disclosure, including in Ontario and British Columbia, where the acquisition of the franchise exceeds $5M
Similarly to the United States, Canada has pre-sale franchise disclosure laws in six of the 10 provinces in the country, each of which require that a “franchise disclosure document” or “FDD” be provided to a prospective franchisee at least 14 days before a franchise agreement is signed or any consideration is paid in respect of the franchise. Due to the broad application of franchise laws, certain relationships, including licensed or managed hotel arrangements, may be considered “franchises” under Canadian law, even if not so intended as such or characterised under American law. Consequences for failures or errors of disclosure include statutory misrepresentation and rescission, including the right to sue for losses. Canadian franchise laws are historically strictly construed against franchisors, with case law supporting large damage awards against hotel franchisors because of technical errors in disclosure. While the substance of disclosure is relatively similar in both countries, Canadian disclosure obligations include an overriding “materiality” concept which can require a FDD to be modified on a deal-by-deal basis to account for deal-specific facts, including, in some instances, the content of a PIP, as well as an ongoing disclosure obligations in respect of “material changes” between the provision of the FDD and the execution of a franchise agreement. Certain exemptions exist from the obligation to make disclosure, including in Ontario and British Columbia, where the acquisition of the franchise exceeds $5M.
NO “AT-WILL” EMPLOYMENT IN CANADA
There is no “at-will” employment in Canada. No Canadian employer has the ability to terminate a Canadian employee’s employment at any time without cause and without notice, except within the first three months of an employee’s employment (provided the employer has reserved that right, in writing, when it offers employment to be able to exercise it).
Employers have an implied duty of good faith and fair dealing with their employees. Consistent with this is the implied obligation to provide an employee with “reasonable notice” of termination of employment where there exists no “cause”. This entitlement can trigger substantial severance payments and is one of the key reasons that Canadian employers typically enter into formal written employment agreements with their employees.
While employers are permitted to terminate employees’ employment without notice for cause, cause has a very high threshold under a Canadian law. Under employment standards legislation in every Canadian jurisdiction, written notice of termination or pay in lieu of notice is required for the termination without cause of any employee with three months’ service or more. The statutory requirements vary across the country, but generally equal roughly a week of notice or pay in lieu for each year of service to a maximum of eight weeks.
Employment standards legislation cannot be contracted out of; attempts to do so are deemed void. The Supreme Court of Canada has set aside an employment agreement where the employee agreed no notice of termination was required. In that case, the Court required the employer to pay an amount consistent with the common law obligation to provide reasonable notice (which is typically much greater than the minimum imposed by employment standards legislation).
The common law obligation to provide reasonable notice is based on a number of factors such as age, length of service, position performed, and prospects for securing alternate, comparable employment. While there is no “rule of thumb”, awards of one month per year of service, and more, are commonplace in Canada.
Reasonable notice generally includes not just pay, but benefits, commissions, most incentives or bonus, pension, deferred payments, car allowances, continued stock option vesting, etc. The employer is required to keep the employee “whole” for the period of reasonable notice and, if paying in lieu, is required to maintain all of the compensation and benefits associated with the employment relationship, unless there is very careful drafting in the applicable plan to prevent this.
CANNABIS LAW
As of October 17, 2018, it has been legal to cultivate, posses, acquire and consume cannabis and cannabis products across Canada. Permitted products include cannabis and cannabis accessories, but excluded, until October 17, 2019, “edibles” and other cannabis-infused products, such beverages and vaporizers. The legal framework which regulates cannabis consists of federal, provincial and municipal laws and regulations. Federal legislation focuses on public health and safety, with jurisdiction over such things as production licensing, packaging, labelling and promotion and taxation. Provincial legislation focuses on distribution, retail, as well as setting rules regarding where individuals may smoke cannabis. The decentralization of jurisdiction to the provinces has created a lack of uniformity across the country. For instance, consumption in public areas is prohibited in some provinces, while others, like Ontario, permit consumption anywhere tobacco smoking is permitted, with certain exemptions (such as vehicles or where children frequent). Certain provinces, like Alberta, have created rules to permit (at a later date) the regulation of consumption spaces (such as lounges or cafes), while others have not. In Ontario, British Columbia, and other provinces, cannabis can be smoked in designated guest rooms in hotels, motels and inns. Local or municipal governments may impose further restrictions which could limit provincial rules.
DESTINATION MARKETING FEE LITIGATION – KNUTH V. BEST WESTERN ET AL…
In Canada, destination marketing programs have been established by local tourism authorities, hotel associations or other bodies, for the purpose of promoting tourism in a particular city or region. These programs raise money for their promotional activities by soliciting hotels and other tourist service providers to remit a percentage or fixed amount of their revenues to the marketing program. These contributions may be funded by the hotels in whatever manner they see fit, but usually take the form of a percentage surcharge on the quoted room rate; surcharges, referred to as Destination Marketing Fees (“DMF”), are collected voluntarily by the hotels, and have no statutory basis.
DMFs are distinguished from lodging or accommodation taxes which are also levied in some provinces over and above applicable sales taxes. These are collected and remitted to provincial authorities. Generally, municipalities in Canada lack the authority to levy local taxes on hotel rooms.
In Canada, a consumer must be provided with clear, unambiguous notice of the DMF prior to the consumer entering into the agreement, particularly as the consumer will use the pricing information to determine if he or she will enter into the agreement. The DMF must be disclosed as a separate item/charge and must not be combined with applicable taxes or any other amounts payable by the consumer.
In the ongoing case of Knuth v. Best Western et al, the plaintiff made claims based on, among other things, the following:
- the characterization (during the booking process on the hotel website) of a DMF as a tax, and
- misleading or incorrect disclosure (during the booking process on the hotel website) of the DMF or the applicable tax.
In many instances the website/software platforms being used by certain hotels could not easily set out the DMF on a separate line at the point of booking. In some instances, it is claimed that the DMF was included with the tax giving the appearance of taxes being charged in excess of the applicable rate. Further many systems could not charge the correct tax on the full room rate such that the tax was on top of the DMF.
By way of update, certain of the franchisors in the action brought a motion for summary judgement to have the action dismissed against them on the basis that they are not liable for the actions of their franchisees. In August 2019, the Court dismissed the summary judgement motion. It is expected that the next major step will be certification as a class action.
LOYALTY PROGRAM LAW UPDATE
There are recently-enacted laws in Ontario (January 2018) and Quebec (August 2019) regulating loyalty programs. Subject to prescribed exceptions, the new laws prohibit the expiry of reward points due to the passage of time alone.
The key exceptions include:
- if the customer has not earned or redeemed any points within a specified period, and such expiration is provided for in the agreement (note that in Quebec, the inactivity must last at least one year)
- rewards for a specific good or service identified at the outset (e.g. coffee stamp card)
- gratuitous points
It is anticipated that other Canadian jurisdictions will adopt similar loyalty specific legislation in the coming years.
CANADA’S ANTI-SPAM LEGISLATION (“CASL”)
In Canada, there are disclosure and consent requirements for the sending of a commercial electronic message (“CEM”). The sender must obtain explicit opt-in consent unless implied consent or an exception applies. This differs from the US “opt-out” model. The key exception is where there is an existing business relationship within a 2-year period immediately preceding sending of the CEM.
There are requirements for every CEM delivered, including:
- the contact information of the sender must be included in the CEM
- the CEM must provide an unsubscribe mechanism that is capable of being readily performed and is clear and prominent
- the sender must retain a clear and comprehensive record of opt-in/opt-out
MERGERS & ACQUISITIONS
Acquisitions of US hotels are almost always completed as asset deals unless there is a specific reason that an entity deal must be utilized. While asset deals are common in Canada, entity deals are sometimes utilized to take advantage of the lifetimes capital gains exemption. The exemption allows a Canadian individual who holds shares of a qualified small business corporation to a lifetime capital gains exemption equal to approximately CAD $850,000. There are a number of requirements in order to take advantage of this exemption including that the shares were held for a minimum of 2 years, the corporation was a Canadian-controlled private corporation, and that the corporation had during such time “active” business income. Further, land transfer tax is not payable in connection with a transfer of shares of a corporation but is payable on a transfer of assets which is further incentive to structure as a share deal.
AUTHORS
Jason Arbuck
Partner and Co-chair, Hospitality Group Cassels Brock & Blackwell LLP
jarbuck@casselsbrock.com
Frank Robinson
Partner and Co-chair, Hospitality Group Cassels Brock & Blackwell LLP
frobinson@casselsbrock.com
This article is part of our Conference Materials Library and has a PowerPoint counterpart that can be accessed in the Resource Libary.
HospitalityLawyer.com® provides numerous resources to all sponsors and attendees of The Hospitality Law Conference: Series 2.0 (Houston and Washington D.C.). If you have attended one of our conferences in the last 12 months you can access our Travel Risk Library, Conference Materials Library, ADA Risk Library, Electronic Journal, Rooms Chronicle and more, by creating an account. Our libraries are filled with white papers and presentations by industry leaders, hotel and restaurant experts, and hotel and restaurant lawyers. Click here to create an account or, if you already have an account, click here to login.
]]>The fundamentals have not changed much over the past couple of years. Continued industry fragmentation (the top brands only account for approximately one third of hotel rooms globally) coupled with low RevPAR growth environment (2.9% in 2018) – limiting organic growth – and the need to create value has made hotel brands and operators seek for consolidation opportunities. For hotel brand operators, a merger with/acquisition of another brand represents the prospect of a larger distribution platform, broader customer base and offering, expanded loyalty programs, integration synergies (i.e., cost reduction) and further expansion of their asset- light strategy through the leverage of scale. On the same note, hotel owners generally realize the benefits of such transactions too, whether in the form of lower distribution costs (i.e., increase production from brand channels vs. OTAs) or improved pricing from suppliers through the procurement of more favorable terms, to name a few. The aforementioned is clearly not without its challenges as a higher number of competing hotels from the same brand family clutter local markets and radius restrictions become a hot topic of HMA (Hotel Management Agreement) negotiations.
For third-party management companies, strategic acquisitions of smaller industry players trigger a somewhat different set of value drivers (addressed below). Unlike hotel brand operators, third-party managers do not sell franchises, or offer access to loyalty programs or a vast distribution platform. Further, third-party hotel management services have become increasingly competitive which challenges organic growth. Hence, beyond financial performance, a stronger focus is placed on ownership mix, length of HMA term, contract churn, retention and re-link.
The high-levels of M&A activity are expected to continue well into 2019 but rather than attempting to become bigger, hotel brands and third-party management companies will seek transactions that provide a strategic edge whether to fill a segment void or improve geographic presence. As such, during the first three months of the year we already saw companies such as Best Western entering the upper upscale and luxury segments through its acquisition of WorldHotels and InterContinental Hotels venturing into wellness after it acquired Six Senses Hotels, Resorts & Spas. This is much similar to Hyatt’s expansion of its luxury offering via its acquisition of Alila (which is primarily present in Asia) or the independent/lifestyle segment via Joie de Vivre, both through the acquisition of Two Roads Hospitality.
Capital players such as PE firms and sovereign wealth funds continue to seek for acquisition opportunities that extend beyond single asset purchases and into operating platform. Interestingly, this comes as no surprise given the healthy exit multiples that these buyers may be able to realize once the performance of the individual hotels has been improved and the target has realized the identified synergies – which in our experience have the potential of increasing EBITDA by 2x – allowing the owners to spin off the OpCo and create yet another valuable asset to be sold.
This article is part of our Conference Materials Library and has a PowerPoint counterpart that can be accessed in the Resource Libary.
HospitalityLawyer.com® provides numerous resources to all sponsors and attendees of The Hospitality Law Conference: Series 2.0 (Houston and Washington D.C.). If you have attended one of our conferences in the last 12 months you can access our Travel Risk Library, Conference Materials Library, ADA Risk Library, Electronic Journal, Rooms Chronicle and more, by creating an account. Our libraries are filled with white papers and presentations by industry leaders, hotel and restaurant experts, and hotel and restaurant lawyers. Click here to create an account or, if you already have an account, click here to login.
]]>Large and even medium scale acquisitions in the hospitality industry trigger these important legal questions and more. Sometimes, however, the dealmakers overlook or delay one critical area: alcohol service! How will we make sure the hotel or restaurant will be able to serve alcohol on Day One?
Careful planning and precise timing are critical. If your transaction involves properties in multiple jurisdictions, you will need to understand the existing licensing structure of each property, and the requirements and procedures for transferring the license to a new owner, noting that the procedures for doing this will not be the same in every jurisdiction. The timelines in each location, dictated by the governing licensing authorities will be different; therefore, it is essential that you work backwards from your proposed closing date to guarantee yourself enough time for licensing. Here are some initial questions to consider:
- Does the jurisdiction require licensing on more than one level (state/local)?
- Does the jurisdiction allow the transfer of a license from the seller, or will new licenses be required?
- Does the jurisdiction’s licensing process include prerequisites with additional internal deadlines which must be adhered to (e.g., publication requirements)?
- Does the jurisdiction allow a procedure for temporary licensing if permanent licensing cannot be completed by the closing date?
- Does the jurisdiction allow a “master file” when there are multiple properties licensed to one entity inside the same jurisdiction?
The answers to these questions will provide you with a rough timeline to work with. The next thing you need to be prepared for, however, is the inevitable. Something will go wrong and you will need to adjust your timeline. That means that is even more important for you to build in extra time. For example:
- The kitchen failed the health inspection.
- The license cannot transfer because the seller has sales tax due and unpaid.
- The officers of your licensed entity have all gone overseas for vacation and cannot be fingerprinted.
Wait a minute….the officers need to be fingerprinted? What officers?
Liquor license applications in all states require some level of fingerprinting of the officers disclosed on the liquor license application, as well as disclosure of personal information like physical description (height, weight, eye color), bank account references, and social security numbers. Similar information may be required for spouses of the disclosed individuals. There are several reasons that government agencies request this information, but the most important one is that the state has an interest in knowing that the individuals running a regulated business are who they say they are. The number of individuals to be disclosed will depend on the corporate structure of the applicant, and, depending on the nature of the transaction and the enforcement policies of the licensing jurisdiction, the officers of parent companies or holding companies related to the applicant may also need to be disclosed. It will be important for you to understand at the beginning of the licensing process how many individuals need to be fingerprinted and submit personal questionnaires.
Timing is paramount when acquiring any business with a liquor license. These introductory tips apply in any jurisdiction; however, note that each licensing authority has different rules and communication with those government agencies about your transaction so that you understand the expectations will be key to a successful and timely transaction.
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]]>On November 16, 2015, Marriott International announced its $12.2 billion acquisition of Starwood Hotels and Resorts Worldwide. The deal is the largest acquisition in the hospitality industry since Blackstone Group bought Hilton Hotels & Resorts for $26 billion in 2007.
If the deal goes through (as is expected in mid-2016), the combined company will emerge as the largest hotel company in the world, encompassing 30 hotel brands, 5,500 hotels under management, and 1.1 million hotel rooms worldwide.
According to Fitch Ratings, this acquisition marks the beginning of a possible increase in M&A activity in the hospitality sector. This Article briefly explores this trend and its potential implications on the industry, including the impact on owners, franchisees and hotel developers.
Increased Hotel M&A
The predicted rise in hotel consolidations is largely attributed to the sector’s evolving landscape. In addition to expected competition among the established industry players, large hotel chains are increasingly facing competition from popular new alternative lodging arrangements such as Airbnb and other companies that focus on short-term rentals. Experts explain that scale is particularly important in the hospitality industry, with the most profitable companies being those with the most rooms in the most locations.
The rapid growth and success of Airbnb has seemingly also had an effect on companies ancillary to the hotel industry, such as travel websites, as evidenced by Expedia’s recently announced takeover of Orbitz Worldwide, Travelocity, and HomeAway (a site that allows owners to rent out their homes for longer stays).
Many experts believe that the sheer size and breadth of the Marriott holdings following the acquisition could prompt other hotel companies to join forces with smaller operators to avoid being outpaced in the market. This transaction will likely cause other companies to consider mergers when they had not considered them an option previously.
Fitch Ratings also suggests that REIT privatizations will play a large role in upcoming hospitality acquisitions because of better access to low cost debt. This prediction comes largely in response to Blackstone’s announcement in September that it had finalized an agreement to acquire lodging REIT Strategic Hotels & Resorts in a deal worth approximately $6 billion.
Implications for Hospitality Players
While the Marriot-Starwood deal is certain to impact shareholders of both companies (in fact, it already has, with Marriott shares rising and Starwood shares falling after the announcement), the deal, and others like it, will likely also have a significant effect on hotel owners and developers.
- Owners Face Fewer Franchise Options
As hotel companies merge to form larger hotel conglomerates, the differences between individual hotels will fade. These new consolidations may offer less flexibility and unique character differentiations as newly merged hotel chains strive to achieve uniformity across their locations. Owners looking to meet specific demands of local markets will find fewer options that truly meet their unique business needs.
- Owners Lose Leverage
Fewer hotel companies also means less competition. Therefore, in addition to having fewer choices, with less players in the market, owners will face a reduction in bargaining power when choosing a franchisor and negotiating a franchise agreement. This problem could affect even those owners with hotel properties in highly desirable areas.
- Opportunities for New Market Entrants
Although this trend towards increased M&A will likely have some negative implications for the industry, this shift may also open up opportunities for new entrants into the market. As the larger brands merge and create less specialized, more uniform franchises, new, smaller hotel brands may have the opportunity to gain a market share by catering to the unique demands of owners looking to maximize value in individual locations and among new consumer classes.
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Practical Law Real Estate offers hotel owners and developers, and their counsel, a variety of resources related to hotel property transactions:
Practical Law Real Estate also features Toolkits comprised of resources to assist counsel to purchasers and sellers in corporate stock, asset acquisition and merger transactions, where real estate assets, among other assets, are involved in the transaction. These Toolkits contain resources to assist counsel at every stage of the transaction, from due diligence to post-closing:
Practical Law provides legal know-how that gives lawyers a better starting point. Our expert team of attorney editors creates and maintains thousands of practical resources across all major practice areas. We go beyond primary law and traditional legal research to allow you to practice more efficiently and improve client service.
To learn more about Practical Law, look for them at The Hospitality Law Conference 2016
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