As of March 11, 2020 the World Health Organization declared COVID-19 as an international pandemic, which besides the unfortunate health implications, it will produce a wide range of legal and economic impacts and challenges.
Taking into consideration the current situation resulting from the COVID-19 and in advance to the anticipated legal effects, Basham´s Hospitality Group supports our clients in the implementation of a comprehensive analysis of the statutory and contractual obligations related to the day to day operations comprising hospitality, leisure and real estate matters, including all associated potential legal impacts.
In consideration of the above, we hereby recommend our clients the following to do actions to be implemented as soon as practicably possible:
1. Review of existing contracts:
Given this pandemic, it is possible to encounter direct or indirect effects that could be considered as breaches of the obligations derived from existing contracts, such as lack of personnel, delivery delays, production stoppage and breaches of commitments with third parties, among others.
We recommend clearly identifying all existing contracts and catalog the levels of impact in the flow of operations or within the day-to-day management of the companies. The foregoing will allow our clients to be able to take the necessary precautions and legal measure against a potential breach.
2. Acts of God or Force Majeure provisions:
In connection with fortuitous events and force majeure matters, we emphasize the importance of analyzing the Acts of God or Force Majeure provisions that will be applicable as a matter of contractual provisions or derived from a statutory point of view.
As a general rule, if it is not possible to fulfill the obligations of one of the parties under a contract, such as the provision of services and/or delivery of goods, the party that fails to comply would be responsible for such breach. However, if said breach is derived directly from events outside the control or scope of the breached party, there is a possibility that the breached party may not be liable for the responsibilities or sanctions that would derive from its breach as a result of Acts of God of Force Majeure events, since they constitute unforeseeable, unavoidable and out of control actions.
3. New Contracts:
On the other hand, it is recommended to have a comprehensive legal advisory in the event our clients are in the process of negotiating new contracts.
Given the current situation, it is necessary to include within the corresponding new agreements qualifications and possible contingent procedures to protect the interests of the parties.
4. Lease Agreements:
The effects of the COVID-19 situation may have impacts on current Lease Agreements, such as related to payment of the rent and the use of the leased premises as well as regarding the renewal of the real estate permits, such as land use license, operational licenses or additional applicable governmental permit as well as matters related to payment of rent and use of the leased premises.
Further, Lease Agreements with a variable rent component, may be affected as a result of failure to obtain a minimum of net sales; due to the lack of commercial activities derived from an official or unofficial lockout; which in some cases can cause the early termination of an agreement.
It is strongly convenient to review and list the obligations that may be breached and anticipate its compliance, for example, to obtain prior to an official lockout the required documents to be up to date and avoid a closure or a fine; and to negotiate with the counterparty a fixed rent during the contingency period. In view of the above, we recommend reviewing the provisions included within the Lease Agreement currently in place, in detail.
5. Construction Agreements:
As a condition precedent for the development of a construction, a wide catalogue of permits and authorizations are required to be obtained, including without limitation constructions permits and zoning licenses. Taking this into consideration, it is necessary to anticipate a possible closure of federal, state and municipal authorities regarding the obtainment and maintenance of the required permits and authorizations on a timely basis.
Furthermore, certain delivery and compliance terms may be delayed due to the absence of personnel or obtention of raw materials, in addition to a stoppage of the works.
Such delays may constitute grounds of termination of the construction agreement. Accordingly, it is important to review the applicable notice periods and potential suspension and compliance provisions. Finally, it is important to review if an insurance policy will be applicable under these circumstances.
6. Specific Hospitality and Leisure Agreements:
Given the Covid-19 outbreak, one of the most affected industries will be Hospitality and Leisure Industry. Hence, as Franchise and Management Agreements are the most common hospitality agreements in place within this industry, please find below certain matters to take into consideration and recommendations:
Hospitality’s Franchises Agreements.
It is noteworthy to review the corresponding Franchise Agreement to confirm the provisions agreed within the Agreement as well as those applicable by law that shall be adapted to the corresponding health and safety measures recommended by the World Health Organization, as well as by the competent Mexican authorities.
At last, the franchise must comply with all labor regulations and have a contingency plan for absence of personnel, so it can continue with the level or service, quality and uniformity agreed within the corresponding Franchise Agreement, considering that quality of the service, prestige and use of the trademark are some of the most important aspects governed by a Hospitality´s Franchise.
Hospitality’s Management Agreements.
It is important to review the terms and provisions that may be affected as a result of the COVID-19 situation in connection with Management Agreement, including without limitation, the following aspects: (i) Brand Systems, (ii) Hotel or Leisure Facility operations, (iii) Suspension or termination of the Agreement, (iv) Labor capabilities and training of the Hotel or Leisure Facility personnel, (v) Legal aspects of the management fees, incentive management fee, operational fees, brand system fees and any applicable management fees.
For further queries do not hesitate contacting our Hospitality Team at Basham.
Daniel Del Rio
Juan Jose Lopez de Silanes
Mexico City, March 23rd, 2020.