Hospitality Performance Tests In the Real World

Hotel management agreements often contain language permitting a hotel owner to terminate if the hotel’s performance fails to meet certain financial metrics. This provision, colloquially referred to as the “performance test,” is touted as a form of protection for owners by providing a right to terminate (or to receive a “cure payment”) if the hotel underperforms.
But the reality is performance tests are generally structured to make them difficult, if not impossible, to fail, leaving hotel owners without the financial protection they thought they bargained for — or worse.
In fact, some hotel operators have attempted to use the existence of a performance test as a defense to a claimed breach, arguing that a hotel owner cannot claim a breach by the operator if the performance test has not been triggered.
In this article, we discuss how performance tests function in the real world, recent case law interpreting performance tests, and the manners in which performance tests can and cannot provide additional protection to hotel owners.