Four Seasons lawsuit underscores luxury hotels' troubles

When the owner of a five-star resort hotel in Southern California decided to dump its property manager earlier this year, it was just the beginning of a very public and ugly divorce.

The dumpee is none other than the Four Seasons, a brand synonymous with luxury. And it is battling to stay on managing the Four Seasons Resort Aviara near San Diego.

Last month, the hotel's owner sought a temporary restraining order in federal court barring the management from entering the premises.

The case, now in arbitration, underscores how the dismal economy has put profit and cost-containment pressures from hotel owners in direct conflict with hotel operators' vision of how to run high-end enterprises.

Its outcome could have implications for luxury hotels nationwide, including the Four Seasons at 18th and Locust in Philadelphia and the Ritz-Carlton on the Avenue of the Arts.

"It's a big deal," said Jeff Higley of Smith Travel Research Inc., of Hendersonville, Tenn., which tracks hotels worldwide. "It can reset how management contracts are written and enforced.

"It's one of those things where the owners are obviously wanting a better performance," Higley said, "and frankly, a company like the Four Seasons has its hands tied."

Said Vivian Deuschl, a spokeswoman for the Ritz-Carlton Hotel Co. L.L.C.: "Everyone in the hotel industry is watching because these are challenging times."

Luxury hotels have been hit hard in this recession. Corporate travel has shrunk as firms have backed off booking meetings in high-priced spaces. Leisure travelers are choosing less choice accommodations.

Quite often, hotel brands do not own the hotels they manage.

In Philadelphia, for example, the Four Seasons is owned by Host Hotels & Resorts Inc., of Bethesda, Md., which owns 116 mostly luxury hotels worldwide. The Ritz-Carlton here is owned by the Arden Group Inc., a real estate investment company with headquarters in the city.

Owners build the hotels, pay for renovations, and refurbish the properties. They oversee asset management, annual budgeting, and the functions of the management companies they hire.

Management companies run the hotels on the owners' behalf, including recruiting, hiring, and training employees; handling the day-to-day operations of the hotel, its restaurant, spa, and any other facilities; administering payroll and other expenses, and selling and marketing the hotel to guests.

The Four Seasons Aviara is owned by Broadreach Capital Partners, of Palo Alto, Calif., which signed a 30-year management contract with Four Seasons in 1995.

Broadreach seeks to terminate the contract, which included an option to renew three times for up to 60 more years.

In a lawsuit filed April 1 in U.S. District Court for the Southern District of California, Broadreach accused the Four Seasons of fiscal mismanagement and breach of fiduciary duties. On May 8, Broadreach advised the Four Seasons that Dolce Hotels & Resorts, of Montvale, N.J., would assume managerial control of the Aviara, starting May 11.

Four Seasons, based in Toronto, fired back and informed the owner it would not voluntarily relinquish control.

On May 11, Four Seasons managers barricaded themselves in the hotel and stationed security guards at each door to prevent the owners from entering.

A judge ruled May 27 that the case would go before an arbitration panel, due to reconvene June 17 to determine whether Four Seasons has the right to continue managing the hotel.

"For an owner to make this as public as it has been, and for it to attempt to kick out the operator of the hotel is a major thing," said David M. Brudney, a hospitality consultant in Carlsbad, Calif. "In one respect, what is at stake is the reputation of Four Seasons, and the impact that this is going to have on all the properties that Four Seasons manages and owns around the world."

Four Seasons, which has 82 hotels, 28 in the United States, does not discount rooms. It was the only luxury hotel that opted not to reduce room rates to increase occupancy and revenue after the Sept. 11, 2001, terrorist attacks.

"That's where Four Seasons scored big last time, because it didn't discount," Higley said. "They came out so far ahead that they looked like the poster child for why you should not lower rates."

There are inherent risks in discounting luxury-hotel rooms, he said: "You place an expectation on consumers by placing an artificially low value on your property that, in turn, takes longer to recoup when the economy rebounds."

But in this harsh downturn, hotel owners argue, property managers must adjust to changing market conditions, which may mean reducing room rates to boost occupancy or cutting valet staff.

"Owners have had to be more active with marketing," said Laurence Geller, president and chief executive officer of Strategic Hotels & Resorts Inc., of Chicago, which owns three Four Seasons and two Ritz-Carltons.

A luxury hotel has higher fixed costs than a more limited-service hotel, Geller said. And because it is so highly geared to revenue, it must adjust swiftly in a downturn.

"This is just a different period right now," said Minaz Abji, executive vice president of asset management for Host Hotels & Resorts, which owns the Four Seasons in Philadelphia. "We are working with our brand operators to look at everything we do.

"We're asking questions like, 'What does a customer really want, and do we need to redefine what a luxury-hotel experience is, and what it should be?' "

At the Four Seasons in Center City, the rates are the same as last year: a room costs $395 plus tax on weeknights, $295 plus tax on Fridays and Saturdays.

There have been no reductions in 24-hour valet, concierge, and room service, and hours have been maintained for the pool, gym, and spa, said spokeswoman Farra D'Orazio.

In its lawsuit, Broadreach claims Four Seasons failed to act accordingly as the San Diego hotel's occupancy slid drastically.

"The Four Seasons' refusal to act in the best interests of the owner by failing, among other things, to operate the hotel in a financially efficient and cost-effective manner" is at the heart of the case, said William A. Brewer, the lead attorney for Broadreach. "The owners terminated Four Seasons because they lost trust and confidence in its management of their resort."

Four Seasons denies that, saying the Aviara resort is profitable at an operating level. It blames the owners for taking on more debt than it can handle.

"We believe we have been operating the hotel in a fiscally prudent manner," said Elizabeth Pizzinato, vice president of brand communications at Four Seasons. "We understand the need to contain costs and maintain the assets in an appropriate way."

But "one thing we do not do is compromise on services," she said. "It's part of what building a global brand is all about, whether you stay with us in New York, Philadelphia, or Hong Kong."