By SUSANNAH MOODY
November 9, 2022
An ICC tribunal chaired by Foley Hoag partner Christina Hioureas has held the owner of a hotel on Manhattan’s Lower East Side liable for converting the property into a homeless shelter during the pandemic without the consent of its manager.
On 21 October, the New York Supreme Court confirmed the award in favour of US hotel management group Ace Group International against hotel owner 225 Bowery.
The award, issued a month earlier, ordered the hotel owner to pay around US$10 million to cover unpaid management fees, expenses and interest.
Hioureas, New York-based chair of Foley Hoag’s United Nations practice, heard the case alongside Edward Boyle, chair of commercial litigation at Venable, and Fred Stevens of restructuring boutique Klestadt Winters.
Ace signed a hotel management agreement with the owner in 2014. It provided for the owner to build a hotel to be operated and managed by Ace for a 10-year initial term. The hotel was to be operated under the Sister City brand, a micro-hotel brand owned by Ace.
The hotel opened in March 2019 but closed temporarily after the outbreak of covid-19. While it was closed, the owner entered into an agreement with the US Department of Homeless Services and the Hotel Association of New York to repurpose the hotel as a temporary shelter for the homeless.
This agreement expired in June 2021, after which the owners rebranded the hotel as “Untitled at 3 Freeman Alley”, offering rooms through Airbnb and self-managing it through an affiliated entity.
Ace filed for arbitration in January, arguing that it had not consented to the repurposing of the hotel and that the owner had breached the management agreement, including by terminating Ace employees and cutting off access to hotel accounts. Ace also claimed over non-payment of management and other fees.
The owner argued that Ace had been trying to terminate the agreement and was in breach of good faith. It argued that a contractual provision requiring Ace to support the advancement of the business meant the manager was required to consent to the repurposing. The owner also argued that force majeure applied as the decision to repurpose the hotel was caused directly by an epidemic.
It also counterclaimed over Ace’s alleged failure to maintain insurance following the repurposing, and accused Ace of breaching its fiduciary duty by attempting to sabotage the repurposing agreement and foment a mortgage foreclosure proceeding against the owner.
In its award, the tribunal found that the owner had breached material provisions of the hotel management agreement when it agreed to repurpose the hotel.
The tribunal found that the owner had repudiated the hotel management agreement because it had prevented Ace from operating or managing the hotel, and had authorised non-parties to the agreement to occupy and use the property. Having repudiated the agreement, it could not claim for breach of insurance provisions.
It also decided that Ace had explicitly withheld consent and had expressed credible concerns about the financial impact of the repurposing, given that the hotel was in a precarious financial position followed its delayed opening.
Ace also brought claims over the use of its “base camp rights” (the rights of the Sister City brand and concept) and intellectual property without permission, and requested injunctive relief. This was granted in part for the Sister City brand and concept, but not for physical objects and furniture that had been designed for the hotel.
All the owner’s counterclaims were dismissed.
Confirming the award in its entirety, Judge Joel Cohen found that the owner had not satisfied the burden of demonstrating the tribunal had acted irrationally. He confirmed that Ace should be awarded pre- and post-judgment interest and costs.