Impact of COVID-19 on the Hotel Industry

Posted On - 27 May, 2020 • By - Mirza Aslam Beg

The hospitality sector depends upon the manoeuvrability of masses and the same has been restricted by the outbreak of the pandemic. The hospitality industry is one of the severely affected industries throughout the world. The nation-wide lockdown imposed to stop the spread of the virus is now in its fourth phase. As much as the lockdown is necessary to help improve the current situation, it has had a catastrophic effect on the Indian economy. The effect is so severe that it may lead to a recession in the forthcoming quarters.

The State of Hospitality Sector Amidst the COVID 19 Pandemic

The Hotel Industry works on the preposition of leisure and necessity as well, with the lockdown being in place for almost 2 months already, the masses have limited resources to spend, and leisurely activities such as vacations requiring hotel accommodation are far from anyone’s mind. With nearly all companies adopting ‘work from home’ and the ‘no travel’ policy of the government, market opportunities for hotels are severely limited.

Since the hotel industry relies fully on travel and tourism, it is among the worst affected, and the chances of revival in the near future seem bleak.

Challenges

  • The overall revenue of the Indian hotel sector is set to decline significantly as compared to last year besides the actual business loss, the hotel owners will also incur losses due to fixed operating expenses, debt repayments, interest payments and several other necessary compliances.
  • As quoted by the World Health Organization “The Corona Virus is going to stay with us for a long time”, it is despairing to say that this will have its cascading effect on the tourism and hotel industry. Since Corona Virus is communicable people may avoid unnecessary travel in near future.
  • The hospitality industry is facing losses due to complete shutdown, there is high possibility that in order for the organization to survive there may be salary cuts or layoffs and to maintain the continuity of business, there is a possibility of mass layoffs and deduction in salaries. This may lead to disgruntled employees initiating litigation against employers.
  • A lot of travel plans were cancelled due to the lockdown imposed in numerous countries. In case of advance bookings with mandate payments at the time of booking, hotel policies usually have strict non-cancellation terms including forfeiture of advance payment received. Hence, there is a possibility of litigation arising out of such cancellations.
  • It is the standard business practice of the hospitality sector to execute various kinds of contracts with their service providers such as security and maintenance contracts as well as lease deeds for business properties. Due to the complete shutdown of business, hospitality providers may not be able to fulfil their obligations arising out of certain contracts due to the paucity of funds and lack of customers.

 Reliefs granted to the Hospitality Sector

  • It’s important to note that through the current MHA order dated May 17, 2020[1], the government has called off its previous order and now it is not mandatory for the employers to pay wages to employees, irrespective of whether the workplace was functional or not. This means that employers are now back in the situation that existed before the lockdown and the imposition of the Disaster Management Act, especially with respect to the treatment of employees. This will be treated as a normal situation (no lockdown restrictions) in the relationship between the employer and employee, irrespective of the continued lockdown.
  • Since the Hospitality Sector is heavily dependent on financing aid from banking institutions, the RBI’s announcement that the moratorium on interest and principal repayment of loans for three months is a sign of relief.[2]

Propositions for the Hospitality Sector

  • The key issue under most hotel contracts (be those with operators or vendors) is examining whether such contracts provide for force majeure provision. COVID-19 could be covered under the head of ‘epidemic’.
  • The companies in the hospitality sector often depend upon contractors for security, maintenance, etc. Due to a lack of business operations, the requirement of services of such third-party contractors will also be severely diminished. Where contracts with service providers and lessors account for force majeure exemptions, legal departments of the hospitality company may take initiative during the lockdown period itself and issue legal notices for suspension of obligations arising out of such contracts such as waiver of rents and service fees. It may prevent future unnecessary litigation and also to save considerable expenditure of the company.
  • The hospitality franchise giants like OYO, Make My Trip, and TREEBO can ease up some pressure by invoking “force majeure” to hold up invoices that are raised by the owners of the hotel premises.
  •  Due to travel restrictions, customers will be constrained to cancel advance bookings and will seek full refunds due to extraordinary circumstances. In such a scenario, terms and conditions governing the relationship between hotel and customers should not be strictly construed. Instead, refunds should be readily provided for consumers who are unable to honour their bookings by only deducting nominal charges. This is a preventive measure that will help avoid future litigations from dissatisfied customers.
  • Due to ongoing lockdown, the legal teams of the hospitality industry will have to play a proactive role in anticipating and thereby taking steps to reduce future litigation. This may be done by communicating with the customers about present cancellation and refund policy measures beforehand and increasing customer support services to resolve their concerns. From a legal standpoint, it will be cost-effective for the industry to focus on customer grievances caused due to lockdown and offer innovative solutions such as flexibility to reschedule cancelled bookings as a satisfied customer is unlikely to initiate legal action. 
  • Consumer courts throughout the country will likely adopt a consumer sympathetic approach in the near future, maybe even in case of unscrupulous litigants. It is thus suggested that legal departments reinvent themselves and train sales and operations teams about the importance of maintenance of proper records. All communications exchanged with the customers with regards to present policies ought to systematically documented. Wherever possible, customer confirmations and approvals to new policies and terms should be obtained and maintained. This will generate evidence in order to strengthen the stand of the hospitality industry in case any matter proceeds to the stage of the litigation and may aid in obtaining favourable judgments where litigants malafidely attempt to seek unlawful gains at the expense of hospitality service providers.   

Conclusion

The hospitality industry service providers shall try to abide by the law books so as to prevent any unnecessary expenses in these situations where the cash flow is already minimal. The cancellation of bookings has spiked and new future bookings have almost come to zero. Hence, the occupancy levels are at an all-time low. On a positive note, some hotels are offering their hospitality services as part of the government’s initiative to help those people who have been affected by the Covid-19 crisis. The next few months are going to be tough for business and we shall expect the situation to improve once the cases of COVID-19 decline.

Contributed By – Mirza Aslam Beg, Partner
& Karan Singh, Associate

King Stubb & Kasiva,
Advocates & Attorneys

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