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Proposed NJ Legislation Could Be a Game-Changer for Hotel Franchises

Oct 9, 2023

New Jersey Assembly Bill 1958, which is making its way through the state legislature, would change the hotel franchise model in New Jersey as we know it. Interestingly, this legislation has remained under the radar for most hoteliers and hospitality industry practitioners.

The bill targets the procurement of goods, services, brand standards and elements of brand loyalty programs. If passed, it would become a violation for a hotel franchisor to receive any direct or indirect consideration from a vendor unless disclosed and paid to the franchisee instead. This includes all fees, rebates and commissions, which could add up to a significant amount of money depending on the size of the assets or portfolio.

The bill permits a franchisee to purchase goods or services from suppliers other than those approved by the franchisor. It also requires franchisors to license a third-party supplier to use its trademarks for franchise supplies. Furthermore, the bill prohibits the franchisor from competing with the franchisee in an exclusive or protected territory under a different name or market without the franchisee’s approval. The legislation also prohibits the franchisor from changing the material terms of the franchise agreement by making changes to the brand operations manual, however, there are certain exceptions concerning health and safety.

Franchisors would not be able to impose new fees on franchisees (1) unless they are disclosed in a franchise disclosure document; and (2) approved by the franchisee. There are also provisions regarding guest loyalty points and related charges.

On the positive side, this bill provides specific and far-reaching protections to franchisees. Conversely, these changes could have unintended consequences that might damage brand image, weaken the effectiveness of guest loyalty programs, as well as hamper consumer confidence and brand loyalty. A brand-guest loyalty program is powerful tool to increase customer retention, guest satisfaction and hotel revenue. Loyalty members earn points by staying at a branded hotel and can then redeem those points toward a future stay. Guests have often been known to travel many extra miles to stay within a specific brand’s hotel to earn additional points.

This bill only applies to hotel franchise agreements in New Jersey, but it could have a wider impact outside the state and across different industries. Regardless of the outcome of this legislation, the fact that this bill has gotten this far in the legislative process may encourage similar legislation to be introduced beyond the Garden State.

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Deborah S. Friedland

Deborah Friedland specializes in in operational strategy analysis, asset management, valuation, internal control review and assessments, market studies, and transactional due diligence for investors and lenders.

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