MASTER FRANCHISE AGREEMENT
between
HSA PROPERTIES, L.L.C.,
a Delaware limited liability company
and
U.S. FRANCHISE SYSTEMS, INC.,
a Delaware corporation
DATED: As of March 27, 1996
TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ...................................................... 1
ARTICLE I Definitions ................................................ 2
1.1 Definitions ................................................. 2
1.2 References ................................................... 9
1.3 Gender and Number............................................. 9
ARTICLE II Grant of License ........................................... 9
2.1 Master License................................................ 9
2.2 Assignment of Existing Licenses, Reservation Agreement and
Contracts ....................................................10
2.3 Future Hawthorn Licenses......................................11
2.4 Relationship to Hyatt Hotels..................................11
ARTICLE III Royalty Fees................................................13
3.1 HSA Royalties.................................................13
3.2 HSA Royalty Fees with Respect to Out of System Hawthorn
Licenses......................................................18
3.3 Other Fees Property of USFS...................................18
3.4 Time and Manner of Payment ...................................18
3.5 Books and Records; Audit......................................19
ARTICLE IV Operating Covenants.........................................20
4.1 Grant of Licenses.............................................20
4.2 Promotion and Enhancement of Hawthorn Brand ..................21
4.3 Compliance with Law...........................................22
4.4 Restrictive Covenants.........................................23
4.5 Managed Hotels................................................25
4.6 Reservations .................................................26
4.7 Foreign Rights................................................26
4.8 Additional HSA Covenants......................................27
4.9 Additional USFS Covenants.....................................27
4.10 Independent Contractors ......................................29
4.11 Hawthorn Personnel ...........................................30
4.12 Regarding the Ad Fund.........................................30
ARTICLE V Transfers...................................................31
5.1 Transfers by HSA..............................................31
5.2 Restrictions on Transfer by USFS .............................31
5.3 Permitted Transfers...........................................32
5.4 "Change of Control"...........................................33
5.5 Assumption by Transferee......................................34
ARTICLE VI Default and Termination.....................................34
6.1 Termination Standard .........................................34
6.2 Royalty Reduction Standard ...................................35
6.3 Default.......................................................36
6.4 Remedies......................................................37
6.5 Termination...................................................38
6.6 Continuing USFS Administration................................43
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ARTICLE VII Miscellaneous ..............................................44
7.1 Arbitration...................................................44
7.2 Representations and Warranties of HSA.........................45
7.3 Representations and Warranties of USFS .......................51
7.4 HSA and Rockwood Indemnity ...................................52
7.5 USFS Indemnities..............................................52
7.6 Provisions Relating to Intellectual Property,
Infringement and Restrictive Agreements.......................53
7.7 Indemnification Procedures ...................................55
7.8 Governing Law.................................................56
7.9 Successors and Assigns........................................56
7.10 Entire Agreement..............................................57
7.11 Confidentiality ..............................................57
7.12 Notices.......................................................57
7.13 Joint Drafting................................................58
7.14 Brokers.......................................................58
7.15 Severability .................................................58
7.16 Waiver of Obligations.........................................59
7.17 Rights of Parties Are Cumulative .............................59
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MASTER FRANCHISE AGREEMENT
THIS AGREEMENT is dated as of March 27, 1996 and is by and between:
HSA PROPERTIES, L.L.C., ("HSA"),
a Delaware limited liability company
200 West Madison Street
39th Floor
Chicago, Illinois 60606
Attention: Michael C. Shindler
Telecopy No.: (312) 750-8084
- and -
U.S. FRANCHISE SYSTEMS, INC. ("USFS"),
a Delaware corporation
13 Corporate Square
Suite 250
Atlanta, Georgia 30329
Attention: Michael Leven
Telecopy No.: (404) 321-4482
PRELIMINARY STATEMENT
HSA, together with its Affiliates, is the owner of a brand of all-suites
hotels known as "Hawthorn Suites", has licensed the use of the Hawthorn Brand
in the operation of 17 currently existing hotels in the United States, and is
currently the direct owner of the Intellectual Property, the Existing
Licenses and the Contracts. USFS, directly and through its subsidiaries, is
in the business of franchising and licensing others to use certain
proprietary names, marks and other intellectual property in connection with
the operation of hotels and has a particular expertise in such business. HSA,
desiring to take advantage of the expertise of USFS in the hotel licensing
and franchising business, and in order to exploit further the commercial
value of the Hawthorn Brand, has agreed to enter into a master franchise
agreement with USFS, and USFS, desiring to take advantage of the commercial
potential in the Hawthorn Brand, has agreed to license the same from HSA, all
in accordance with the terms and provisions set forth in this Agreement.
NOW, THEREFORE, it is hereby agreed, by and between the parties hereto, as
follows:
ARTICLE I
Definitions
1.1 Definitions. Except as otherwise herein expressly provided, and in
addition to any other definitions which may be herein contained, the
following terms, when used in this Agreement and in the foregoing Preliminary
Statement, shall have meanings set forth below:
"Ad Fund" shall mean the segregated fund required to be maintained by the
licensor under provisions of the Existing Licenses from which are to be
paid or reimbursed costs incurred by the Licensor in connection with the
Hawthorn reservation system, and in connection with certain advertising,
promotion and marketing expenses.
"Additional Hawthorn" shall mean any Hotel operated under the Hawthorn
Brand as part of the Hawthorn System which is other than an All-Suite
Hotel.
"Affiliate" shall mean, as to any Person, any other Person controlled by,
under common control with, or which controls, directly or indirectly, the
Person in question. The term "Control" for these purposes means the
ability, whether by direct or indirect ownership of shares or other equity
interest, by contract or otherwise, to elect a majority of the directors
of a corporation, to select the managing partner or member of a
partnership or limited liability company, or otherwise to select, or have
the power to remove and then select, a majority of those persons
exercising governing authority over an entity, and, in the case of a
limited partnership or limited liability company, shall mean the sole
general partner thereof, all of the general partners thereof, to the
extent each has equal management control or authority, or the managing
general partner or member or managing general partners or members thereof,
as appropriate (and in any event shall mean the ownership and control
[that is, the right to vote] of fifty percent (50%) or more of the
residual equity interest in an entity). The term "Affiliate" shall also
mean and include: (i) a trust of which the Person, or a direct or indirect
shareholder of such Person, is a trustee, or which has as its principal
income or residuary beneficiaries such Person, or any direct or indirect
shareholder of such Person, or members of the immediate family of such
Person, or direct or indirect shareholder; and (ii) any members of such
Person's immediate family, or the member of the immediate family of any
direct or indirect shareholder of such Person. For purposes hereof, shares
or other ownership interests held by a trust shall be deemed to be owned
pro rata by the income and residuary beneficiaries of such trust. Further,
the members of the immediate family of any Person shall include all
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collateral relatives of such Person having a common linear ancestor with
such Person, and the spouse or any former spouse of such Person or any of
such collateral relatives.
"Agreement" shall mean this Master Franchise Agreement, together with any
amendments or supplements hereto which may hereafter be entered into by
the parties.
"All-Suite Hotel" shall mean a hotel (i) at least 50% of whose guest
accommodations consist of Suites, or (ii) whose name includes the word
"suites", or both of the foregoing.
"Change of Control" shall have the meaning set forth in Section 5.4.
"Contracts" shall have the meaning set forth in Section 7.2(j).
"CPI Adjustment" shall mean an adjustment resulting from multiplying the
figure or number to be adjusted by a fraction (which in no event shall be
less than 1/1) the numerator of which shall be the CPI Index as of the
most recent date required under the provisions of this Agreement, the
denominator of which shall be the CPI Index in effect as of the comparison
year specified under the provisions of this Agreement.
"CPI Index" shall mean the Consumer Price Index, United States City
Average, All Items, All Urban Consumers (1982-84 = 100) as published from
time to time from by the United States Bureau of Labor Statistics. If the
foregoing Consumer Price Index shall, for any reason, be discontinued, or
shall otherwise no longer be available, the CPI Index shall be an index of
the purchasing power of the United States dollar as published by a
recognized government or private source agreeable to both HSA and USFS.
"Deemed Approval" shall have the meaning set forth in Section 2.4(b).
"Development Area" shall mean the entire world.
"Effective Date" shall mean the first to occur of (i) ninety (9O) days
after the date hereof; and (ii) the date on which USFS shall be legally
entitled to grant licenses for the use of the Hawthorn Brand in all fifty
(50) states of the United States.
"Existing Hotels" shall mean those hotels, or hotel prospects, listed and
described in Exhibit A hereto, all of which (i) are currently operated, or
under license to be included, under the Hawthorn System, and (ii) meet the
conditions and standards
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described in clauses (ii) and (iii) of the defined term "Qualified License
Agreement". In the case of an Existing Hotel which is to be constructed,
or, if completed, is to be converted to the Hawthorn System, the same
shall cease to be an Existing Hotel unless (i) in the case of a hotel to
be constructed, such hotel shall be completed and shall open for operation
as part of the Hawthorn System not later than fifteen (15) months after
grant of the Existing License; or (ii) in the case of a hotel in existence
as of the date of execution of the Existing License and fully completed
and constructed, such hotel shall be converted and become part of the
Hawthorn System not later than nine (9) months after grant of the Existing
License, it being understood and agreed that unless the conditions of this
sentence shall be complied with, any Existing Hotel shall cease to
constitute an Existing Hotel, and the corresponding Hawthorn License shall
cease to constitute an Existing License. The term "Existing Hotels" shall
also mean, (i) any Shaner Hotel, except to the extent provided in Section
3.1(a), and (ii) any hotel at any time on or after the Effective Date
constructed by HSA or any Affiliate of HSA on property currently owned by
an Affiliate of HSA in the city limits of Rosemont, Illinois and operated
as part of the Hawthorn System provided that construction thereof shall
commence within twelve (12) months of the Effective Date.
"Existing License(s)" shall mean the Hawthorn Licenses, together with all
related documentation (other than management contracts), relating to
Existing Hotels.
"Franchise Royalty Fee" shall have the meaning set forth in Section
3.1(c).
"Gross Rooms Revenues" shall have the meaning set forth in Section 3.1(c).
"Hawthorn Brand" shall mean the trade names "Hawthorn", "Hawthorn Suites"
and any other trade names, trademarks, copyrights and other Intellectual
Property now used, or which may hereafter be developed for use, in
connection with the operation of hotels under the "Hawthorn" brand.
"Hawthorn Brand Saturation" shall be deemed to occur as of the date on
which both of the following conditions shall have been satisfied: (i)
there shall be not less than one hundred seventy five (175) Hawthorn Brand
All-Suite Hotels subject to then valid and subsisting Hawthorn Licenses
(excluding, as of the date of determination, "Suspended Hotels" [as
defined in Section 3.1(d)], Additional Hawthorns and Existing Hotels), and
(ii) the total number of guestroom keys in all hotels included in the
number of hotels included for purposes of clause (i) shall be not less
than 11,375.
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"Hawthorn License" shall mean any license or franchise agreement granted
by USFS pursuant to the provisions of the Agreement (or, with respect to
Existing Hotels, by HSA or its Affiliate) for the use of the Hawthorn
Brand and for the participation by the licensee in the Hawthorn System.
"Hawthorn System" shall mean the Hawthorn Brand, together with the system
of operation now existing or hereafter developed with respect thereto,
including, without limitation, the system of licensing, reservations,
training, marketing and advertising, prototype plans, specifications and
working drawings, and operations, used or associated with the use and
operation of hotels operated under the Hawthorn Brand, and together with
the rights and interests of HSA under the Reservation Agreement and the
Contracts.
"Hotel Brand" shall mean any series of trademarks, trade names, copyrights
and other intellectual property used by USFS, or any of its Affiliates, in
connection with the use or operation of hotels operated under one or more
of the trade names or trademarks in question, excluding, however, the
Hawthorn Brand and the Microtel Brand.
"HSA Royalty Fee" shall have the meaning set forth in Section 3.1.
"Intellectual Property" shall have the meaning set forth in Section
7.2(d).
"Knowledge of HSA" shall mean the actual (as opposed to imputed or
constructive) knowledge of any of Nicholas J. Pritzker, Douglas G. Geoga,
Michael C. Shindler, Glen Miller, John Lyons, Paul White or Sara Hays.
"Limited Service Brand" shall mean a Hotel Brand wherein (i) the average
daily rate for all hotels of such Hotel Brand which, as of the date of
determination thereof, are opened and operating, is $49 or less, and (ii)
the hotels operated under such Hotel Brand have no Suites and no food or
beverage outlets. The figure of $49 appearing in the preceding sentence
shall be subject to CPI Adjustment based upon the difference between the
CPI Index as of the date of determination in comparison with the CPI Index
as of December 31, 1995. Average daily rate of a Limited Service Brand
shall mean the total Gross Rooms Revenues for the rental or occupancy of
rooms in all hotels bearing the Limited Service Brand divided by the
number of available rooms in the hotel or hotels in question, then further
divided by 365 and multiplied by the decimal equivalent of the percentage
of occupancy for such Brand on a chain-wide basis.
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"Managed Hotels" shall mean those of the Existing Hotels which, as of the
Effective Date, in addition to being operated as part of the Hawthorn
System, are actively managed by one or more Affiliates of HSA under
management contracts between said Affiliate, on the one hand, and the
owner of the hotel in question, on the other hand. The Managed Hotels, as
of the date hereof, are those of the Existing Hotels indicated with an
asterisk next to their names on Exhibit A hereto.
"Microtel" shall mean Microtel Inns and Suites Franchising, Inc., a
Georgia corporation, and currently a wholly owned subsidiary of USFS.
"Microtel Brand" shall mean the trade name "Microtel" and any other trade
names, trademarks, copyrights and other intellectual property now used, or
which may hereafter be developed for use, in connection with the operation
of hotels under the "Microtel" Brand.
"Microtel Suite Hotels" shall mean any Microtel Brand hotel constituting
an All-Suite Hotel and having construction costs of $40,000 per hotel room
or less, subject to CPI Adjustment (the calculation of the costs of
construction of a Microtel Suite Hotel to be in accordance with the
provisions set forth in the definition of Mid-Priced Brand).
"Microtel System" shall mean the Microtel Brand, together with the system
of operation now existing or hereafter developed with respect thereto,
including, without limitation, the system of licensing, reservations,
training and operations, used or associated with the use and operation of
hotels under the Microtel Brand.
"Mid-Priced Brand" shall mean a Hotel Brand relating to hotels which (i)
in the case of any hotel either under construction at the time of the
determination of its status or which had been newly constructed within the
preceding two years, had a construction cost of $50,000 per room or less;
or (ii) in the case of any hotel which, as of the date of determination of
its status, has been constructed for more than two years prior thereto,
had an estimated replacement cost of $50,000 per room or less. The number
$50,000 appearing above shall be subject to CPI Adjustment for the
difference in the CPI Index between the date of the determination of the
costs of construction or replacement cost as the case may be, of any hotel
in question, and December 31, 1996. In computing the cost of construction
or replacement cost there shall be included all so-called "hard" and
"soft" costs (meaning actual costs of construction, labor and materials,
costs of acquisition and installation of furnishings, fixtures and
equipment, initial quantities of inventory and working capital,
pre-opening marketing, staff hiring and training costs, utility
installations, construction
6
period interest and other financing charges such as appraisal, legal and
title insurance, and design costs and fees), excluding, however, the cost
of land acquisition or leasing. If any portion of any particular hotel is
financed, in whole or in part, by means of personal property leases, the
cost of the leased components shall be included in hard costs based on the
purchase price of such items if purchased.
"Person" shall mean any natural person, or any corporation, partnership,
joint venture, limited liability company, business association, trust,
governmental agency or other entity.
"Primary Development Area" shall mean the United States and Canada.
"Qualified License Agreement" shall mean a Hawthorn License (other than an
Existing License) meeting the following conditions and standards: (i) the
licensed hotel shall be either an All-Suites Hotel having more than 40
Suites, or an Additional Hawthorn having a minimum number of rooms to be
agreed to between HSA and USFS; (ii) all application fees required by USFS
to have been paid prior to such date shall have been paid by the licensee
thereunder; (iii) the licensee shall have acquired and shall own or
control through long-term lease the land on which the hotel is located or
is to be constructed; and (iv) the average number of Suites in all hotels
covered by Hawthorn Licenses which, except for the provisions of this
clause (iv) would constitute Qualified License Agreements, shall be equal
to or greater than fifty (50). If the average number of Suites in hotels
covered by Hawthorn Licenses which, except for the provisions of clause
(iv) of the preceding sentence would constitute Qualified Licenses, is
less than fifty (50), USFS shall have the right to specify which of said
Hawthorn Licenses shall constitute Qualified License Agreements, it being
the understanding that USFS shall have the right to select such of the
then existing Qualified License Agreements in its discretion which would,
in the aggregate, meet the requirements of the preceding sentence. In the
case of a Qualified License Agreement relating to a hotel to be
constructed, or, with respect to a completed hotel which is to be
converted to the Hawthorn System, such Hawthorn License shall cease to be
a Qualified License Agreement unless (i) in the case of a hotel to be
constructed, such hotel shall be completed and shall open for operation as
part of the Hawthorn System not later than fifteen (15) months after grant
of the Hawthorn License; or (ii) in the case of hotel in existence as of
the date of execution of the license and fully completed and constructed,
such hotel shall be converted and become part of the Hawthorn System not
later than nine (9) months after grant of the Hawthorn License, it being
understood and agreed that unless
7
the conditions of this sentence shall be complied with, any Hawthorn
License formerly constituting a Qualified License Agreement shall cease to
constitute a Qualified License Agreement.
"Qualified Licensee" shall mean the licensee under a Qualified License.
"Required Consents" shall have the meaning set forth in Section 7.2(f).
"Reservation Agreement" shall mean that certain Reservation Agreement, of
even date herewith, between Regency Systems Solutions, Inc. and HSA.
"Restrictive Agreement(s)" shall have the meaning set forth in Section
2.4(b).
"Royalty Reduction Standard" shall have the meaning set forth in Section
6.2.
"Shaner Agreement" shall mean the Amended and Restated Agreement of
Limited Partnership of Shaner Hotel Group Limited Partnership, dated as of
December 19, 1995.
"Shaner Hotels" shall mean those hotels which, under the provisions of
Section 3.3 of the Shaner Agreement, require the Shaner Partnership to
convert or cause an affiliated partnership to convert certain hotels,
thereafter acquired by the Shaner Partnership, to Hawthorn Brand hotels,
all in accordance with the provisions of the Shaner Agreement. The term
"Shaner Hotel" shall not include any hotel, whether or not owned or
controlled by the Shaner Partnership, or any Affiliate of the Shaner
Partnership, unless such hotel shall have been included as part of the
Hawthorn System in satisfaction or in partial satisfaction of the
obligations of the Shaner Partnership under Section 3.3 of the Shaner
Agreement.
"Shaner Partnership" shall mean Shaner Hotel Group Limited Partnership,
the partnership organized and existing under the Shaner Agreement.
"Suite" shall mean a hotel guest accommodation consisting of at least two
distinct areas, separated from each other by a partition (which may
include, without limitation, a door, folding partition, partitioning wall
or other structure), one of which areas shall be intended primarily as a
sleeping area, and the other intended primarily as a sitting room which,
however, may include a convertible sofa or day-bed which may be used as a
sleeping accommodation. A Suite, for purposes of this Agreement, shall
constitute a single unit notwithstanding
8
that the same may be partitioned and one or more of its component parts
sold or rented as a separate guest accommodation. In any count of Suites
in a hotel, a single sitting area may be considered with only one sleeping
area notwithstanding that, in the hotel configuration in question, it may
be combined with two or more sleeping areas to make more than one Suite
configuration.
"Termination Standard" shall have the meaning set forth in Section 6.1.
"UFOC" shall mean the Uniform Franchise Offering Circular, or such other or
additional written material required under applicable provisions of law to
be delivered to prospective licensees of the Hawthorn Brand in connection
with the granting of a Hawthorn License, together with the form thereof
actually delivered from time to time by USFS, and all attachments and
exhibits thereto.
1.2 References. All references in this Agreement to particular sections or
articles shall, unless otherwise expressly provided or unless the context
otherwise requires, be deemed to refer to the specific sections or articles
in this Agreement. In addition, the words "hereof", "herein", "hereunder", and
words of similar import, refer to this Agreement as a whole and not to any
particular section or article.
1.3 Gender and Number. All pronouns or variations used herein shall,
regardless of the pronouns actually used, be deemed to refer to the
masculine, feminine, neuter, singular or plural as the identity of the person
or persons may, in the context in which such pronoun is used, require.
ARTICLE II
Grant of License
2.1 Master License. Subject to the terms and conditions of this Agreement,
HSA does hereby grant to USFS the exclusive right and license in the
Development Area to (i) act as the franchisor of the Hawthorn System,
including the right to make changes in the Hawthorn System; (ii) grant
franchises and licenses for the development and operation of Hawthorn Brand
hotels; (iii) use the Hawthorn System in connection therewith; and (iv)
control the franchising, licensing, operations and development of Hawthorn
Brand hotels, all in accordance with the terms and conditions of this
Agreement, effective immediately and continuing until the earlier to occur of
(x) ninety-nine (99) years after the date hereof, and (y) the earlier
termination of this Agreement in accordance with the provisions hereof.
Licensees, including Affiliates of USFS, shall execute separate Hawthorn
Licenses for
9
each Hawthorn Brand hotel. In addition to the foregoing, and subject to the
terms and conditions of this Agreement, HSA hereby further grants to USFS the
exclusive right to be franchisor of the Hawthorn Brand in connection with any
Additional Hawthorns, the specifications for which, if any, shall be prepared
by USFS; provided, however, that before licensing any party to utilize the
Additional Hawthorn, USFS shall have obtained the approval of HSA to (a) the
name of the Additional Hawthorn, and (b) the specifications for the lodging
product and the use of said name. Upon expiration of the ninety-nine (99)
year term hereof, and provided this Agreement shall not have been sooner
terminated in accordance with Section 6.5, HSA shall sell, assign, transfer,
convey, remise, release and transfer to USFS the entire Hawthorn System, and
all estate, right, title and interest of HSA therein, without further
consideration, with usual and customary warranties and representations
relating to HSA acts, in return for which USFS shall assume any liabilities
or obligations with respect thereto that relate to the period on and after
the date of such transfer (including, without limitation, liabilities arising
on or after said date under contracts existing as of such date).
2.2 Assignment of Existing Licenses, Reservation Agreement and Contracts.
HSA does hereby, effective on and as of the date hereof, and without further
consideration, sell, assign, transfer, set over and convey unto USFS (without
representation or warranty of any kind other than as herein expressly set
forth) all of the estate, right, title and interest of HSA in and to the
Reservation Agreement, the Contracts and all then Existing Licenses, the
foregoing to include, without limitation, the right to receive all royalties,
license fees, reservation and marketing fees and charges, and assessments
which may become due and owing, and which relate to hotel operations, on or
after the date hereof, subject only to the express provisions of this
Agreement. USFS shall, and does hereby, agree to assume and pay, perform and
discharge all of the liabilities and obligations of HSA under and with
respect to the Existing Licenses, the Reservation Agreement and the Contracts
that accrue and relate to events occurring, on or after the date hereof.
Notwithstanding the foregoing, HSA, for itself and its Affiliates, hereby
expressly reserves all of its rights and interests under and with respect to
(i) all management contracts relating to any Managed Hotels and all fees or
other amounts required to be paid thereunder; (ii) any direct or indirect
ownership or mortgage interests in any hotel now or at any time hereafter
operated as part of the Hawthorn System (such interests to include, without
limitation, direct ownership of such hotel or hotel mortgage, or the
ownership of stock, partnership or joint venture interests, interests in
limited liability companies and the like, in entities owning or controlling
any such hotels or such hotel mortgages); and (iii) any ownership interest of
HSA or any Affiliate of HSA in Hawthorn Suites Management Corp., or any other
Person engaged primarily in the business of hotel management, as opposed to
licensing or franchising.
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2.3 Future Hawthorn Licenses. Pursuant to the right, power and authority
granted to USFS hereunder, during the term of this Agreement all future licenses
of Hawthorn Brand hotels anywhere in the Development Area shall be granted (if
at all) solely and exclusively by USFS in accordance with the provisions of this
Agreement, and HSA, for itself and its Affiliates, agrees that it shall not at
any time, on or after the date hereof (and for so long as this Agreement shall
remain in effect), grant, or permit any other Person to grant, any further or
additional licenses of Hawthorn Brand hotels anywhere in the world.
2.4 Relationship to Hyatt Hotels. Hyatt Corporation ("Hyatt"), is a
corporation which, directly and through its subsidiaries and other Affiliated
entities, owns, operates and manages a chain of hotels under the "Hyatt" name
and provides to such Hyatt hotels and others related services such as
purchasing, computer services, technical assistance services, reservation
services, special events planning and other such services. Hyatt and HSA,
through contract and other direct and indirect means, are related entities,
both engaged in the lodging industry. Accordingly, the parties hereto have
agreed as follows with respect to Hyatt:
(a) Neither Hyatt, nor any Affiliates of Hyatt, shall be limited or
restricted (i) in its ownership, financing, operation, licensing,
franchising or management of the "Hyatt" chain of hotels, or any other
hotels (excluding only those operated under the "Hawthorn Brand") in
which Hyatt, HSA or their respective Affiliates may have an interest,
or for whom services are performed whether or not any such hotels may
compete with any Hawthorn Brand hotel, or (ii) in any of its other
business activities whether or not related to the lodging or
hospitality industries. Nothing in this Agreement (except the
provisions of this Section 2.4) shall be deemed in any way to relate
to Hyatt, the conduct of its business or its ownership or operation.
(b) Hyatt has heretofore entered into management contracts, leases and the
like containing covenants restricting the right of Hyatt, and its
Affiliates, to own or operate hotels within a restricted area (and,
usually, for a restricted period of time) defined in the governing
documents, some of which provisions, by their terms, restrict or may
be interpreted to restrict, the right or authority of HSA, or any
licensee of HSA, to own, manage, license or operate hotels within the
aforesaid restricted area (the "Restrictive Agreements"). HSA hereby
represents, warrants and covenants that (i) Schedule I hereto contains
a complete and accurate list of all Restrictive Agreements, describing
in reasonable detail the duration, geographic scope and nature of such
11
restrictions, (ii) other than the Restrictive Agreements set forth in
Schedule I, there are no other Restrictive Agreements, and (iii)
neither HSA, nor Hyatt, nor any of their Affiliates shall enter into
any further Restrictive Agreements or agree to any amendments,
modifications, extensions or renewals of any existing Restrictive
Agreements which affect the Hawthorn System, without the prior written
consent of USFS, which may be withheld in its sole discretion.
Notwithstanding the previous sentence, neither HSA, nor Hyatt, nor any
of its Affiliates shall be liable or responsible to USFS, or any
Affiliate of USFS, or any licensee of USFS or its Affiliates, in the
event it shall be determined that any of the Restrictive Agreements
listed on Schedule I adversely affects the ability of USFS or its
Affiliates or licensees to own, manage, operate or license any
Hawthorn Brand hotel in the geographic areas identified on Schedule I.
Prior to entering into any Hawthorn License that could reasonably be
expected to violate any of the Restrictive Agreements listed on
Schedule I, USFS agrees that it shall provide written notice of its
intention to do so to HSA and HSA shall promptly (and in no event
later than five (5) days following receipt of such notice from USFS)
advise USFS whether or not the proposed Hawthorn License would violate
any of the Restrictive Agreements listed on Schedule I. If HSA advises
USFS that the proposed Hawthorn License would be in violation of a
Restrictive Agreement, USFS agrees that it shall not grant the
Hawthorn License until after expiration (if applicable) of the
Restrictive Agreement in question. If, however, HSA either advises
USFS in writing that no such Restrictive Agreement will be violated by
the proposed Hawthorn License, or fails to respond, either
affirmatively or negatively, to a notice from USFS as herein
contemplated within the aforesaid period of five (5) days, the same
shall be deemed a representation and warranty (the "Deemed Approval")
by HSA that no such proposed Hawthorn License will be in violation of
any Restrictive Agreement.
(c) Hyatt and each franchisee and licensee of USFS are intended and shall
be third party beneficiaries of the provisions of this Section 2.4.
12
ARTICLE III
Royalty Fees
3.1 HSA Royalties. In consideration of the agreements herein contained,
and subject to the provisions of Section 6.4(c) below, USFS shall, throughout
the term of this Agreement, pay royalties ("HSA Royalty Fees") to HSA as
follows:
(a) Existing Hotels. One hundred percent (100%) of Franchise Royalty Fees,
plus one hundred percent (100%) of termination fees (if any are
actually received by USFS), paid to the licensor under all Existing
Licenses, or any extensions or renewals thereof. USFS shall have the
sole right in its discretion to determine whether any Existing License
shall be extended or renewed. For purposes hereof, an Existing License
shall be deemed to have been renewed or extended if, in addition to
any amendment of the Existing License extending its term, a new
Hawthorn License relating to the hotel in question shall be entered
into with the licensee under the Existing License, or any Affiliate of
the said licensee, or any Person (or Affiliate of any Person) who
shall have acquired the existing hotel subject to the then Existing
License. Solely for purposes of determining the amount of HSA Royalty
Fees, the Shaner Hotels shall not constitute Existing Hotels, but
shall be included in the rooms count of Hawthorn Brand hotels and HSA
Royalty Fees shall be determined in accordance with Section 3.1(b)
below, it being understood and agreed, however, that for all other
purposes of this Agreement, all Shaner Hotels shall be deemed Existing
Hotels.
(b) Hawthorn Brand Hotels. With respect to all Hawthorn Brand Hotels,
other than Existing Hotels, the amounts to be paid to HSA shall be one
hundred one and one-one hundredth percent (101.01%) of the following
amounts (all remaining amounts to be retained by USFS as its sole
property):
(1) Two-thirds (2/3rds) of Franchise Royalty Fees actually paid by each
Hawthorn Brand hotel which in the aggregate contain the first three
thousand six hundred (3,600) rooms; provided that if the Franchise
Royalty Fee (expressed as a percentage of Gross Rooms Revenues)
required to be paid under the applicable Hawthorn License is less
than four percent (4%), then the amount to be paid to HSA with
respect to such hotel (and only such hotel) shall be a portion of
the Franchise Royalty Fees actually paid by such hotel that is
equal to a fraction the numerator of which is two and two-
13
thirds percent (2.67%) and the denominator of which is the stated
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) payable under the applicable Hawthorn License; plus
(2) One-half (1/2) of Franchise Royalty Fees actually paid by each
Hawthorn Brand hotel which in the aggregate contain the next three
thousand one hundred fifty (3,150) rooms; provided that if the
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) required to be paid under the applicable Hawthorn License
is less than four percent (4%), then the amount to be paid to HSA
with respect to such hotel (and only such hotel) shall be a portion
of the Franchise Royalty Fees actually paid by such hotel that is
equal to a fraction the numerator of which is two percent (2%) and
the denominator of which is the stated Franchise Royalty Fee
(expressed as a percentage of Gross Rooms Revenues) payable under
the applicable Hawthorn License; plus
(3) Three-eighths (3/8ths) of Franchise Royalty Fees actually paid by
each Hawthorn Brand hotel which in the aggregate contain the next
two thousand one hundred sixty (2,160) rooms; provided that if the
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) required to be paid under the applicable Hawthorn License
is less than four percent (4%), then the amount to be paid to HSA
with respect to such hotel (and only such hotel) shall be a portion
of the Franchise Royalty Fees actually paid by such hotel that is
equal to a fraction the numerator of which is one and one-half
percent (1.50%) and the denominator of which is the stated
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) payable under the applicable Hawthorn License; plus
(4) One-third (1/3rd) of Franchise Royalty Fees actually paid by each
Hawthorn Brand hotel which in the aggregate contain the next four
thousand four hundred ten (4,410) rooms; provided that if the
Franchise Royalty Fee (expressed as a percentage of Gross Rooms
Revenues) required to be paid under the applicable Hawthorn License
is less than four percent (4%), then the amount to be paid to HSA
with respect to such hotel (and only such hotel) shall be a portion
of the Franchise Royalty Fees actually paid by such hotel that is
equal to a fraction the numerator of which is one and one-third
percent (1.33%) and the denominator of which
14
is the stated Franchise Royalty Fee (expressed as a percentage of
Gross Rooms Revenues) payable under the applicable Hawthorn
License; plus
(5) One-fourth (1/4th) of Franchise Royalty Fees actually paid by each
Hawthorn Brand hotel which in the aggregate contain all other hotel
rooms; provided that if the Franchise Royalty Fee (expressed as a
percentage of Gross Rooms Revenues) required to be paid under the
applicable Hawthorn License is less than four percent (4%), then
the amount to be paid to HSA with respect to such hotel (and only
such hotel) shall be a portion of the Franchise Royalty Fees
actually paid by such hotel that is equal to a fraction the
numerator of which is one percent (1%) and the denominator of which
is the stated Franchise Royalty Fee (expressed as a percentage of
Gross Rooms Revenues) payable under the applicable Hawthorn
License.
Notwithstanding the foregoing, (i) if the application of the proviso
contained in clauses (1) through (5) applicable to any particular Hawthorn
License is greater than one hundred percent (100%), that percentage,
applied to the amount actually received from the licensee under the
Hawthorn License in question shall be paid to HSA and USFS shall be
responsible for the difference between the amount actually paid by the
said licensee and the amount required to be paid in accordance with the
formula above set forth; and (ii) USFS shall have the right to provide to
licensees or franchisees under Hawthorn Licenses allowances or
royalty-free periods of not more than six (6) months during the initial
term of such Hawthorn License and during each extension or renewal of the
term thereof. HSA acknowledges and agrees that the provision of allowances
or royalty-free periods by USFS will result in a reduction of the amount
of Franchise Royalty Fees and HSA Royalty Fees and that the provision of
such allowances or royalty-free periods shall not be deemed to be a
reduction of the stated percentage royalty payable under the applicable
Hawthorn License for purposes of this Section 3.1 or any other section of
this Agreement.
(c) "Gross Rooms Revenues" and "Franchise Royalty Fees" Defined. For
purposes of this Section 3.1, and wherever else reference is made to
these terms, (1) the term "Gross Rooms Revenues shall be as defined in
the applicable Hawthorn License and, to the extent not inconsistent
therewith, generally shall mean all amounts paid by or on behalf of
hotel guests for the rental or occupancy of hotel rooms excluding (i)
charges for other hotel services or other forms of hotel revenues
including, without limitation, telephone charges, valet
15
services, in-room entertainment, vending machines and store or
merchandise sales or rentals; and (ii) sales, use or occupancy taxes
relating solely to revenues for the use or occupancy of hotel rooms
charged to and collected directly from hotel guests; and (2) the term
"Franchise Royalty Fees" shall mean the franchise royalty fees actually
received by USFS from licensees under Hawthorn Licenses (or any
amounts actually received by USFS from licensees in lieu thereof),
less out-of-pocket collection costs, gross receipts taxes payable by
USFS thereon, and, with respect to Hawthorn Licenses relating to
hotels in any jurisdiction in which USFS incurred expenses under
Section 4.7 to protect its rights in the Intellectual Property in that
jurisdiction, amounts necessary to reimburse USFS for such expenses,
excluding, however, reservation, sales, marketing and advertising fees
and expenses, initial license fees or other origination charges,
franchisee assessments, termination fees and charges for specific
services such as training, use of prototype plans and the like.
(d) Rooms Count Determination. In determining whether Franchise Royalty
Fees are attributable to the first 3,600 rooms or to some subsequent
tranche of hotel rooms, the rooms count shall be arranged in
chronological order beginning with the Hawthorn License which, as of
the date of determination, represents the Hawthorn Brand hotel having
then been opened and operating as part of the Hawthorn System for the
longest time, and proceeding then in descending chronological order to
the hotel which, as of the date of determination, has most recently
been added to the Hawthorn System. The chronological order shall be
recomputed as of the end of each calendar quarter to reflect new or
additional Hawthorn Brand hotels added to the Hawthorn System since
the end of the preceding quarter, or the deletion of a former member
of the Hawthorn System either because of the expiration or earlier
termination of the applicable Hawthorn License.
Any Hawthorn Brand hotel (herein a "Suspended Hotel") whose operation,
as of the date of determination, has ceased (either by reason of
casualty, temporary condemnation, or construction or refurbishing
activities) shall, so long as the applicable Hawthorn License shall
remain in effect, be deemed part of the Hawthorn System, but shall not
be included in the rooms count until such time (if ever) as its
operations as part of the Hawthorn System are resumed. During the
period of time that a hotel constitutes a Suspended Hotel, it shall be
disregarded for purposes of determining room count or the
chronological ordering of Hawthorn Licenses. Operations of a Hawthorn
Brand hotel shall be deemed to have ceased
16
(and the same shall constitute a Suspended Hotel) if, and for so long
as, two-thirds (2/3rds) or more of its rooms formerly available for
occupancy are not so available.
The parties acknowledge that it is unlikely that arranging Hawthorn
Licenses in chronological order will provide a cut off precisely at
the rooms count contemplated above. Accordingly, the dividing line for
a particular tranche shall be increased to that number of rooms
corresponding to the last Hawthorn License necessary to be included in
order to reach the required rooms count. For example, in determining
the Hawthorn Licenses relating to the first 3,600 rooms, if the total
rooms count for the chronologically oldest Hawthorn Licenses totals
3,500 hotel rooms, and if the next oldest Hawthorn License relates to
a hotel containing 150 rooms, the first tranche shall be deemed to
have been increased from 3,600 rooms to 3,650 rooms, the immediately
succeeding tranche shall be reduced accordingly, and similar increases
shall be made in each of the other tranches to the extent necessary in
order that the dividing line can correspond to a particular Hawthorn
License.
All calculations and determinations of rooms count shall be as of the
last day of the calendar quarter for which HSA Royalty Fees are being
calculated. With respect to any Hawthorn License granted a royalty
free period, the hotel with respect thereto shall be included in the
rooms count only as of the date when such royalty free period shall
expire.
(e) Defaulted Licenses. For purposes hereof, a "Defaulted License" shall
mean any Hawthorn License under which, as of the date of determination
of the amount of HSA Royalty Fees payable hereunder, the licensee has
failed to pay the full amount of Franchise Royalty Fees required to be
paid under such Hawthorn License for three (3) months (whether or not
consecutive) in any period of six (6) consecutive months, for reasons
other than the allowance or royalty-free period which may have been
granted to the licensee as contemplated by Section 3.1(b) above. Any
hotel operating under a Defaulted License shall, until such time as
the applicable Hawthorn License shall have been terminated, be deemed
part of the Hawthorn System, but shall not be included in the rooms
count until such time (if ever) as the licensee thereunder shall have
cured all previous payment defaults in full. So long as a Hawthorn
License constitutes a Defaulted License, it shall be disregarded for
purposes of determining rooms count or the chronological ordering of
Hawthorn Licenses. If the default is cured, in whole or in part, by an
17
amendment to the applicable Hawthorn License changing the structure of
the Franchise Royalty Fees payable thereunder, or by waiver, in whole
or in part, of Franchise Royalty Fees required to be paid (as opposed
to settlement of a dispute as to the required amount), the said
Hawthorn License shall, for all purposes of this Article III, be
deemed a new Hawthorn License with an effective date as of the date of
any such amendment, modification or waiver.
(f) Terminated Licenses. Any Hawthorn License which, as of the date of
determination of rooms count, has been terminated, whether by USFS or
by the licensee thereunder, and regardless of whether the termination
is being contested, shall, for rooms count purposes, be deemed a
terminated Hawthorn License until the same shall have been
reinstituted, if at all, by court order or agreement of the parties,
and the provisions of Section 3.2 below shall govern the payments to
HSA with respect thereto. The foregoing shall apply to any Hawthorn
License that the hotel in question continues to operate as part of the
Hawthorn System during the pendency of any termination dispute.
3.2 HSA Royalty Fees with Respect to Out of System Hawthorn Licenses. For
purposes hereof, the term "Out of System Payments" shall mean any collections
of Royalty Fee Payments by USFS pursuant to a Hawthorn License which, as of
the date of determination, relates to a hotel or hotels not included, as of
such date, in the rooms count of Hawthorn Brand hotels, less out-of-pocket
collection costs and gross receipts taxes payable by USFS therefrom. With
respect to Out of System Payments, the amount of the HSA Royalty Fee shall be
equal to that amount which would have been payable to HSA hereunder had the
hotels to which the Out of System Payments relate been chronologically the
hotels most recently added to the Hawthorn System.
3.3 Other Fees Property of USFS. Except as expressly provided herein, all
fees, charges, payments, assessments or other amounts payable under any
Hawthorn License shall be payable to USFS and may be retained by USFS as its
sole property, including, without limitation, reservation or marketing fees,
joint advertising charges, training charges and the like, it being understood
and agreed that the provisions of this Article III shall relate solely to
Franchise Royalty Fees.
3.4 Time and Manner of Payment. Payment of HSA Royalty Fees shall be made,
in lawful money of the United States, not later than twenty (20) days
following the end of each calendar quarter and shall relate to Gross Rooms
Revenues and Franchise Royalty Fees for Hawthorn Brand hotels actually
realized by the licensee or collected by USFS, as the case may be, during the
preceding
18
calendar quarter. All payments of HSA Royalty Fees shall be accompanied by a
report (the "Quarterly Report") setting forth, in reasonable detail, and with
respect to each separate Hawthorn License, (i) the amount of Gross Rooms
Revenue received by each such Hawthorn Brand hotel; (ii) the amount of
Franchise Royalty Fees received by USFS with respect to each Hawthorn
License; (iii) the number of hotel rooms in each Hawthorn Brand hotel as of
the end of the preceding quarter; (iv) the identity of each Suspended Hotel;
(v) the amount of collections by USFS of Out of System Payments during the
preceding quarter; and (vi) a chronological listing of all Hawthorn Licenses
in existence as of the last day of such calendar quarter. Each Quarterly
Report submitted to HSA in accordance with the provisions of this Section 3.3
shall be certified on behalf of USFS by its Chief Financial Officer as being
true and correct in all material respects. For all purposes hereunder, the
rooms count, the chronological ordering of Hawthorn Licenses, and the number
of available guest rooms, shall be made as of the last day of the calendar
quarter as to which each Quarterly Report shall relate.
3.5 Books and Records; Audit.
(a) USFS agrees that it shall maintain accurate books and records
sufficient, for all purposes, for the preparation of Quarterly Reports,
and to verify the information contained therein, and otherwise to
calculate the HSA Royalty Fees required to be paid by USFS to HSA pursuant
hereto. USFS agrees that it shall grant to HSA, and each of its agents,
accountants, employees and other authorized representatives executing a
customary confidentiality agreement in form and substance reasonably
satisfactory to USFS, full and complete access to all books and records of
USFS relating to the Hawthorn Brand, and the revenues and income received
therefrom by USFS. To the extent such information is contained in
electronic storage media, USFS agrees to provide, upon request of HSA and
at the sole cost and expense of USFS, hard copies of all such data. All
such materials shall be maintained by HSA strictly in accordance with the
provisions of Section 7.11 and shall be returned to USFS promptly upon
written demand therefor. Any investigation conducted by HSA or its
Affiliates, employees or agents shall be upon reasonable prior written
notice and during normal business hours and shall be conducted in a manner
so as to minimize disruption of the operations of USFS and its employees
and agents.
(b) HSA shall have the right once during each twelve (12) month period,
directly and through representatives appointed by it executing a customary
confidentiality agreement in form and substance reasonably satisfactory to
USFS, to audit the books and records of USFS for any period or periods
during the three (3) full fiscal years next preceding the date of such
audit that have not previously been so audited to the extent the same
relate to Hawthorn Licenses or other activities of USFS under or pursuant
to
19
this Agreement, all at the sole cost and expense of HSA except as otherwise
hereinafter expressly provided. If, as a result of any such audit, it shall
be determined that the amount of HSA Royalty Fees theretofore paid to HSA
pursuant hereto is less than the amount required to have been paid, USFS
shall promptly remit the deficiency to HSA together with interest thereon at
the rate of Prime (as reported by The Wall Street Journal) plus two percent
(2%) per annum from the date on which payment was otherwise due to the actual
date of payment thereof. If, however, it shall be determined that the amounts
actually paid by USFS to HSA were greater than the amounts otherwise required
to be paid hereunder, the overpayment shall be credited against the next
payment of HSA Royalty Fees coming due by USFS to HSA without, however, any
interest thereon. In addition, if any such audit discloses an underpayment to
HSA for any one of the calendar quarters being audited of five percent (5%)
or more, USFS shall promptly reimburse HSA for all reasonable costs and
expenses incurred by HSA in conducting such audit for all quarters then being
audited.
ARTICLE IV
Operating Covenants
4.1 Grant of Licenses. USFS shall have sole, exclusive and complete
control and authority over all aspects of the commercial development of the
Hawthorn Brand and the franchising, licensing and operation of the Hawthorn
System, subject, however, to the express terms and provisions of this
Agreement. Without limiting the generality of the preceding sentence, USFS
shall have full control, authority and discretion (subject in all cases to
compliance with the express provisions of this Agreement) to (i) grant
Hawthorn Licenses, except that with respect to the Shaner Hotels, USFS shall
issue the same in accordance with, and subject to the terms and provisions
of, Section 4.9(g); (ii) make any election not to grant a Hawthorn License;
(iii) establish the terms and conditions of all Hawthorn Licenses granted by
USFS, including, without limitation, the amount of Franchise Royalty Fees,
initial license fees, assessments and other fees and charges required to be
paid by licensees, together with additional charges for specialized services
such as marketing and reservations which may not, however, be intended as
charges in lieu (in whole or in part) of Franchise Royalty Fees or exceed in
amount the reasonably estimated costs to USFS of providing such services;
provided, however, HSA shall have the right to approve any Franchise Royalty
Fee in excess of five percent (5%) of Gross Rooms Revenues or any application
fee in excess of the lesser of Seven Hundred Fifty Dollars ($750) per room or
Seventy-Five Thousand Dollars ($75,000); (iv) establish performance and
operating standards required to be met by licensees under Hawthorn Licenses;
(v) make any elections with respect to enforcement of Hawthorn Licenses
including elections to institute proceedings against licensees, terminate or
cancel licenses, or to
20
waive or grant consents with respect to any Hawthorn License; (vi) develop
and implement standards of operations, construction and furnishing for
Hawthorn Brand hotels, except that such standards with respect to Existing
Hotels shall not be varied by USFS from those required under Existing
Licenses; (vii) establish the direction and strategy for development,
operations and design of the Hawthorn Brand; and (viii) make any elections to
advertise and promote the Hawthorn Brand. Notwithstanding the foregoing, in
the event HSA or any of its Affiliates shall at any time on or after the
Effective Date construct any hotel which it proposes to operate as part of
the Hawthorn System, USFS agrees to grant to HSA or its said Affiliate a
Hawthorn License on terms and conditions (including royalty, license and
other fees and charges) not less favorable to HSA or its said Affiliate than
those then being offered to other licensees, subject however to the
following: (x) the hotel being constructed shall meet all quality,
construction and operating standards then applicable to Hawthorn Brand
hotels; (y) the issuance of the Hawthorn License shall not violate any
restrictive agreements to which USFS shall then be a party or general "impact"
policy of USFS at the time; and (z) USFS shall not then have received, or is
not reasonably expecting to receive within ten (10) days, an application for
a Hawthorn License which would, if issued, be violated by the issuance to
HSA.
4.2 Promotion and Enhancement of Hawthorn Brand. USFS agrees to use all
reasonable efforts to promote the Hawthorn Brand and to maximize Franchise
Royalty Fees. In promoting the Hawthorn Brand, and in the development and
operation of the Hawthorn System, USFS agrees that it will use commercially
reasonable efforts to preserve the good will of the Hawthorn Brand and the
Hawthorn System. Accordingly, USFS agrees that it shall at all times
faithfully, honestly and diligently perform its obligations hereunder and
continuously exert its reasonable efforts to promote and enhance the
development and operation of Hawthorn Brand hotels and the Hawthorn System
within the Development Area and use reasonable efforts to seek out and
recruit high quality licensees. At all times, USFS will use reasonable
efforts to seek to maintain a high quality standard applicable to the
Hawthorn Brand and that it will not change the standards relating to
operations, construction and furnishing required by Existing Hotels beyond
what is currently required under Existing Licenses. Upon written request from
time to time from HSA (not to exceed once per year), USFS agrees to disclose
to HSA all ideas, concepts, methods, techniques, products and services
relating to the development and operation of Hawthorn Brand hotels conceived
or developed by USFS or its Affiliates, or by any licensees of Hawthorn Brand
hotels during the Term, all of which shall be and become part of the Hawthorn
System, shall be covered by the license granted hereunder, shall be held
confidential by HSA throughout the term hereof, and shall not be used for any
other purpose.
21
Neither HSA nor any of its Affiliates shall have any liability or obligation
to incur any costs or expenses in connection with promotion of the Hawthorn
Brand. USFS shall, at all times, have not less than fifteen (15) full time
sales persons (including corporate and regional supervisory personnel)
seeking to sell Hawthorn Licenses and licenses for Microtel Brand Hotels. If
USFS engages in franchising or licensing of either or both of a Limited
Service Brand, or licensing or other activities in non-lodging industries, it
shall engage in such businesses only with sales persons and corporate and
regional supervisory personnel who are not involved in the sales or promotion
of the Hawthorn System or the Microtel System, or, if such personnel are
involved with the Hawthorn Brand or the Microtel Brand, USFS shall increase
the number of personnel engaged in the selling of franchises or licenses to a
sufficient number so that there shall, on a full time basis, at all times be
the equivalent of 15 persons devoted to the sales and promotion of licenses
relating to the Hawthorn Brand and the Microtel Brand. In determining the
full time equivalence of personnel, HSA and USFS shall meet from time to time
to assess the number of persons and their deployment to determine compliance
with the requirements of this Section. Any decision by USFS regarding the
number of personnel constituting fifteen full time equivalents shall be
subject to approval of HSA, not to be unreasonably withheld, until such time
as Hawthorn Brand Saturation shall have been achieved, after which the
decisions regarding full time equivalents shall be within the discretion of
USFS. If any required sales or supervisory positions shall become vacant,
USFS shall have not more than ninety (90) days in which to fill such
position.
Without in any way limiting the generality of any of the provisions of
this Section 4.2, USFS agrees that it shall spend not less than One Hundred
Thousand Dollars ($100,000) in each of 1996 and 1997 for hotel marketing
expenditures (other than payroll and payroll related expenses) to promote the
Hawthorn Brand. For purposes of the preceding sentence, marketing
expenditures shall include only direct expenses incurred in connection with
marketing activities, such as advertising, sales brochures and the like, but
shall not include any general or corporate overhead (or allocations thereof)
or costs attributable to specific Hawthorn Licenses or proposed or
prospective Hawthorn Licenses such as the cost of negotiating Hawthorn
Licenses, preparation of any UFOC, required franchise filing, registration or
reporting fees, or sales or other commissions paid in connection with the
execution of delivery of any Hawthorn License.
4.3 Compliance with Law. In all of its activities under or pursuant to
this Agreement, USFS shall, at its sole cost and expense, comply in all
material respects with applicable provisions of law; provided, however, the
foregoing shall not apply unless the failure to comply with law has a
material adverse effect on the financial condition of the Hawthorn System, or
unless the failure
22
to comply by USFS constitutes a material violation of law. Without in any way
limiting the generality of the foregoing, USFS shall (i) prepare and deliver,
on a timely basis, all required UFOCs and related materials required to be
delivered to prospective franchisees or licensees, and any required
supplements or amendments thereto (subject to prior written approval of HSA
which shall not be unreasonably withheld, conditioned or delayed); (ii) with
respect to any Existing Licenses, where required by law in the reasonable
opinion of HSA, prepare and deliver to the franchisees and licensees
thereunder (subject to prior written approval of HSA which shall not be
unreasonably withheld, conditioned or delayed) supplements or amendments to
the UFOCs and other required materials theretofore delivered to said
licensees or franchisees describing the transfer of the Existing License in
question to USFS, making additional disclosures as required by law; and (iii)
make all reports and filings required under applicable law except where the
failure to comply with any of the foregoing would not have a material adverse
effect on HSA or the Hawthorn System; provided, however, HSA shall have no
such approval right at such time as Hawthorn Brand Saturation has been
reached.
4.4 Restrictive Covenants.
(a) Subject to the limitations and conditions hereinafter set forth, USFS,
for itself, and on behalf of any present or future Affiliate of USFS, hereby
agrees that neither USFS nor any such Affiliate shall (A) for a period of two
(2) years from the Effective Date, engage in any licensing or franchising
business of any kind or manner whatsoever excepting only the licensing or
franchising of (i) Microtel Brand hotels (including, without limitation,
Microtel Suite/Hotels); (ii) Hawthorn Brand hotels in accordance with the
provisions hereof; (iii) Limited Service Brand hotels; and (iv) commencing
one (1) year after the Effective Date (and not prior thereto) licensing or
franchising of business operations which do not include hotel or lodging
facilities; and (B) without complying with Section 4.4(d), license or
franchise a Hotel Brand relating to All Suites Hotels during the term of this
Agreement and for a period of six (6) months thereafter. With respect to
Mid-Priced Brand hotels, the restriction above provided shall restrict any
announcements with respect to the proposed licensing activity, preparation
(or commencement of preparation) of any UFOC with respect thereto or
negotiation with prospective licensees with respect to licenses or franchises
to be issued, until after the occurrence of the second anniversary of the
Effective Date. The provisions of clause (B) above shall survive the
termination of this Agreement.
(b) The parties hereto acknowledge that the restrictions set forth in
Section 4.4(a) above are reasonable in scope and time and are necessary in
order that HSA can be reasonably assured of achieving the benefits it intends
to achieve by entering into this Agreement. The parties further acknowledge
that any breach of the
23
foregoing restrictions by USFS shall be material, and will result in material
damage to HSA which cannot reasonably be remedied solely by the payment of
money damages. Accordingly, USFS, for itself and on behalf of any Person now
or at any time hereafter constituting or becoming an Affiliate of USFS, that
HSA shall be entitled to appropriate equitable relief in connection with any
breach or threatened breach of provisions of Section 4.4(a) above, USFS, for
itself and on behalf of any of its aforesaid Affiliates, hereby waiving the
requirement of the posting of any bond or other surety in connection with any
such proceedings.
(c) Nothing herein contained shall limit or restrict the right of USFS or
any Affiliate of USFS to license or franchise the Microtel Brand in
connection with Microtel Brand hotels (including, without limitation,
Microtel Suite Hotels).
(d) Notwithstanding the foregoing provisions of this Section 4.4, but
subject to the provisions of this subsection (d), USFS shall be relieved of
all of its obligations under Section 4.4(a) at such time as Hawthorn Brand
Saturation shall have been achieved. If at any time during the term of this
Agreement USFS intends to license or franchise a Hotel Brand relating to an
All Suites Hotel in violation of the provisions of Section 4.4(a) but in the
reliance on provisions of the preceding sentence, it shall so notify HSA
thereof in writing not less than fifteen (15) days prior to the execution of
any franchise or license setting forth (i) the name of the Hotel Brand to be
licensed, (ii) the location of the initial licensed hotel or hotels, (iii) a
description in reasonable detail of the Hotel Brand in question including its
intended marketing niche (such as, the anticipated average daily rate, the
anticipated costs of construction of hotels of the Hotel Brand in question,
the facilities expected to be included in hotels of the Hotel Brand, such as
food and beverage outlets, meeting space, recreational and banquet
facilities, and the like); and (iv) the assessment of USFS of the competitive
impact of the Hotel Brand in question on the Hawthorn Brand. Such information
shall be maintained strictly in accordance with Section 7.11 and shall be
used by HSA solely for purposes of evaluating whether to exercise its rights
under this Section 4.4(d) and for no other purpose.
Upon receipt of any such written notice from USFS, HSA shall have the
right, by written notice (the "Sale Notice") to USFS delivered at any time
within thirty (30) days after receipt of the aforesaid notice from USFS, and
subject to the provisions of this Section 4.4(d), to cause USFS to purchase
the "Hawthorn Assets" for the "Selling Price" (both of the above-quoted terms
being as defined in subsection (e) below). If HSA fails to deliver the Sale
Notice within the aforesaid period of thirty (30) days, its right to cause
the sale of the Hawthorn Assets to USFS pursuant to the provisions of this
Section 4.4(d) shall terminate. If, however, HSA shall deliver the Sale
Notice on a timely basis as herein contemplated, the delivery thereof shall
constitute a binding
24
agreement between HSA and USFS for the purchase and sale of the Hawthorn
Assets at the Selling Price and upon the terms and conditions set forth
below, provided that, within fifteen (15) days after delivery of the Sale
Notice, USFS may, by written notice to HSA, withdraw its intention to license
or franchise a Hotel Brand relating to All-Suites Hotels, in which case it
shall not be obligated to purchase the Hawthorn Assets as provided in this
Section 4.4(d). If USFS shall subsequently intend to license or franchise a
Hotel Brand of All-Suites Hotels, it shall do so only after once again
complying with this Section 4.4(d).
Any sale of the Hawthorn Assets made pursuant hereto shall be upon the
following terms and conditions: (i) closing shall take place sixty (60) days
after delivery of the Sale Notice; (ii) the sale shall be with customary
representations and warranties by HSA which, where appropriate, will be to
the Knowledge of HSA, including, without limitation, a warranty by HSA that
the Hawthorn Assets being transferred to USFS are free and clear of any
liens, claims, charges or encumbrances of any kind or nature; (iii) any
required disclosures to licensees, amendments to UFOCs, or other reports,
notices, filings or registrations required in connection with the sale of the
Hawthorn Assets shall be the sole responsibility, and the sole cost, of USFS;
(iv) HSA Royalty Fees, and any other amounts required to be paid pursuant to
the provisions of this Agreement, shall be prorated as of the closing date
and paid promptly after collected; (v) this Agreement shall, concurrently
with the closing, terminate, except that all indemnities shall continue with
respect to events occurring or matters arising prior to the closing date; and
(vi) USFS shall indemnify, defend (with counsel selected by HSA) and hold HSA
and its Affiliates completely free and harmless of and from any and all
manner of all claim, loss, damage, liability or expense (other than transfer
taxes) in any way relating to the Hawthorn System arising, accruing and
relating to events occurring from and after the closing date of such sale.
(e) For purposes hereof, the term "Hawthorn Assets" shall mean and include
any and all right, title and interest of HSA and its Affiliates in and to the
assets relating to the Hawthorn Brand and the Hawthorn System (including the
Intellectual Property), but shall exclude any direct or indirect interest of
HSA, or any of its Affiliates, in any of the hotels which are operated as
part of the Hawthorn System, or in, to or under any management agreements
relating to any such Hawthorn Brand hotels.
For purposes hereof, the term "Selling Price" shall mean ten times the
amount of HSA Royalty Fees earned or accrued by HSA hereunder during the
twelve full calendar months next preceding the date of the delivery by HSA of
the Sale Notice.
4.5 Managed Hotels. HSA and its Affiliates shall continue to have the
right to manage and operate any hotels, including
25
specifically but without limitation, Hawthorn Brand hotels, and any other
hotels now or at any time hereafter managed or operated by HSA or its
Affiliates. HSA and its Affiliates shall have no obligation or liability to
include any hotels hereafter managed by HSA or its Affiliates in the Hawthorn
System, and USFS shall have no liability or obligation to grant any Hawthorn
License to any hotels managed or operated by HSA or its Affiliates.
Management fees payable under any management agreements with HSA or its
Affiliates shall be the sole property of HSA, and neither the management
agreements nor the income therefrom, shall be included as part of the
Hawthorn System.
4.6 Reservations.
(a) The Hawthorn System includes the right of all Hawthorn System hotels
to participate in the reservation system under Reservation Agreement. The
assignment of the Hawthorn System to USFS as hereinabove provided includes
all right, title and interest of HSA under the Reservation Agreement, and the
assumption by USFS of the obligations and liabilities of HSA thereunder
arising, accruing and relating to events occurring on and after the date
hereof, it being the understanding and agreement of the parties hereto that
any consent of third parties to the transfer and assignment of the
Reservation Agreement shall have been obtained prior to the date hereof.
Charges for reservation services shall be paid by licensees in accordance
with the Hawthorn License to be entered into between USFS and the proposed
licensee, except that charges for Existing Hotels shall be made in accordance
with the Existing Licenses.
(b) Subject to the provisions of the Reservation Agreement to be assumed
by USFS, and subject to the provisions of the various Hawthorn Licenses, USFS
shall have the right, at its discretion, to change the provisions applicable
to the reservation system, the reservation provider, or any other aspects of
the reservation system in its discretion.
4.7 Foreign Rights. HSA has heretofore advised USFS, and USFS does hereby
acknowledge, that trademark, trade name and copyright registrations have been
filed and obtained by HSA only in the jurisdictions referred to in Schedule
7.2(d)(3). In the event USFS elects to license Hawthorn Brand hotels in any
jurisdiction within the Development Area in which Intellectual Property
registration has not been obtained, USFS shall have the right, at its
expense, to make or cause HSA to make such filings or registrations as it
deems necessary in order to protect the rights of USFS and HSA in the
Intellectual Property in the jurisdiction in which Hawthorn Licenses are to
be granted, it being understood and agreed that any such registrations or
filings shall be for the benefit of, and shall, upon the effectiveness
thereof, constitute part of, the Hawthorn System. Throughout the term of this
Agreement HSA agrees that it shall not, and shall not license or
26
authorize any other Person to, grant licenses either within or outside the
Development Area relating to Hawthorn Brand hotels, and USFS agrees that it
shall not license or franchise the Hawthorn Brand in any such other
jurisdictions except as part of the Hawthorn System and in accordance with
the provisions of this Agreement.
4.8 Additional HSA Covenants. In addition to each of its other covenants,
agreements and obligations herein set forth, HSA, for itself and its present
and future Affiliates, hereby covenants and agrees as follows:
(a) At the request of USFS during the term of this Agreement HSA shall
share with USFS the management and other expertise and tactics
specific to the Hawthorn Brand which it has accumulated in licensing
and operating the Hawthorn System.
(b) For as long as this Agreement is in effect, HSA shall, and shall cause
its Affiliates to, cooperate with USFS, its Affiliates and their
representatives and counsel, in the preparation of any documents or
other materials in connection with the Hawthorn System that may be
reasonably required by any governmental authority, including, without
limitation, any filings with federal or state franchise authorities.
All reasonable out-of-pocket costs or expenses incurred by HSA in
complying with the provisions of this Section 4.8 shall be paid or
reimbursed to HSA by USFS upon presentation of proper documentation
therefor.
(c) For as long as this Agreement is in effect, HSA will promptly notify
USFS in writing upon becoming aware of any investigations, lawsuits,
claims or proceedings relating to the Hawthorn System that, after the
date hereof, are commenced or threatened against HSA or the Hawthorn
System.
4.9 Additional USFS Covenants. In addition to each of its other covenants,
agreements and obligations herein set forth, USFS, for itself and its present
and future Affiliates, hereby covenants and agrees as follows:
(a) For so long as this Agreement is in effect, USFS shall promptly notify
HSA in writing upon becoming aware of any investigations, lawsuits,
claims or proceedings relating to the Hawthorn System that, after the
date hereof, are commenced or threatened against or with respect to
the Hawthorn System.
(b) Attached hereto as Exhibit B is a form of license agreement
substantially in the form which USFS proposes
27
to use in connection with its franchising activities hereunder and
which shall constitute future Hawthorn Licenses. HSA hereby approves
the form of License Agreement substantially in the form attached
hereto as Exhibit B. All ancillary agreements and documents, including
operating and other relevant standards relating to the Hawthorn Brand,
shall be subject to the approval of HSA, which approval shall not be
unreasonably withheld or delayed. The form of license agreement shall
not be altered in any material respect by USFS without the approval of
HSA, which approvals shall not be unreasonably withheld or delayed.
The provisions of this Section 4.9(b) shall terminate and be of no
further force or effect, on and after Hawthorn Brand Saturation.
(c) USFS or its Affiliates shall diligently and continuously monitor, and
strictly enforce, compliance by licensees with the provisions of
Sections 3(A), 3(B), 5(C) and 1O(D) of the form of the Hawthorn
License attached hereto as Exhibit B.
(d) USFS, by itself or through its Affiliates, or as part of the
provisions of Hawthorn Licenses, agrees to maintain insurance
necessary to comply with all legal requirements concerning insurance
and to maintain general liability insurance against claims for bodily
and personal injury, death and property damage caused by or occurring
in connection with the conduct of USFS's business pursuant to this
Agreement. Such insurance shall be maintained under one or more
policies of insurance containing minimum liability and types of
coverages appropriate in the Development Area. Each policy of general
liability insurance shall name HSA, and such of the Affiliates of HSA
as shall be designated in writing by HSA, as additional insureds, such
coverage to contain a waiver of all subrogation against HSA, its
Affiliates, and their successors and assigns. To the extent of any
extra costs incurred by USFS by reason of adding HSA as an additional
insured, the amount of such extra costs shall be borne and paid for by
HSA. USFS shall furnish to HSA annually a copy of the certificate of
insurance or other evidence requested by HSA confirming that such
insurance coverage is in force. HSA shall have no right or obligation
to prescribe types or amounts of insurance coverage and shall have no
liability or obligation to USFS, or any third party, for failure to do
so.
(e) USFS or its Affiliates shall maintain and preserve at its principal
office full, complete and accurate records and reports pertaining to
the development and operation of the Hawthorn System and the
performance by USFS of its obligations hereunder.
28
(f) USFS shall not use the Intellectual Property as part of any corporate
name or with any prefix, suffix, or other modifying words, terms,
designs or symbols, or in any modified form, nor may USFS use any of
the Intellectual Property in connection with the performance or sale
of any other services or products or in any other manner not expressly
authorized hereunder or otherwise in writing by HSA. HSA hereby
approves of the corporate name "Hawthorn Suites Franchising Inc." by
USFS or any subsidiary of USFS.
(g) USFS agrees that it shall grant Hawthorn licenses as required from
time to time under the terms of the Shaner Agreement. All such
licenses granted in satisfaction or partial satisfaction of the
obligations of the Shaner Partnership under the Shaner Agreement shall
constitute Existing Licenses (except as otherwise provided by Section
3.1 above). Notwithstanding the foregoing, in the event the Shaner
Partnership shall apply for or request the issuance of a Hawthorn
License for a hotel which does not, for any reason, comply with the
requirements of the Shaner Agreement, USFS shall have the sole and
exclusive right to determine whether or not to grant the Hawthorn
License being requested. If a Hawthorn License is issued by USFS in
accordance with the provisions of the preceding sentence, the same
shall constitute a Shaner Hotel only if HSA, in its discretion,
determines that the same constitutes a Shaner Hotel and that,
accordingly, the Shaner Partnership has fulfilled, to that extent, its
obligation under the Shaner Agreement. If it is determined by HSA that
a Hawthorn License granted to the Shaner Partnership constitutes a
Shaner Hotel, said Hawthorn License shall constitute an Existing
License for purposes hereof, except as otherwise provided in Section
3.1 above. If, however, the hotel subject to the Hawthorn License is
not considered a Shaner Hotel then the Hawthorn License so granted
shall in no event, and for no purpose, be deemed an Existing License
but simply a Hawthorn License issued in accordance with the provisions
of this Agreement.
4.10 Independent Contractors. It is understood and agreed by the parties
hereto that this Agreement does not create a fiduciary relationship between
HSA and USFS, that HSA and USFS are and shall be independent contractors, and
that nothing in this Agreement is intended to make either party a general or
special agent, joint venturer, partner or employee of the other for any
purpose. Except as expressly authorized hereunder or in writing, neither HSA
nor USFS shall make any express or implied agreements, warranties, guarantees
or representations, or incur any debt, in the name of or on behalf of the
other, or represent that their relationship is other than franchisor and
sub-franchisor, and neither HSA nor USFS
29
shall be obligated by or have any liability under any agreements or
representations made by the other that are not expressly authorized in
writing.
4.11 Hawthorn Personnel. It is hereby understood and agreed that USFS
shall have the right, at its option (but in no event shall be obligated) at
any time on, prior to or after the Effective Date, to solicit any HSA
employees for employment by USFS and no such solicitation or employment by
USFS shall violate any rights of HSA or its Affiliates, and shall be without
liability to USFS or its Affiliates.
4.12 Regarding the Ad Fund.
(a) Concurrently with the execution and delivery hereof, or as soon
thereafter as reasonably practicable, HSA shall deliver, or cause to be
delivered, to USFS, or as USFS shall direct, the entire remaining cash
balance in the Ad Fund. USFS shall, or shall cause its Affiliate, to accept
such deposit and to hold, operate and administer the Ad Fund, receive
deposits thereto, and make expenditures therefrom, all in accordance with the
provisions of the Existing Licenses. USFS also agrees that it shall, or shall
cause its Affiliate, in all future Hawthorn Licenses granted by USFS or its
Affiliates, to include appropriate provisions regarding the Ad Fund
consistent with, and in accordance with, the provisions of the Existing
Licenses. Any approval herein contained with respect to the form of the
Hawthorn License to be used by USFS or its Affiliates in connection with
licensing and franchising Hawthorn Brand hotels is conditioned upon, and on
the express understanding of the parties that, all such Hawthorn Licenses
shall contain appropriate provisions regarding Ad Fund as currently required
under the Existing Licenses.
(b) As soon as reasonably practicable after the date hereof, HSA shall
deliver, or cause to be delivered to USFS, copies of all annual reports
heretofore prepared with respect to the Ad Fund as required by the Existing
Licenses. HSA agrees that it shall provide such other information as may be
reasonably requested by USFS to enable it to prepare the annual reports for
1996. USFS agrees that it shall, out of funds available in the Ad Fund, pay
all accrued liabilities as disclosed on the Accounting (as defined below) as
and when requested by HSA. Any request for payment by HSA shall constitute a
certification by HSA that the amounts being requested are due and payable,
and that payment thereof from the Ad Fund represents an appropriate use of
such funds in accordance with the provisions of the Existing Licenses.
(c) HSA hereby represents and warrants to USFS and its Affiliates that all
amounts received and expended from the Ad Fund with respect to matters
arising or events occurring prior to the date hereof have been properly
received and expended or accrued in accordance with the provisions of the
Existing Licenses, that all
30
information contained in the accounting of the Ad Fund's receipts,
expenditures and liabilities heretofore delivered to USFS (the "Accounting")
is true and correct in all material respects for all periods shown except
that amounts for March 1996 are HSA's good faith estimate of actual amounts,
and that all information in any annual report furnished by HSA to USFS
hereunder is true and correct in all material respects, that HSA or its
Affiliates, as appropriate, have administered the Ad Fund in all respects in
compliance with the provisions of the Existing Licenses, and that there are
no unreimbursed loans or advances to the Ad Fund by HSA or any of its
Affiliates other than as set forth in the Accounting and that there are no
commitments relating to the Ad Fund for any period after the date hereof.
(d) USFS covenants and agrees that it shall pay or reimburse HSA, and each
of the Affiliates of HSA, any loss, cost, damage, liability or expense which
HSA or any of its said Affiliates may suffer and incur by reason of the
administration of the Ad Fund after the date hereof and during the term of
this Agreement (except with respect to matters for which USFS may be entitled
to indemnity hereunder).
(e) The parties hereto do hereby acknowledge that as of the date hereof
there remains an outstanding and unreimbursed advance due from the Ad Fund to
HSA, or an Affiliate of HSA, in the amount of approximately $169,000, subject
to adjustment with respect to estimated amounts for the month of March 1996
but in no event to exceed $179,000. USFS agrees that it shall pay or
reimburse HSA for the outstanding balance of such advance less the amount of
any receivables reflected as assets on the Accounting ($154,489 in the
aggregate) that have not been collected by December 31, 1996 without resort
to litigation or extraordinary collection activity, without interest (such
interest being hereby expressly waived and released by HSA for itself and on
behalf of each of its Affiliates) out of funds available from time to time in
the Ad Fund and in any event shall repay the full amount of the advance, if
not sooner paid, not later than December 31, 1996.
ARTICLE V
Transfers
5.1 Transfers by HSA. HSA shall not, without the prior written consent or
approval of USFS, sell, transfer, assign, pledge, encumber, hypothecate, set
over or convey any of its rights, obligations or interests hereunder or in
the Intellectual Property or any part thereof or interest therein.
5.2 Restrictions on Transfer by USFS. Except as otherwise herein expressly
provided, USFS shall have no right, power or authority to sell, assign,
transfer, pledge, encumber, hypothecate, set over or convey (any of the
foregoing being herein collectively referred to as a "Transfer") all or any
part of its right, title or interest in, to or under this Agreement, or in or
to the Hawthorn Brand or the Hawthorn System, or any part or interest
therein, either directly or indirectly, without the express written approval
31
of HSA (which approval may be granted or withheld in the sole discretion of
HSA). It is the intention of the parties that there shall be no indirect
Transfer of this Agreement by USFS as a result of a "Change of Control" (as
hereinafter defined) of USFS under any circumstances in which a direct
Transfer of this Agreement would be prohibited or restricted. Accordingly,
the provisions of this Article V with respect to any Transfer by USFS shall
be equally applicable to a Change of Control, and all references herein to
Transfers of this Agreement shall apply equally to any such Change of
Control. Any Transfer made in violation of any of the provisions of this
Section 5.2, or any other provisions of this Article V, shall be void, except
as otherwise hereinafter provided.
5.3 Permitted Transfers. Notwithstanding the foregoing, the following
shall constitute "Permitted Transfers" which may be made by USFS without the
prior written consent of HSA and free of any restrictions on Transfer set
forth in Section 5.2 (but subject to any restrictions, conditions or
limitations hereinafter set forth):
(a) Any Transfer made by USFS to any wholly-owned subsidiary of USFS, it
being understood and agreed, however, that no such Transfer to a
wholly-owned subsidiary shall, anything herein contained to the
contrary notwithstanding, relieve USFS of any of its liabilities,
obligations, duties or responsibilities hereunder; or
(b) The granting of any sub-license by USFS to any wholly-owned
subsidiary of USFS so long as the term of such sub-license shall not
extend beyond the date on which any such subsidiary shall cease to be
a wholly-owned subsidiary of USFS, it being understood and agreed,
however, that in the event USFS shall grant a sub-license to any such
subsidiary, such sub-license shall, for all purposes of this
Agreement, be disregarded and shall not constitute a Hawthorn License;
only licenses granted by said wholly-owned subsidiary pursuant to its
authority under any sub-license shall be deemed to constitute a
Hawthorn License for purposes hereof; or
(c) Any grant of, and exercise of rights under, a security interest in
this Agreement or any of the Hawthorn Licenses given as security for
any indebtedness of USFS or any of its subsidiaries for money borrowed
by USFS or any of its subsidiaries from the Person secured by such
security interest; or
(d) Any Transfer made by USFS at such time as the Royalty Reduction
Standard shall be in effect and shall have been satisfied by USFS; or
(e) Any transfer made at such time as any class of "equity securities" of
USFS shall be registered under the United
32
States Securities Exchange Act of 1934, as amended (the term "equity
securities" to have the same meaning as set forth in the said Act); or
(f) Any transfer made at such time as the number of Qualified License
Agreements then in effect shall be sufficient to constitute Hawthorn
Brand Saturation;
provided, however, no Transfer by USFS pursuant to subsections (c) through
(f), both inclusive, of this Section 5.3 shall be made to a Person who is
not, as of the date of such Transfer, a "Qualified Transferee", and, provided
further, no such Transfer (other than a Change of Control) shall be made
unless the provisions of Section 5.5 below shall have been complied with. For
purposes hereof, a "Qualified Transferee" shall mean a Person who (i) has a
net worth (that is, stockholder's equity), exclusive of its interest in the
Hawthorn System, equal to or greater than the net worth (stockholder's
equity) of USFS as of the date of Transfer; (ii) has a generally good
business reputation; and (iii) has not, and any Person or Persons in control
of said Transferee has not been convicted of or indicted for, any criminal
act or activity; provided, however, in the case of any Change of Control, the
net worth test shall be deemed to have been met, notwithstanding the net
worth of the Person acquiring controlling interest in USFS, so long as the
transaction giving rise to the Change of Control, and any related transaction
or transactions, shall not cause any reduction in the net worth of USFS to an
amount less than the lesser of (i) the net worth of USFS as of the effective
date of any such Change of Control, and (ii) Twenty-Five Million Dollars
($25,000,000). "Net worth" for purposes hereof shall include any redeemable
preferred stock, including mandatorily redeemable preferred stock. In the
case of any Person acquiring an interest in this Agreement from USFS as
security for the payment of money or the performance of obligations, such
Person need be a Qualified Transferee only at the time of said Person's
acquisition of the security interest and not necessarily at the time of its
acquisition of full rights of HSA hereunder whether upon foreclosure,
transfer in lieu of foreclosure or otherwise.
5.4 "Change of Control". As used in this Article V, and anywhere else in
this Agreement where such term is referred to, the term "Change of Control"
shall mean any transaction or series of related transactions whereby actual
control of USFS shall be transferred to a Person or group of related Persons
other than a Person who is, or is part of a group of related, Affiliated or
associated Persons who are, currently shareholders of USFS, or to members of
their immediate family (or trusts for their benefit, or the benefit of
members of their immediate family, or both) (any such Person being herein
referred to as a "Current Shareholder"). The immediate family of any person
shall mean the spouse or any lineal ancestor or descendent of such person.
For purposes hereof, "control" of USFS shall mean control in fact and may
arise by
33
virtue of the ownership or control of a majority of the voting rights in HSA
(whether by ownership of equity interests, through a voting trust, by proxy
or other means) or by contract or other arrangement in which control over the
business and affairs of USFS is governed. Any change of equity ownership in
USFS, or transfer of voting rights, to a Person or group of Affiliated,
associated or related Persons (other than Current Shareholders) not then
holding voting or other control interests in USFS, shall constitute a Change
of Control if the transfer, regardless of the amount of voting or controlling
interests so transferred, together with any other voting or controlling
interests then held by the transferee Person or group of Persons, shall
result in a Change of Control in fact.
5.5 Assumption by Transferee. Upon any Transfer (other than a Change of
Control or grant of a security interest), whether in violation of or
compliance with the provisions of this Article V, the Transferee shall, by
written instrument reasonably satisfactory in form and substance to HSA,
assume, for the benefit of HSA, all of the duties, liabilities, obligations
and responsibilities of USFS under this Agreement relating to any events
occurring or matters arising on or after the effective date of any such
Transfer. A fully executed copy of the aforesaid written instrument shall
promptly be delivered to HSA in accordance with the provisions of this
Agreement. Upon any Transfer made in strict compliance with all of the terms,
covenants and conditions of this Article V, including, without limitation,
delivery of the written instrument referred to in the preceding sentence, the
Transferor shall be relieved of any further liability or obligation hereunder
except with respect to matters arising or events occurring prior to the
effective date of any such Transfer, as to which the Transferee shall remain
fully liable for so long as any such covenants or obligations shall remain in
effect in accordance with the terms of this Agreement.
ARTICLE VI
Default and Termination
6.1 Termination Standard. The following represents the "Termination
Standard" to be adhered to by USFS:
(a) not later than the first anniversary of the occurrence of the
Effective Date, there shall be not less than ten (10) hotels subject
to Qualified License Agreements which are in effect and in good
standing on the said date; and
(b) not later than the second anniversary of the occurrence of the
Effective Date, there shall be not less than twenty (20) hotels
subject to Qualified License
34
Agreements, which are in effect and in good standing on the said date;
(c) not later than the third anniversary of the occurrence of the
Effective Date, there shall be not less than forty (40) hotels subject
to Qualified License Agreements which are in effect and in good
standing on the said date;
(d) not later than the fourth anniversary of the occurrence of the
Effective Date, there shall be not less than sixty (60) hotels subject
to Qualified License Agreements which are in effect and in good
standing on the said date;
(e) not later than the fifth anniversary of the occurrence of the
Effective Date, there shall be not less than eighty (80) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date; and
(f) not later than the sixth anniversary of the occurrence of the
Effective Date, there shall be not less than one hundred (100) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date.
6.2 Royalty Reduction Standard. The following shall comprise the Royalty
Reduction Standard for purposes of this Agreement:
(a) not later than the first anniversary of the occurrence of the
Effective Date, there shall be not less than twenty (20) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date; and
(b) not later than eighteen (18) months following the occurrence of the
Effective Date, there shall be not less than thirty (30) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date;
(c) not later than the second anniversary of the occurrence of the
Effective Date, there shall be not less than forty (40) hotels subject
to Qualified License Agreements which are in effect and in good
standing on the said date;
(d) not later than the third anniversary of the occurrence of the
Effective Date, there shall be not less than sixty-five (65) hotels
subject to Qualified License Agreements which are in effect and in
good standing on the said date;
(e) not later than the fourth anniversary of the occurrence of the
Effective Date, there shall be not less than ninety (90) hotels
subject to Qualified License
35
Agreements which are in effect and in good standing on the said date;
(f) not later than the fifth anniversary of the occurrence of the
Effective Date, there shall be not less than one hundred fifteen (115)
hotels subject to Qualified License Agreements which are in effect and
in good standing on the said date; and
(g) not later than the sixth anniversary of the occurrence of the
Effective Date, there shall be not less than one hundred forty (140)
hotels subject to Qualified License Agreements which are in effect and
in good standing on the said date.
6.3 Default. USFS shall be deemed to be in default under the provisions of
this Agreement upon the occurrence of any one or more of the following events
and for so long as the same shall remain in effect:
(a) As of any anniversary of the Effective Date, the Termination Standard
shall not have been complied with, and such condition shall continue
to and including the date of termination (if any) of this Agreement in
accordance with the provisions of this Agreement. If, prior to (but
not after) the delivery of a "Default Notice" (as defined below), the
number of hotels in the Hawthorn System operating under Qualified
License Agreements shall equal or exceed the number required to have
been in effect on the immediately preceding anniversary date of the
Effective Date, the same shall constitute a cure of the default and
compliance with the applicable Termination Standard.
(b) USFS shall have failed to fully satisfy, perform or discharge any one
or more of its covenants or obligations under this Agreement (other
than the Termination Standard or the Royalty Reduction Standard), and
such failure shall continue for not less than thirty (30) days after
written notice thereof from HSA to USFS setting forth specifically the
manner in which USFS is in default hereunder.
(c) As of any relevant date after the occurrence of the Effective Date,
the Royalty Reduction Standard shall not have been complied with, such
default to continue until such time as the number of hotels subject to
Qualified License Agreements shall equal or exceed the number required
in order to satisfy the Royalty Reduction Standard as of the
immediately preceding relevant date after occurrence of the Effective
Date.
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6.4 Remedies. In the event of the occurrence of any one or more defaults
hereunder, HSA shall have the following rights and remedies:
(a) In connection with any default under the provisions of Section 6.3(a),
HSA shall have the right, in its discretion, to deem such default
either a default under Section 6.3(a) or under Section 6.3(c), such
election to be set forth in a written notice from HSA to USFS (the
"Default Notice"). Until such time as a Default Notice shall have been
delivered by HSA to USFS, and for so long as such default shall
continue in effect, any such default shall be deemed a default under
Section 6.3(c) and the rights and remedies of HSA shall be as provided
in Section 6.4(c) below. The delivery of a Default Notice from HSA to
USFS (during the continuance of any default under Section 6.3(a)) to
the effect that HSA elects to treat such default as a default under
Section 6.3(a) shall constitute an election by HSA to terminate this
Agreement, and all of the rights and remedies of the parties hereto,
such termination to become effective thirty (30) days after the
delivery of the Default Notice from HSA to USFS notwithstanding that
after the delivery of the Default Notice additional Qualified License
Agreements shall have been entered into which, had they been in effect
prior thereto, would have constituted a cure of the default.
(b) Upon the occurrence of any event of default under Section 6.3(b) and
expiration of the grace period applicable thereto, HSA shall have and
may exercise all rights and remedies provided herein or at law or in
equity, except that HSA shall have no right to terminate this
Agreement by reason of any event of default under Section 6.3(b)
unless specifically provided in Section 6.5.
(c) Upon the occurrence of any event of default under Section 6.3(c)
(including, without limitation, any event of default under Section
6.3(a) prior to the time that HSA delivers a Default Notice with
respect thereto as hereinabove provided), the amount of the HSA
Royalty Fees payable to HSA by USFS during the continuance of such
event of default shall be increased by an amount determined by
multiplying the "USFS Share" by a fraction the numerator of which
shall be the number of additional Qualified License Agreements that
would be required on the date of determination in order for USFS to
comply with the applicable Royalty Reduction Standard (but in no event
shall the numerator be greater than the denominator), and the
denominator of which shall be the minimum number of Qualified License
Agreements required to be in effect as of the date of determination in
order
37
that the Royalty Reduction Standard shall have been complied with. For
purposes hereof the "USFS Share" shall mean the difference between:
(i) the total Franchise Royalty Fees paid for the calendar quarter in
question under all Hawthorn Licenses in effect as of the date on which
the event of default shall have occurred, less (ii) the amount of HSA
Royalty Fees required to be paid with respect to each such Hawthorn
License. The increase herein provided for shall be in addition to the
amount of HSA Royalty Fees otherwise required to be paid under Section
3.1.
The remedies forth above shall be the sole and exclusive remedies of HSA with
respect to the occurrence of any default hereunder, subject however to the
provisions of Section 4.4(b) and Section 6.5.
6.5 Termination.
(a) This Agreement may be terminated, by written notice delivered in
accordance with the provisions hereof, at any time prior to the expiration of
the Term by reason of the occurrence of any one or more of the following
events:
(i) Immediately, by mutual action of HSA and USFS set forth in a
written instrument;
(ii) At the election of HSA, exercisable by written notice
delivered to USFS within thirty (30) days after receipt of written
notice of, or, if no such written notice shall have been delivered,
after receipt of actual knowledge of, the death, disability,
retirement, resignation or inability to function (for any reason
including termination of employment) of Michael Leven as Chief
Executive Officer of USFS at any time prior to the occurrence of a
Permitted Transfer under Section 5.3, or, if earlier, prior to the time
that a Permitted Transfer may be made under Section S.3(d) or Section
5.3(f);
(iii) At the election of HSA, exercisable by written notice
delivered to USFS within thirty (30) days after receipt of written
notice of, or, if no such written notice shall have been delivered,
after receipt of actual knowledge of, a Transfer made in violation of
the provisions of Article V;
(iv) At the election of HSA in accordance with the provisions of
Section 6.4(a); or
(v) At the election of HSA, exercisable by written notice delivered
to USFS, in the event of any breach or default by USFS in any material
respect in the performance of its covenants, duties and obligations
under Section 4.3 and
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Section 4.4 hereof which continues uncured for more than the period of
grace applicable thereto and remains uncured on and as of the date of
exercise by HSA of its right of termination as herein provided;
provided that any such termination shall become effective (A) immediately in
the case of a termination under clause (a)(i), and (B) on the thirtieth
(30th) day after delivery of the notice of termination in the case of any
other termination.
(b) Upon termination of this Agreement for any reason (other than
expiration of the term hereof), all of the rights, duties, liabilities,
obligations, remedies and authority of the respective parties hereto under
this Agreement shall terminate and expire, except with respect to those
matters which, under the express provisions hereof, survive the expiration or
earlier termination of this Agreement. Without in any way limiting the
generality of the foregoing, upon any such termination of this Agreement, all
right and interest of USFS in and to the Hawthorn Brand and the Hawthorn
System shall, except as otherwise herein expressly provided, terminate and
HSA shall have and may exercise the full use and enjoyment of all rights and
interests in and to the Hawthorn Brand and the commercial exploitation
thereof, and in and to the Hawthorn System.
(c) Upon any such termination of this Agreement:
(i) Subject to the provisions of subsections (d) and (e) of this
Section 6.5, USFS shall sell, transfer, assign and convey to HSA (subject
to usual and customary representations and warranties which, where
appropriate, will be to the knowledge of USFS) all right, title and
interest of USFS in, to and under, any then existing Hawthorn Licenses and
HSA shall expressly assume in writing all of the liabilities and
obligations of the licensor thereunder. In connection with the foregoing,
appropriate disclosures, filings, registrations, amendments or
supplements, in form required by applicable law, shall be made and
delivered in accordance with applicable law, by HSA at its sole cost and
expense.
(ii) If, on such date of termination, USFS shall be subject to any
contract or agreement with respect to the reservation system, marketing or
promotional agreements or the like (but excluding contracts or agreements
with employees or consultants or which related to Hotel Brands other than
or in addition to the Hawthorn Brand) all such contracts or agreements
which, by their terms, permit the assignment thereof shall likewise be
transferred and assigned by USFS to HSA, without payment of any kind to
USFS or any third party,
39
and HSA shall, in connection therewith, expressly assume in writing all of
the liabilities and obligations of USFS with respect thereto.
(iii) Any books or records pertaining to the operation of the Hawthorn
System, including, without limitation, original document files, accounting
books and records and the like shall be delivered to HSA, or its then
successor in interest, although USFS shall be entitled to retain copies
thereof. With respect to any books or records stored on electronic storage
media, both hard copies thereof and convertible forms of electronic
storage shall be delivered to HSA.
(iv) Any funds remaining unexpended in the Ad Fund shall be delivered
to or at the direction of HSA. USFS shall, as soon as reasonably
practicable, but in no event later than 45 days following the effective
date of any such termination, provide HSA with an accounting of all
accrued and unpaid liabilities of the Ad Fund as of such date which shall
be true and correct in all material respects. HSA agrees that it shall,
out of funds available in the Ad Fund, pay all such accrued liabilities to
USFS as and when requested by USFS. Any request for payment by USFS shall
constitute a certification by USFS that the amounts being requested are
due and payable and that the payment thereof from the Ad Fund represents
an appropriate use of such funds in accordance with the provisions of the
Hawthorn Licenses. HSA shall be fully liable and responsible for the
satisfaction, payment and performance of all liabilities and obligations
of the Ad Fund thereafter. In addition, at the request and expense of HSA,
USFS shall prepare the necessary accounting and annual reports, to the
extent it has not previously done so, sufficient to comply with the
provisions of all Hawthorn licenses and to permit compliance by HSA for
the year in which such termination shall occur.
(d) Upon any termination of this Agreement pursuant to Section 6.5(a)(iv),
and subject to the following provisions of this Section 6.5(d), any amounts
required to be paid by licensees under Hawthorn Licenses shall thereafter (to
the extent the same relate to operations by such licensees after the
effective date of termination and subject to the provisions of Section 6.4(a)
above) be the sole property of HSA, although any payments received shall be
applied first to amounts owing with respect to operations on or prior to the
effective date of termination and promptly remitted to USFS (less the amounts
which would otherwise be required to be paid to HSA as HSA Royalty Fees in
accordance with the provisions of this Agreement). Notwithstanding the
foregoing, in the event of any termination pursuant to Section 6.5(a)(iv), in
addition to any amounts required to be paid to USFS by HSA pursuant to the
provisions of Section 6.6 (in the event HSA elects to cause USFS to
40
continue to administer the Hawthorn Licenses then in effect), USFS shall also
be entitled to receive (and HSA agrees to pay or to permit USFS to withhold
from amounts otherwise required to be paid to HSA) a portion of the Franchise
Royalty Fees required to be paid by licensees under any Hawthorn Licenses in
existence on the effective date of any termination in accordance with the
following schedule:
(i) If, on the date of termination, the number of then existing
Hawthorn Licenses shall be equal to or greater than ninety percent (90%)
of the required Termination Standard, but less than one hundred percent
(100%) thereof, HSA shall be entitled to receive all Franchise Royalty
Fees and other fees and charges thereunder less forty percent (40%) of an
amount equal to the difference between: (i) the Franchise Royalty Fees
under then existing Hawthorn Licenses as of the end of each calendar
quarter, less (ii) the amount which would, absent any such termination,
otherwise be required to be paid to HSA with respect thereto as HSA
Royalty Fees, such percentage of the difference to be remitted to USFS.
(ii) If, on the date of termination, the number of then existing
Hawthorn Licenses shall be equal to or greater than seventy-five percent
(75%) of the required Termination Standard, but less than ninety percent
(90%) thereof, HSA shall be entitled to receive all Franchise Royalty Fees
and other fees and charges thereunder less twenty-five percent (25%) of an
amount equal to the difference between: (i) the Franchise Royalty Fees
under then existing Hawthorn Licenses as of the end of each calendar
quarter, less (ii) the amount which would, absent any such termination,
otherwise be required to be paid to HSA with respect thereto as HSA
Royalty Fees, such percentage of the difference to be remitted to USFS.
(iii) If, on the date of termination, the number of then existing
Hawthorn Licenses shall be less than seventy-five percent (75%) of the
required Termination Standard, HSA shall be entitled to receive all
Franchise Royalty Fees and other fees and charges thereunder less fifteen
percent (15%) of an amount equal to the difference between: (i) the
Franchise Royalty Fees under then existing Hawthorn Licenses as of the end
of each calendar quarter, less (ii) the amount which would, absent any
such termination, otherwise be required to be paid to HSA with respect
thereto as HSA Royalty Fees, such percentage of the difference to be
remitted to USFS.
(e) Upon any termination of this Agreement pursuant to Section 6.5(a)(ii),
(iii) or (v), HSA shall be entitled to receive all Franchise Royalty Fees and
other fees and charges actually paid by licensees under any Hawthorn Licenses
existing as of the date of any such termination less eighty-two and one-half
percent (82.5%)
41
of an amount equal to the difference between: (x) the Franchise Royalty Fees
under the said then existing Hawthorn Licenses as of the end of each calendar
quarter, less (y) the amount which would, absent any such termination,
otherwise be required to be paid to HSA with respect thereto as HSA Royalty
Fees, such percentage of the difference to be promptly remitted to or
retained by USFS. If at the date of termination HSA shall be entitled to
terminate this Agreement pursuant to Section 6.5(a)(iv) and one or more of
the other provisions of Section 6.5(a), the subsection pursuant to which this
Agreement is being terminated shall be any one of the applicable subsections
selected by, and at the election of, HSA as set forth in its notice of
termination, and if no such subsection shall be set forth, shall be deemed to
be a termination pursuant to Section 6.5(a)(iv).
(f) Payments required to be made to USFS as above provided shall continue
to be made so long as any Hawthorn Licenses, or any extensions or renewals
thereof, in existence as of the effective date of any termination hereof
(including, without limitation, those referred to in the last sentence of
Section 6.5(g) below) shall continue in effect, it being understood and
agreed, however, that HSA shall have the sole right, in its discretion, to
determine which of the Hawthorn Licenses shall be extended or renewed, or
which shall be cancelled or terminated either by agreement of the parties or
for any other reason permitted in accordance with the Hawthorn License in
question. For purposes hereof, a Hawthorn License shall be deemed to have
been renewed or extended if, in addition to any amendment of such Hawthorn
License, extending its term, a new Hawthorn License relating to the hotel in
question shall be entered into with the licensee under any such Hawthorn
License, or any affiliate of said licensee, or any Person (or affiliate of
any Person) who shall have acquired the Existing Hotel subject to the then
existing Hawthorn License.
(g) If, on the effective date of termination, there shall be any
applications for Hawthorn Licenses pending, such pending applications, and
the files with respect thereto, shall be assigned and transferred to HSA, but
any decisions with respect to granting a Hawthorn License with respect to any
such pending applications shall be in the reasonable discretion of HSA. With
respect to any applications for Hawthorn License which have been accepted,
but as to which no Hawthorn License shall have been issued as of the
effective date of any such termination, HSA agrees that it shall grant a
Hawthorn License in accordance with the agreement contained in the accepted
application unless conditions applicable to the issuance thereof shall not
have been satisfied or performed by the Licensee thereunder, or unless, under
the provisions of the approved application, the Licensee shall otherwise be
excused from the obligation to grant, execute or deliver a Hawthorn License.
Any Hawthorn Licenses that are so granted by HSA shall be deemed to be
Hawthorn Licenses that were in effect as of the effective date of termination
of this Agreement.
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(h) Any and all other aspects of the Hawthorn System then in effect,
including, without limitation, licensee operating standards, prototype plans and
specifications, marketing brochures, interior design standards, samples and
specimens, training manuals and the like shall likewise be delivered and
conveyed by USFS to HSA.
(i) The provisions of this Section 6.5 shall survive the termination of
this Agreement.
6.6 Continuing USFS Administration. In connection with any termination of
the Agreement pursuant to any of the provisions of this Article VI, HSA shall
have the right (exercisable by notice contained in the Default Notice
delivered as above provided), to cause USFS to continue to administer
Hawthorn Licenses in effect as of the effective date of any termination of
this Agreement, as agent for HSA, for a period of not more than one (1) year
after the effective date of any such termination and for a fee equal to one-
half of one percent (0.5%) of Gross Rooms Revenues from the Hawthorn Brand
hotels then subject to Hawthorn Licenses in effect as of the effective date
of any termination. Administration of the Hawthorn Licenses, for this
purpose, shall mean collection of Franchise Royalty Fees and other amounts
required to be paid by licensees, remitting the same, less any amounts to
which USFS may be entitled therefrom, to HSA, maintaining communication with
licensees, at HSA's direction monitoring performance and adherence to
operating standards by licensees, at HSA's direction enforcing the provisions
of Hawthorn Licenses, maintaining books and records necessary in connection
with the administration of Hawthorn Licenses, preparing for filing by HSA all
necessary filings and reports with governmental agencies required in order to
comply with applicable provisions of law, and notifying HSA promptly of the
occurrence of any breach or default by any licensee under the provisions of
any then existing Hawthorn License; provided, however, in no event shall USFS
thereafter have the right to grant, withhold, or terminate any Hawthorn
License, to waive compliance by a Hawthorn licensee with the provisions of
any Hawthorn License, or to modify or amend any Hawthorn License then in
existence; provided, further, that USFS will have no liability to HSA or its
Affiliates relating to the manner in which USFS so administers the Hawthorn
Licenses other than as a result of its gross negligence or willful
misconduct. In addition to the fee (if any) required to be paid to USFS
pursuant to the preceding sentence in connection with the administration of
Hawthorn Licenses following termination of this Agreement, USFS shall be
entitled to (and HSA shall promptly pay to USFS) reimbursement for its
reasonable direct out-of-pocket costs incurred in connection therewith, which
amounts USFS may deduct from amounts otherwise required to be remitted to
HSA, and a report of any such deducted amounts shall be furnished to HSA, in
reasonable detail, each time amounts are remitted to HSA.
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ARTICLE VII
Miscellaneous
7.1 Arbitration.
(a) In case of any dispute arising under this Agreement the same shall be
resolved exclusively by arbitration conducted in accordance with the
provisions of this Section 7.1.
(b) In any matter submitted to arbitration, the arbitrators shall each be
individuals having not less than ten years experience in senior executive
positions in the lodging industry. The parties intend that the third
arbitrator selected by the two arbitrators previously appointed by each of
the parties (if any shall be appointed hereunder) shall be independent and
impartial. Consequently, the said third arbitrator shall not have or have had
any professional relationship with either party hereto, or their respective
Affiliates, or the respective directors, officers, supervisory employees or
counsel of any such party or its said Affiliates, which could reasonably be
considered as likely to affect his or her independence or impartiality. To
this end, the third arbitrator shall be required to disclose to the parties
any professional relationships, present or past, with either party, or its
directors, officers, supervisory employees or counsel, or any of their
respective Affiliates.
(c) Whenever any disputes or disagreements shall arise between HSA and
USFS hereunder, HSA and USFS shall meet and confer in an attempt to resolve
such dispute, each party setting forth its position regarding the matter in
question in writing and suggesting a proposed solution. After discussion, and
review or revision of any of their respective proposals, if the parties
remain unable to resolve their differences in full, the remaining unresolved
issues may be submitted to arbitration. Any arbitration initiated pursuant
hereto shall be conducted in the City of Chicago, Illinois in accordance with
the rules and regulations of the local chapter of the American Arbitration
Association, subject, however, to the specific terms and provisions of this
Agreement. In any such arbitration, the party submitting the same to
arbitration shall designate, in writing, its arbitrator and shall serve
written notice thereof on the other party. Upon receipt of such notice, the
other party shall have twenty (20) days in which to identify its arbitrator
and to notify the other party of the identity of its arbitrator. If the other
party shall fail to identify its arbitrator within the aforesaid period of
twenty (20) days the matter in dispute shall be resolved by the single
arbitrator previously selected. If both parties shall name their respective
arbitrators as herein provided on a timely basis, the two arbitrators so
selected shall thereafter, and in any event within thirty (30) days after
selection of the second of the two arbitrators, select a third arbitrator. If
the two arbitrators are
44
unable to agree on a third arbitrator, the third arbitrator shall be selected
in accordance with the rules and regulations of the American Arbitration
Association, provided that the third arbitrator shall meet the qualifications
for an arbitrator herein specified.
(d) The three arbitrators so selected shall have full power and authority
to resolve the dispute, and issue any order or award which they deem
reasonably necessary in connection therewith, including orders for specific
or other equitable forms of relief, except that the arbitrators may not award
any relief not previously suggested by one of the parties and not any other
or modified relief, nor award any punitive or exemplary damages. A decision
of the majority of the arbitrators shall constitute the decision or award of
the arbitration panel, and shall, absent fraud or manifest error, be binding
on the parties hereto. In any arbitration proceeding, the arbitrator shall be
bound by the provisions of this Agreement, including, without limitation, the
provisions of this Section 7.1(d).
(e) The award or decision of the arbitrators may be enforced by
appropriate court action.
(f) Each party shall bear the costs and expenses of its own counsel in
connection with any arbitration proceeding, and shall pay the fees and
expenses of the arbitrator appointed by it. The fees and expenses of the
third arbitrator shall be paid by USFS or HSA as the third arbitrator may
determine, or shall be borne by both of them in such proportions or such
amounts as the third arbitrator shall determine.
(g) During the pendency of any arbitration proceedings, either party may
seek temporary equitable relief in a court of competent jurisdiction such as
temporary restraining orders or temporary injunctions.
(h) The provisions of this Section 7.1 shall survive the termination of
this Agreement.
7.2 Representation and warranties of HSA. HSA hereby represents and
warrants to USFS, and its successors and assigns, as follows:
(a) The Existing Licenses are in full force and effect.
(b) To the Knowledge of HSA, neither the licensor nor the licensee under
any of the Existing Licenses is in breach or default thereunder as of
the date hereof, nor, to the Knowledge of HSA, does any condition
exist which, with notice or lapse of time or both, would constitute a
material breach or default or permit termination under or modification
of the terms of any Existing License, and no
45
party has repudiated any provision of any Existing License.
(c) Schedule 7.2(c) hereto contains a true and correct list of the
Existing Licenses. Copies of the Existing Licenses heretofore
delivered by HSA to USFS are true, accurate and complete in all
respects.
(d) (1) "Intellectual Property" shall mean:
(i) United States and foreign trademarks, service marks, trade names,
brand names, trade dress, designs and logos, and product or
service identifiers, whether registered or unregistered, and all
registrations and applications for registration thereof, that are,
as of the date hereof, used by HSA in connection with the Hawthorn
System (the "Trademarks");
(ii) Patents and patent applications throughout the world that are, as
of the date hereof, actually used or intended for use by HSA in
connection with the Hawthorn System (the "Patents");
(iii) Copyrights, registered or unregistered, throughout the world that
are, as of the date hereof, actually used or intended to be used
by HSA in connection with the Hawthorn System (the "Copyrights");
(iv) Trade secrets (if any) used by HSA in connection with the Hawthorn
System and other information in the possession of HSA concerning
the Hawthorn System that is not generally available to the public
and that is treated as confidential or proprietary by HSA
(excluding information regarding employees);
(v) Computer software programs, source code, object code, date and
documentation to the extent owned by HSA that are, as of the date
hereof, actually used or intended for use in connection with the
Hawthorn System;
(vi) All transferable permits, grants and licenses or other rights
running to or from HSA relating to any of the foregoing; and
46
(viii) Any other similar intellectual property rights actually used in
connection with the Hawthorn Brand.
(2) To the Knowledge of HSA, HSA owns or is exclusively licensed or
otherwise has the exclusive right to use, practice, sell, license
and dispose of, without restriction, all Intellectual Property
reasonably necessary for the operation of the business relating to
the Hawthorn System as presently conducted, except that the name
"Hawthorn" or variations thereof, are being used in connection with
the operation of a hotel in Salem, Massachusetts without license
from HSA or any Affiliate of HSA but, to the Knowledge of HSA,
without violation or infringement of any rights of HSA.
(3) Schedule 7.2(d)(3) hereto sets forth all Trademarks, Patents and
Copyrights which, to the Knowledge of HSA, are owned by HSA and
used by HSA in connection with the Hawthorn System which Schedule
7.2(d)(3) specifies, as to each item of Trademark, Patent or
Copyright: (w) the nature of the item, including the title or
description; (x) the jurisdictions by or in which the item is, to
Knowledge of HSA, issued or registered, or in which an application
for issuance or registration has been filed, including the
respective registration or application numbers; (y) the issue date
and expiration date of the item, and (z) with respect to each
Trademark, the class or classes of goods or services on which such
Trademark is or is intended to be used.
(4) Schedule 7.2(d)(4) sets forth all licenses, sublicenses and other
agreements or permissions ("IP Licenses") under which HSA is a
licensee or otherwise is authorized to use or practice any
Intellectual Property and all IP Licenses, other than the Existing
Licenses, under which HSA is a licensor or otherwise authorizes any
Person to use or practice Intellectual Property.
(5) To the Knowledge of HSA, HSA possesses all right, title and
interest in and to the Intellectual Property, free and clear of any
lien, license or other restriction (other than the Existing
Licenses and the IP Licenses), and has received no notice from any
third party to the contrary.
47
(6) HSA is not, and, as a result of the execution and delivery of this
Agreement or the performance of its obligations hereunder or
thereunder, will not be, in violation of, and will not lose any
rights pursuant to, any instrument or agreement governing
Intellectual Property. Each IP License is now, to the Knowledge of
HSA, valid and enforceable and in full force and effect, and will
continue to be so on identical terms following the execution and
delivery of this Agreement, in accordance with the terms of each
such IP License.
(7) To the Knowledge of HSA, no other party is in breach or default
under any IP License in any material respect, nor does any
condition exist which with notice or lapse of time or both would
constitute a material breach or default by any such third party, or
permit termination, modification or acceleration thereunder, and no
such third party has repudiated any provision thereof. HSA has not
received from any third party any notice, and has no actual
knowledge of the existence of, any breach or default under any IP
License in any material respect, nor, to the Knowledge of HSA, does
any condition exist which with notice or the lapse of time or both
would constitute a material breach or default by HSA or permit
termination, modification or acceleration thereunder, or give rise
to a right of repudiation, by any other party to any such IP
License.
(8) No litigation is pending or, to the Knowledge of HSA, threatened
that challenges the validity, enforceability, ownership or right to
use, sell, license or dispose of any item of Intellectual Property,
and no item of Intellectual Property is subject to any outstanding
order, ruling, judgment, decree, stipulation, charge or agreement
restricting in any manner the use or licensing thereof by HSA or
the sublicensing thereof by USFS.
(9) HSA has received no notice of any claim, charge, complaint, demand
or notice alleging any infringement upon or other violation of the
intellectual property rights of third parties, and, to the
Knowledge of HSA, no basis for any such claim exists. To the
Knowledge of HSA, the use of the Intellectual Property by USFS
pursuant to this Agreement will not infringe upon or otherwise
violate any intellectual property right of third parties.
48
(10) To the Knowledge of HSA, no third party is infringing upon or
otherwise violating any of its rights to the Intellectual
Property.
(e) HSA is a limited liability company, duly organized, validly existing
and in good standing under the laws of the State of Delaware and has
full right, power and authority to own and license the Hawthorn Brand,
to operate the Hawthorn System, to execute, deliver and perform the
Existing Licenses and the assignment thereof to USFS, and to enter
into and perform this Agreement, all in accordance with the terms and
provisions of this Agreement and the Existing Licenses. The execution
and delivery of this Agreement has been duly authorized by all
necessary action of the governing board of HSA and, upon the due
authorization, execution and delivery hereof by and on behalf of USFS,
constitutes and will constitute the valid and binding obligation of
HSA enforceable against HSA in accordance with its terms, subject,
however, to bankruptcy, moratorium, reorganization, insolvency and
other similar laws of general application affecting the rights of
creditors in general.
(f) Neither the execution and delivery of this Agreement or any other
agreement or instrument contemplated hereby, nor the consummation of
the transactions contemplated hereby, nor the performance of this
Agreement or any other agreement or instrument contemplated hereby in
accordance with their respective terms and conditions, by HSA will
require HSA to obtain any consent, approval or action of, or make any
filing with or give any notice to, any governmental authority or other
person, (i) conflict with or result in any breach or violation of any
of the terms and conditions of, or constitute (with or without notice
or lapse of time or both), to the Knowledge of HSA, a default under,
the certificate of organization, operating agreement or other similar
organizational documents of HSA or any law, statute, rule or
regulation, order, writ, injunction, determination, award, judgment or
decree applicable to HSA or the Hawthorn System, or any instrument,
contract, franchise agreement or other agreement to which HSA is a
party or by which HSA or the Hawthorn System may be bound or subject,
or (iii) require any consent, approval or written notice under or
result in a violation or breach of, or a material modification of the
effect of, or constitute (with or without due notice or lapse of time
or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture or any agreement,
instrument, license or obligation to which HSA
49
is a party or by which HSA or the Hawthorn System may be bound.
(g) There are no outstanding orders, writs, injunctions, determinations,
awards, judgments or decrees against HSA relating to the Hawthorn
System, and there are no actions, suits, claims or legal
administrative or arbitral proceedings or investigations
(collectively, "Claims"), pending, or to the Knowledge of HSA,
threatened against HSA relating to the Hawthorn System.
(h) Except as set forth in Schedule 7.2(h), (i) no franchisee that is a
party to any Existing License has cancelled or otherwise terminated,
or threatened in writing to cancel or otherwise terminate, its
relationship with HSA, (ii) none of the franchisees that are parties
to any Existing License have formed or organized any association
relating to the franchisees' relationship with HSA, (iii) no party to
any Existing License has commenced, or notified HSA in writing of any
intention to commence, any Claim against HSA or any Affiliate thereof,
or asserted that any provision of the franchise agreements used by HSA
is not enforceable or that any offering circular or other disclosure
statement issued by HSA or any of its Affiliates is false or
misleading, and (iv) HSA has not entered into any agreement or
arrangement, written or oral, with any franchisee for any concessions
with respect to fees or other payments owed or to be owed by such
franchisee to HSA.
(i) To the Knowledge of HSA, the Hawthorn System is in material compliance
with all laws (including, without limitation, all federal and state
franchise laws and regulations), ordinances, regulations and orders,
judgments, injunctions, awards or decrees as presently enacted and in
force, of any governmental authority relating to the Hawthorn System.
To the Knowledge of HSA, HSA has all licenses, permits, orders or
approvals (including, without limitation, with respect to offer and
sale of franchises) of any governmental authority (collectively,
"Permits") that are necessary for the conduct of the Hawthorn System as
now conducted and Schedule 7.2(i) contains a true and complete list of
all Permits currently in effect and held by HSA. HSA has received no
written notice from any governmental authority of any violation of any
Permit and no proceeding is pending, or to the Knowledge of HSA,
threatened, to revoke or limit any Permit. To the Knowledge of HSA,
HSA has made all filings and disclosures under all state franchise
disclosure laws required by reason of the business conducted by HSA in
order to offer and sell franchises. The UFOCs filed by
50
HSA comply in all material respects with applicable state and federal
law and HSA has not received any written notice that such offering
circulars are not in compliance with any applicable laws.
(j) Schedule 7.2(j) sets forth a true and complete list of all agreements,
contracts, commitments or undertakings entered into by HSA or any of
its Affiliates with respect to the Hawthorn System (the "Contracts").
HSA has delivered to USFS true and complete copies of each of the
Contracts. Each of the Contracts is, to the Knowledge of HSA, legal,
valid, binding and enforceable and in full force and effect and will
continue to be so on identical terms after the consummation of the
transactions contemplated hereby. To the Knowledge of HSA, no party is
in breach or default under any Contract in any material respect, nor,
to the Knowledge of HSA, does any condition exist which with notice or
lapse of time or both would constitute a material breach or default or
permit termination, modification or acceleration thereunder, and no
party has repudiated any provision thereof.
(k) HSA has, to the Knowledge of HSA, heretofore provided USFS with all
material information in its possession regarding prospective Hawthorn
Brand licensees with whom HSA is negotiating or for whom HSA has
received inquiries.
(1) HSA has, to the Knowledge of HSA, made available to USFS all prototype
plans, specifications and drawings currently in effect with respect to
the Hawthorn Brand, or under development by Hawthorn, including the
specifications, plans and drawings being developed by HSA for a $65 to
$90 per room Hawthorn Brand hotel prototype. USFS shall have no
obligation to use such plans, specifications or drawings. Any
amendments of modifications to the HSA plans shall be the sole cost
and expense of USFS.
7.3 Representations and Warranties of USFS. USFS does hereby represent and
warrant to HSA that USFS is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and is duly
qualified as a foreign corporation in each jurisdiction in which the nature
of the business conducted by it or the assets owned by it require such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the financial condition of USFS and its
subsidiaries, taken as a whole, or materially and adversely affect its
ability to conduct its business as heretofore conducted or as contemplated by
the provisions of this Agreement. USFS has full corporate right, power and
authority to execute and
51
deliver this Agreement in accordance with the terms and provisions of this
Agreement, and to perform its duties and obligations hereunder. The execution
and delivery of this Agreement by or on behalf of USFS has been duly
authorized by all necessary corporate action by USFS and, upon the due
authorization, execution and delivery hereof constitutes and will constitute
the valid and binding obligation of USFS enforceable against USFS in
accordance with their respective terms, subject, however, to bankruptcy,
moratorium, reorganization, insolvency and other similar laws of general
application affecting the rights of creditors in general.
7.4 HSA and Rockwood Indemnity. Subject to the provisions of Section 7.6,
HSA and Rockwood & Co., jointly and severally, for themselves and on behalf
of their Affiliates do hereby indemnify and agree to defend and hold USFS,
its officers, directors, shareholders, employees, agents, successors,
permitted assigns and Affiliates completely free and harmless from any and
all manner of claim, loss, damage, liability or expense (including, without
limitation, reasonable legal fees and expenses) (collectively, the "Losses")
arising under or in any relating to: (i) any representation or warranty of
HSA herein contained being untrue or incorrect in any material respect as of
the date made; (ii) failure of HSA to perform or comply in any material
respect with any of its covenants or agreements contained in this Agreement;
(iii) the operation of the Hawthorn System, including, without limitation,
any matters pertaining to the Existing Licenses (including without limitation
the administration of the Ad Fund), prior to the date hereof; (iv) the grant
of any Hawthorn License, or the execution of any agreement, by HSA or any of
its Affiliates; (v) any Restrictive Agreement that relates to or is asserted
against any Hawthorn Brand hotel for which Deemed Approval was given under
Section 2.4(b) or which is not listed on Schedule I; or (vi) any matters
pertaining to any UFOC prepared or delivered by USFS to the extent relating
to or arising out of information that was provided in writing by HSA or its
Affiliates to USFS for inclusion therein. The provisions of this Section 7.4
shall survive the expiration or earlier termination of this Agreement.
7.5 USFS Indemnities. Subject to the provisions of Section 7.6, USFS, for
itself and on behalf of its Affiliates, hereby agrees to indemnify, defend
and hold HSA, its officers, directors, shareholders, employees, agents,
successors, permitted assigns and Affiliates completely free and harmless of
and from any and all manner of Losses arising out of or in any way relating
to any of the Existing Licenses, or the operation of the Hawthorn System, or
any other acts or omissions of USFS, or its Affiliates, with respect to the
Hawthorn Brand or the Hawthorn System, to the extent the same relates to
matters occurring or events arising or otherwise in any respect relating to
the period on or after the date hereof (except for such matters that entitle
USFS to indemnify from HSA under Section 7.4). Without in any way limiting
the generality of the foregoing, the aforesaid indemnity shall relate
52
to: (i) any representation or warranty of USFS herein contained being untrue
or incorrect in any material respect as of the date made; (ii) failure of
USFS to perform or comply in any material respect with any of its covenants
or agreements contained in this Agreement; (iii) the operation of the
Hawthorn System, including, without limitation, any matters pertaining to the
Existing Licenses, after the date hereof; (iv) the grant of any Hawthorn
License or the execution of any agreement by USFS after the date hereof; or
(v) any matters pertaining to any UFOC prepared or delivered by USFS other
than any matters included therein relating to or arising out of information
that was provided in writing by HSA or its Affiliates to USFS for inclusion
therein. The provisions of this Section 7.5 shall survive the expiration or
earlier termination of this Agreement.
7.6 Provisions Relating to Intellectual Property, Infringement and
Restrictive Agreements.
(a) Except as provided in Section 7.6(f), the provisions of this Section
7.6 shall prevail over contrary provisions, if any, contained in Sections
7.4, 7.5 or 2.4(b) above.
(b) For purposes hereof, the term "infringement" shall mean the occurrence
of any one or more of the following events: (i) any licensee under a Hawthorn
License shall be enjoined, restrained or otherwise prevented from the use of
any of the Intellectual Property the use of which it shall be entitled to
under the applicable provisions of its Hawthorn License anywhere within the
Primary Development Area; (ii) either HSA or USFS shall be enjoined,
restrained or otherwise prevented from using or licensing others to use any
of the Intellectual Property anywhere within the Primary Development Area; or
(iii) any unauthorized or unlicensed use anywhere within the Primary
Development Area of any of the Intellectual Property by a party other than
HSA or USFS (in accordance with the provisions of this Agreement) or a
Hawthorn licensee. Also, for purposes hereof, "Significant Intellectual
Property" shall mean all of the Intellectual Property other than as described
on Schedule 7.2(d)(3).
(c) In the event HSA or USFS shall receive written or other actual notice
of the existence of an infringement, or any claim by any third party of the
occurrence of any infringement, relating to any Significant Intellectual
Property, or any notice of the existence or claimed existence of a
restriction on any of the rights of USFS hereunder, or of any licensee under
a Hawthorn License, arising under or with respect to any contract, agreement
or understanding with Hyatt or any of its Affiliates other than the
Restrictive Agreements listed on Schedule I (a "Hyatt Claim"), the party
receiving such notice shall promptly notify the other party thereof and shall
include copies of any correspondence, complaints, petitions or other written
materials relating thereto. The parties shall then meet and confer in an
attempt to develop a mutually
53
satisfactory response to the infringement or claim of infringement, or the
Hyatt Claim, as the case may be, which may include contesting the same by
litigation or otherwise, settling any claim, electing to terminate or accept
termination of an affected Hawthorn License, or electing to cease licensing
activities in the geographic area in dispute. In the event the parties hereto
are unable to agree, between themselves, as to the appropriate action to be
taken, any claim of infringement, or any Hyatt Claim, as the case may be,
will be contested by the parties hereto by all appropriate proceedings which
shall be conducted in good faith and with due diligence, utilizing, where
appropriate, counsel mutually satisfactory to HSA and USFS, and in the case
of a Hyatt claim, Hyatt. All Losses (other than consequential damages)
arising out of any infringement contest referred to in this Section 7.6 will
be paid by USFS out of Franchise Royalty Fees collected by USFS under
Hawthorn Licenses, and shall be deducted from Franchise Royalty Fees prior to
any determination of the actual amount thereof collected by USFS; and any
Losses (other than consequential damages) arising out of any Hyatt Claim
contest will be paid by HSA or Hyatt and USFS shall be, and hereby is,
indemnified with respect thereto. In determining the amount of such Losses
attributable to each of the particular Hawthorn Licenses for purposes of
allocating the remaining Franchise Royalty Fees and the determination of the
amount of HSA Royalty Fees, such Losses shall be deemed to have been deducted
from Franchise Royalty Fees actually received by USFS pro rata in accordance
with the amount received under each Hawthorn License. In the event the Losses
arising out of an infringement contest herein referred to shall exceed the
amount of Franchise Royalty Fees actually collected by USFS during and as of
the end of the month in which such costs are incurred, the excess shall be
borne between the parties in the same proportion that the Franchise Royalty
Fees theretofore collected have been allocated to the parties in accordance
with Section 3.1 and HSA shall promptly pay to USFS the portion to be borne
by HSA.
(d) If in connection with any infringement, or claimed infringement, or in
connection with any Hyatt Claim, whether as a result of a final determination
by a court of other tribunal of competent jurisdiction, or by settlement of
any such dispute, USFS or HSA, or both, shall be enjoined, restrained or
otherwise restricted in its use of any of the Significant Intellectual
Property, either permanently or temporarily, anywhere within the Primary
Development Area or in selected geographic portions thereof, the parties
shall meet and confer for the purpose of achieving an equitable revision to
this Agreement as the same relates to the number of Hawthorn Licenses
necessary to achieve Hawthorn Brand Saturation, compliance with the
Termination Standard or compliance with the Royalty Reduction Standard, or
all of the foregoing, taking into account the nature of the restriction and
the geographic area in which such restriction shall be applicable, and its
anticipated effect on the ability of USFS to enter into Hawthorn Licenses as
herein contemplated, and to achieve maximum
54
amount of Franchise Royalty Fees. In the event of any disagreement between
the parties hereto regarding the appropriate revisions, if any, to the
Termination Standard, Royalty Reduction Standard or Hawthorn Brand
Saturation, each party shall submit its proposals to arbitration conducted in
accordance with the provisions of this Agreement, and the decision of the
arbitration panel shall be binding and conclusive on the parties hereto.
In addition to the foregoing, during such period of time, if any, in which
USFS or HSA is enjoined, restrained, or otherwise restricted in the use of
Significant Intellectual Property the restrictive covenants set forth in
Section 4.4 shall be inapplicable but only with respect to the specific
geographic area in which the injunction, restraint or limitation shall be
applicable. In all other respects, and in all other areas, and at all other
times, the said restrictive covenants shall continue in full force and effect
in accordance with the provisions of this Agreement; provided that any
franchises entered into or other activities commenced as hereinabove provided
may continue in full force and effect, and may be extended or renewed in the
ordinary course of business, even after the injunction, restraint or other
restriction has been terminated, but no new franchises may be granted or new
activities commenced thereafter.
(e) Notwithstanding the foregoing, in the event of any infringement or
claimed infringement with respect to portions of the Intellectual Property
other than Significant Intellectual Property, any decision with respect to
contesting the claimed infringement, consenting to cease and desist, or
otherwise settling any claims with respect thereto, shall be at the sole
option and election of HSA, which shall bear all costs and expenses in
connection therewith. Any loss of the right to use any Intellectual Property
which is not Significant Intellectual Property shall in no event be deemed a
breach or default hereunder (except as provided in subsection (f) below), or
entitle USFS to any reduction in the Termination Standard, Royalty Reduction
Standard or Hawthorn Brand Saturation.
(f) Anything in this Section 7.6 to the contrary notwithstanding, the
indemnity provisions of Section 7.4 shall apply with respect to any
infringement with respect to any of the Intellectual Property, whether or not
Significant Intellectual Property, to the extent the same constitutes a
breach of any representation or warranty by HSA hereunder.
(g) The provisions of this Section 7.6 shall survive the expiration or
earlier termination of this Agreement.
7.7 Indemnification Procedures. Any party that proposes to assert the
right to be indemnified under Section 7.4 or 7.5 or 7.6 shall, promptly after
receipt of notice of commencement or threatened commencement of any action
against such party in respect
55
of which a claim is to be or may be made against an indemnifying party or
parties under such Sections, notify the indemnifying party of the
commencement or threatened commencement of such action, enclosing a copy of
all papers served, it being understood and agreed, however, that the failure
so to notify promptly the indemnifying party will not relieve the
indemnifying party from any liability it may have to any indemnified party
under such Sections unless, and only to the extent that, such omission
results in the forfeiture of substantive rights or defenses by the
indemnifying party or otherwise materially adversely affects the ability of
the indemnifying party to defend against or diminish the losses arising out
of such claim, action or proceeding. If any such action is brought against
any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and,
to the extent that it elects by delivering written notice to the indemnified
party promptly after receiving notice of the commencement of the action from
the indemnified party, to assume the defense of the action, with counsel
selected by the indemnified party. After notice from the indemnifying party
to the indemnified party of its election to assume the defense, the
indemnifying party will not be liable to the indemnified party for any legal
or other expenses except as provided below and except for the reasonable cost
of investigation subsequently incurred by the indemnified party in connection
with the defense. It is understood and agreed that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for the reasonable fees, disbursements
and other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. All
such fees, disbursements and other charges will be paid or reimbursed by the
indemnifying party promptly as they are incurred. An indemnifying party who
has assumed the defense of any claim or action pursuant to this Section 7.7
will not be liable for any settlement of any action or claim effected without
its written consent. If the indemnifying party assumes the defense of any
claim or action pursuant to this Section 7.7, the indemnified party shall
make available to the indemnifying party any books, records or other
documents within its control that are reasonably necessary for such defense.
The provisions of this Section 7.7 shall survive the expiration or earlier
termination of this Agreement.
7.8 Governing Law. This Agreement is being made with reference to the laws
of the State of Illinois, and shall be governed in all respects by the laws
of the State of Illinois, and, to the extent applicable, the laws of the
United States.
7.9 Successors and Assigns. This Agreement shall be binding on USFS and
HSA and their respective successor and permitted assigns, subject, however,
to the provisions of Article V. Wherever reference herein is made to HSA, the
same shall mean HSA or any successor in interest to HSA hereunder, and
wherever
56
reference is made to USFS, the same shall mean USFS and any successor in
interest to USFS acquiring its interest in compliance with the provisions of
Article V.
7.10 Entire Agreement. This Agreement and any exhibits hereto, constitute
the entire understanding and agreement of the parties hereto, and shall
supersede any prior agreements or understandings of the parties with respect
to the subject matter hereof, including, without limitation, the provisions
of that certain Letter of Intent dated December 14, 1995.
7.11 Confidentiality. The parties hereto do hereby agree to keep all
matters concerning this Agreement, the Hawthorn Brand, the Hawthorn System
and any information or documents delivered pursuant to this Agreement,
completely confidential, and neither party shall make any public announcement
with respect thereto to any Person except the parties' attorneys,
accountants, advisors, shareholders or employees who are aware of and bound
by the provisions of this Section 7.11 without the prior written consent of
the other party. Notwithstanding the foregoing, nothing herein contained
shall prohibit advertising, promotion, public relations or marketing efforts
by USFS relating to the Hawthorn Brand and the Hawthorn System as herein
contemplated. Notwithstanding the foregoing, either party may make
disclosures as required by law, including, without limitation, in response to
court order, in filings or registrations including UFOCs, and disclosures to
counsel and accountants for the respective parties. In addition, any
information which either party obtains with respect to the other party shall
be kept in strict confidence (except as provided above). The provisions of
this Section 7.11 shall survive the expiration or earlier termination of this
Agreement.
7.12 Notices. All notices or other communications delivered hereunder
shall be in writing and shall be deemed duly delivered: (i) three (3)
business days after deposit thereof in the United States mails, certified
mail, return receipt requested with postage prepaid; (ii) upon delivery by
electronic facsimile delivery provided the equipment on which such
transmission is made automatically encodes the transmission with the date and
time thereof; (iii) the next business day following delivery to a nationally
recognized air freight courier service; or (iv) upon actual hand delivery
thereof by personal messenger; provided, however, no such notice shall be
deemed duly delivered unless addressed as set forth on the first page of this
Agreement.
The cost of delivery of any notice shall be born by the party sending the
same. Either party shall have the right to change its address, or facsimile
number, by delivery of notice to the other party in the manner hereinabove
set forth. As an accommodation to the parties, and without it being a
condition to the effectiveness of delivery of any notice, copies of notices
delivered hereunder
57
shall likewise be delivered to the following parties by any method of
delivery which is permitted for delivery of the notice itself:
(a) Copies of any notices delivered to USFS shall likewise be delivered
to:
Paul D. Ginsberg, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Telecopy No.: (212) 757-3990
(b) Copies of any notices delivered to HSA shall likewise be delivered
to:
Philip M. Kayman, Esq.
Neal Gerber & Eisenberg
Two North LaSalle Street
Suite 2100
Chicago, Illinois 60602
Telecopy No.: (312) 269-1747
7.13 Joint Drafting. Each of the parties hereto has been represented by
counsel selected by it in connection with the negotiation, preparation,
execution and delivery of this Agreement, and each party, and its counsel,
has participated in the preparation of this Agreement. This Agreement shall
not be construed against, or more strictly with respect to, either of the
parties regardless of which party, or the counsel for such party, had
principal drafting responsibilities.
7.14 Brokers. Each of the parties hereto does hereby represent and warrant
to the other that neither has dealt with any broker or finder in connection
with any of the matters or transactions herein. The provisions of this
Section 7.14 shall constitute additional representations and warranties made
by each of the parties hereto, which shall be subject to the indemnification
provisions set forth in Section 7.4 and 7.5 hereof, and which shall survive
the expiration or earlier termination of this Agreement.
7.15 Severability. In case any one or more of the provisions or part of a
provision contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect in any jurisdiction, such
invalidity, illegality or unenforceability shall be deemed not to affect any
other jurisdiction or any other provision or part of a provision of this
Agreement, but the Agreement shall be reformed and construed in such
jurisdiction as if such provision or part of a provision held to be invalid
or illegal or unenforceable had never been contained herein and such
provision or part reformed so that it would be
58
valid, legal and enforceable in such jurisdiction to the maximum extent
possible.
7.16 Waiver of Obligations. HSA and USFS shall each have the right, by
written notice delivered to the other party, unilaterally to waive any
obligation of or restriction upon the other party under this Agreement,
either generally, or in any specific circumstance, for any limited period of
time or subject to any other conditions or limitations as may be contained in
such written notice. No acceptance by HSA of any payment by USFS or any other
Person, and no failure, refusal or neglect of HSA or USFS to exercise any
right under this Agreement or to insist upon full compliance by the other
with its obligations hereunder, shall constitute a waiver of any provision of
this Agreement. Any waiver granted by either party on any one occasion shall
in no event be deemed a waiver applicable on any other occasion or in any
other circumstance. HSA and USFS shall not be deemed to have waived or
impaired any right, power or option reserved by this Agreement (including,
without limitation, the right to demand exact compliance with every term,
condition and covenant herein, or to declare any breach thereof to be a
default and to terminate this Agreement prior to the expiration of its Term
in accordance with the provisions hereof) by virtue of any custom or practice
of the parties at variance with the terms hereof, or by reason of any failure
or refusal by either party to act, it being the intention of the parties
hereto that there shall be no implied waivers of any rights or obligations
hereunder, and only a waiver contained in a written notice delivered as
herein provided shall be binding on the waiving party, or may be relied upon
by the other party.
7.17 Rights of Parties Are Cumulative. The rights of HSA and USFS
hereunder are cumulative, unless otherwise herein expressly provided, and no
exercise or infringement by HSA or USFS of any right or remedy hereunder
shall preclude the exercise or enforcement by HSA or USFS of any other right
or remedy hereunder or which HSA or USFS is entitled by law to enforce,
unless otherwise herein provided.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be
duly executed on their behalf as of the day and year first above written.
HSA PROPERTIES, L.L.C., a Delaware
limited liability company, by its
managing member
/s/ HSA PROPERTIES, INC.
By /s/ Glen Miller
__________________________
Vice President
59
U.S. FRANCHISE SYSTEMS, INC., a Delaware
corporation
By /s/ Michael A. Leven
____________________________
_____ President
JOINDER OF ROCKWOOD & CO.
The undersigned, Rockwood & Co., a Delaware corporation, for valuable
consideration which is hereby acknowledged, hereby joins in the execution and
delivery of this Agreement solely for purposes of binding itself to the
provisions of Section 7.1 and Section 7.4. In addition, the undersigned does
hereby unconditionally guarantee full payment, performance, satisfaction and
discharge of the obligations of HSA under and pursuant to Section 7.6 hereof.
Notwithstanding the foregoing, the liability of the undersigned hereunder
shall be limited to an aggregate amount of Twenty-Five Million Dollars
($25,000,000) (the "Guarantee Amount"). At such time as the undersigned has
paid, in the aggregate (and without consideration of interest or other
carrying charges) the Guarantee Amount, whether or not as a result of any
single or group of related occurrences, this joinder shall terminate and the
undersigned shall have no further liability or obligation hereunder.
The provisions of this joinder are intended solely for the benefit of
USFS, and its successors in interest under the above Agreement, and is not
intended for the benefit of, and may not be enforced by, any third party.
ROCKWOOD & CO., a Delaware corporation
By /s/ Glen Miller
____________________________
Vice President
60
EXHIBITS
EXHIBIT A
LIST OF EXISTING HOTELS
Hawthorn Suites Atlanta
1500 Parkwood Circle
Atlanta, GA 30339
Hawthorn Suites Austin (Central)
935 LaPosada Drive
Austin, TX 78752
Hawthorn Suites Austin (Northwest)
8888 Tallwood Drive
Austin, TX 78759
Hawthorn Suites Austin (South)
4020 IH 35 South
Austin, TX 78704
Hawthorn Suites Charleston
181 Church Street
Charleston, SC 29401
Hawthorn Suites Dallas (Arlington)
2401 Brookhollow Plaza Drive
Arlington, TX 76006
Hawthorn Suites Dallas (Market Center)
7900 Brookriver Drive
Dallas, TX 75247
Hawthorn Suites Dallas (Richardson)
250 Municipal Drive
Richardson, TX 75080
Hawthorn Suites Durham (currently operating as Meredith Suites)
1900 Meredith Drive
Durham, NC 27713
Hawthorn Suites Edina (Minneapolis)
3400 Edinborough Way
Edina, MN 55435
Hawthorn Suites Houston
6910 Southwest Freeway
Houston, TX
Hawthorn Suites Kent
6329 South 212th
Kent, WA 98032
Hawthorn Suites Lincolnshire (Chicago)
10 Westminster Way Road
Lincolnshire, IL 60069
Hawthorn Suites Omaha
11025 M Street
Omaha, NE 68137
Hawthorn Suites Orlando (at Sea World)
6435 Westwood Blvd.
Orlando, FL 32821
Hawthorn Suites Pittsburgh
700 Mansfield Avenue
Pittsburgh, PA 15205
Hawthorn Suites San Antonio
4041 Bluemel Road
San Antonio, TX 78240
Hawthorn Suites Tulsa
3509 South 79th East Ave.
Tulsa, OK 74145
3 New England Suites Hotels
-Indianapolis, Indianapolis
-Grand Rapids, Michigan
-Columbus, Ohio
Naperville, Illinois (new construction)
Intersection of I-88 and Hwy 59
EXHIBIT B
Location: [HOTELADDRESS1]
[HOTELADDRESS2]
ID Number: [IDNUMBER]
Date:______________________
HAWTHORN SUITES LICENSE AGREEMENT
BETWEEN
HAWTHORN FRANCHISING, INC.
AND
[[ENTITYNAMECAPS]]
TABLE OF CONTENTS
PAGE
RECITALS
1. THE LICENSE ..........................................................
2. GRANT OF LICENSE .....................................................
3. LICENSEE'S RESPONSIBILITIES ..........................................
4. LICENSOR'S RESPONSIBILITIES ..........................................
5. PROPRIETARY RIGHTS ...................................................
6. RECORDS AND AUDITS ...................................................
7. INDEMNITY AND INSURANCE ..............................................
8. TRANSFER .............................................................
9. CONDEMNATION AND CASUALTY ............................................
10. TERMINATION ..........................................................
11. AGREEMENT IS RENEWABLE ...............................................
12. RELATIONSHIP OF PARTIES .............................................
13. MISCELLANEOUS ........................................................
GUARANTY
ATTACHMENT A
ATTACHMENT B
ATTACHMENT C
LICENSE AGREEMENT
Dated ___, between Hawthorn Franchising, Inc. ("Licensor" or "HFI") and
[[ENTITYNAMECAPS]], a [[ENTITYTYPE]] ("Licensee"), whose address is
-----------.
PARTIES AGREE AS FOLLOWS:
1. The License.
Licensor has been licensed by Hawthorn Suites Associates ("HSA"), under the
terms of a master License Agreement (the "Master License Agreement"), the right
to use and license others to use a unique concept and system relating to the
establishment and operation of certain hotels that operate under the name
"HAWTHORN SUITES" ("Hawthorn Hotels" or the "Hotel System"). Hawthorn Hotels are
all-suite hotels in which the lodging units each contain sleeping quarters,
bath, living room, and kitchen. You have independently investigated the risks of
the business to be operated hereunder, including current and potential market
conditions, competitive factors and risks, and have read Licensor's "Offering
Circular for Prospective Franchisees", and have made an independent evaluation
of all such facts. Aware of the relevant facts, you desire to enter into this
Sublicense Agreement ("Agreement") in order to obtain a license to use the Hotel
System in the operation of a hotel located at [[HOTELADDRESS1]],
[[HOTELADDRESS2]] (the "Hotel").
A. The Hotel. The Hotel comprises all structures, facilities,
appurtenances, furniture, fixtures, equipment, and entry, exit, parking and
other areas from time to time located on the land identified on the plot plan
most recently submitted to an acknowledged by Licensor in anticipation of the
execution of this Agreement, or located on any land from time to time approved
by Licensor for additions, signs or other facilities. The Hotel currently
includes the facilities listed on Attachment A hereto. No change in the number
of approved standard suites or guest rooms (which are hereinafter referred to
collectively as "Suites") and no other significant change in the Hotel shall be
made without Licensor's approval. Redecoration and minor structural changes that
comply with Licensor's standards and specifications shall not be considered
significant. You represent that you are entitled to possession of the Hotel
during the entire License Term, as defined in Paragraph 2 hereof, without
restrictions that would interfere with any of your obligations under this
Agreement.
B. The Hotel System. The Hotel System is composed of elements, as
designated from time to time by Licensor, designed to identify Hawthorn Suites
hotels to the consuming public and/or to contribute to such identification and
its association with quality standards. The Hotel System at present includes,
without limitation, the tradenames, trademarks, and service marks, "HAWTHORN
SUITES" and such other tradenames, trademarks, and service marks as are now
designated (and may hereafter be designated by Licensor in writing) as part of
the Hotel System (hereinafter "Proprietary Marks"); prototypical architectural
plans, designs, and layouts, including, without limitation, site plan, floor
plan, roof plan, plumbing plan, lobby plan, electrical plan, and landscape plan;
access to a reservation service; a centralized reservation system; a national
Hawthorn Suites directory (the "National Directory"); management and personnel
training, and training programs and materials; management and operational
procedures and techniques as prescribed in the Confidential Manual (hereinafter
the "Manual"); standards and specifications for construction, equipment, and
furnishings, as described in the Manual; advertising, marketing, and promotional
programs; and such other improvements that Licensor may make from time to time.
2. Grant of License. Licensor hereby grants to you a license (the
"License") to use the Hotel System only at the Hotel, only in connection with
the operation of the Hotel and, only in accordance with the Agreement, beginning
with the date hereof and terminating as provided in Paragraph 10 hereof (the
"License Term"). During the License Term, neither Licensor nor any affiliate of
Licensor, shall develop any Hawthorn Hotel within the territorial boundaries as
defined in Attachment B hereto (the "Exclusive Territory"). Your rights to the
Exclusive Territory shall automatically terminate if the Hotel's Quality
Assurance Score (defined in Paragraph 4.C. hereof) falls below 425, or its
then-current equivalent, and you are unable to increase the score to 425 within
thirty (30) days of the inspection, or if this Agreement is otherwise terminated
in accordance with Section 10 hereof. This Agreement
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does not limit Licensor's right, or the rights of any parent, subsidiary,
division or affiliate of Licensor, to use or license to others the Hotel System
or any part thereof at any location outside of the Exclusive Territory. Further,
Licensor, or its parent, subsidiary, division or affiliate may conduct any
business activity or license other hospitality concepts under brands other than
the Proprietary Marks outside and within the Exclusive Territory. You
acknowledge that Licensor, its parent, subsidiaries, divisions and affiliates
are and may in the future be engaged in other business activities including
activities related to transient lodging, which may be or may be deemed to be
competitive with the Hotel System; that facilities, programs, services and/or
personnel used in connection with the Hotel System may also be used in
connection with such other business activities of Licensor, its parent,
subsidiaries, divisions or affiliates; and that you are acquiring no rights
hereunder other than the right to use the Hotel System in connection with a
Hawthorn Hotel as specifically defined herein in accordance with the terms of
the Agreement.
3. Licensee's Responsibilities.
A. Operational and Other Requirements. During the License Term, you shall:
(1) maintain a high moral and ethical standard and atmosphere at the
Hotel;
(2) maintain the Hotel in a clean,safe and orderly manner and in first
class condition;
(3) provide efficient, courteous, and high-quality service to the
public;
(4) operate the Hotel twenty four (24) hours a day, every day;
(5) strictly comply in all respects of the Hotel System and the
Manual and with all other policies, procedures and requirements of
Licensor which may be from time to time communicated to you;
(6) strictly comply with Licensor's reasonable requirements to use
only reliable sources of supplies for the Hotel including any
suppliers approved by Licensor;
(7) strictly comply with Licensor's requirements as to:
(a) the types of services, products, and amenities that may be
used, promoted or offered at the Hotel;
(b) use, display, style
and type of signage;
(c) directory and reservation service listings of the Hotel;
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(d) training of persons to be involved in the operation of the
Hotel, including all expenses incurred by you associated
therewith;
(e) participation in all marketing, reservation service,
advertising,training and operating programs designated by
Licensor as System-wide (or area-wide) programs in the best
interests of hotels using the Hotel System; (f) maintenance,
appearance and condition of the Hotel; and (g) quality and
type of service offered to customers at the Hotel.
(8) use such automated guest service and/or hotel management and/or
telephone system(s) as Licensor shall specify, including any
additions, enhancements, supplements or variants developed during the
term hereof;
(9) participate in and use the those reservation services as Licensor
shall specify, including any additions, enhancements, supplements or
variants thereof which may be developed during the term hereof;
(10) adopt improvements or standard changes to the Hotel System as
may be from time to time designated by Licensor, which improvements
are not intended to cause undue hardship;
(11) strictly comply with all governmental requirements including the
filing and maintenance of any required trade name or fictitious name
registrations, pay all taxes, and maintain all governmental licenses
and permits necessary to operate the Hotel in accordance with the
Hotel System;
(12) permit inspection of the Hotel by Licensor's representatives at
any time and give them free lodging for such time as may be
reasonably necessary to complete their inspections;
(13) insure that no part of the Hotel System is used to further or
promote a competing business or other lodging facility, except as
Licensor may approve for those competing businesses or lodging
facilities owned, licensed, operated or otherwise approved by
Licensor or its parent, divisions, subsidiaries and/or affiliates;
(14) in all respects use your best efforts to reflect credit upon and
create favorable public response to the name "Hawthorn Suites";
(15) promptly pay to Licensor all amounts due Licensor, its parent,
divisions, subsidiaries and/or affiliates as royalties or fees or for
goods or services purchased by you;
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(16)comply with Licensor's requirements concerning confidentiality of
information, and, specifically; treat the Manual and all supplements
and revisions as confidential; use all reasonable efforts to keep the
information confidential; not copy the Manual in any way, not make it
available to any unauthorized person; only disclose information
contained in the Manual only to persons who must have access to it in
connection with their employment with you; and obtain each such
person's agreement to keep such information confidential; and
(17) conduct your advertising in a dignified manner and conform to
the standards and requirements as Licensor may specify from time to
time in writing; submit samples of all advertising and promotional
materials to Licensor for approval; and discontinue use of any
disapproved material upon receipt of such written notice.
B. Performance of the Work. You agree to perform the construction and
renovation and/or conversion work on the property including without limitation,
the purchase of furniture, fixtures, and equipment set forth on Attachment C
hereto and incorporated herein by reference (the "Work"). You acknowledge that
your agreement to perform the Work is an essential element of the consideration
relied upon by Licensor in entering into the Agreement. Your failure to perform
the Work in accordance with Licensor's requirements and specifications
(including the progress, milestone, completion and other dates specified in
Attachment "C") shall constitute a material breach of your obligations under
this License. Licensee may not commence operation of the Hotel as a Hawthorn
Suites hotel without Licensor's written authorization. Notwithstanding any
consent by Licensor to the authorized conditional opening of the Hotel, all
upgrading shall be completed and the Hotel shall otherwise be in compliance with
the License and shall be open as a Hawthorn Suites hotel on or before a date
____ months from the date hereof.
C. Upgrading of the Hotel. Licensor shall review the Quality
Assurance Scores (as defined in Paragraph 4.C hereof) of the Hotel upon each
five (5) year anniversary of the opening of the Hotel. If over the previous
five(5) year period, the Hotel has failed to maintain an average score of four
hundred fifty (450) or greater out of a possible five hundred (500) (or its
then-current equivalent), Licensor may require modernization of the Hotel,
softgood rehabilitation (including but not limited to carpet, drapes,
bedspreads) or other upgrading of the Hotel. If the upgrading requirements
contained in this Paragraph 3.C. cause you undue hardship, you may terminate
this Agreement by paying a fee computed according to Paragraph 10.E.
D. Fees.
(1)For each month (or part of a month) during the License Term, you
shall pay to Licensor by the tenth (10th) of the following month:
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(a) a royalty fee equal to five percent (5%) of the Gross Room
Revenues of the Hotel, with deductions for sales and room taxes only ("Gross
Room Revenues");
(b) an "Advertising Fund Contribution" of 2.5 percent of Gross Rooms
Revenue. The Advertising Fund Contribution payments do not include the cost,
installation or maintenance of reservation services equipment or training.
Licensor may, in its sole discretion and at any time, increase the Advertising
Fund Contribution amount above by no more than ten percent (10%) per year
provided that Licensee's Advertising Fund Contributions shall not exceed a
maximum of three percent (3.0%). Licensor hereby acknowledge that each such
increase, if any, shall not be imposed unless Licensor imposes a similar
increase on all licensees operating under the Hotel System according to license
agreements that contain provisions similar to this Paragraph 3(D)(1)(6) that
provides for such increased contributions by licensees; and
(c) an amount equal to any sales, gross receipts, or similar tax
imposed on Licensor and calculated solely on payment required hereunder, unless
the tax is an optional alternative to an income tax otherwise payable by
Licensor.
(2) "Gross Room Revenues" shall mean the gross receipts attributable
to or payable for the rental of guest rooms at the Hotel, including, without
limitation, the net proceeds (after deduction of the expenses of adjustment and
collection) of use and occupancy, or for business interruption, rent loss, or
similar insurance with respect to the Hotel (provided that insurance proceeds
shall be included in Gross Room revenues only when and to the extent actually
received). Gross Room Revenues shall not include gratuities to employees or
service charges levied in lieu of such gratuities, which, in either case, are
payable to employees, or federal, state, and local taxes or fees collected by
you for transmittal to the appropriate taxing authorities.
(3) All monthly payments required by this Agreement shall be
submitted to Licensor together with all reports required under this Agreement.
Licensor may require that all monthly payments required under this Agreement
shall be made by telegraphic transfer, automatic debit arrangement, or other
means as Licensor may specify from time to time, to a bank account designated by
Licensor. In the event such arrangements are made, Licensor shall be responsible
for the cost of connection to such service and you shall maintain sufficient
funds in your bank account to pay all such debited obligations. Any payment or
report not actually received by Licensor on or before such date shall be deemed
overdue, or, if an automatic debit or similar arrangement is utilized and funds
are insufficient to cover your payment obligation, any amounts unpaid on or
before such date shall be deemed overdue. If any payment is overdue, you shall
pay to Licensor, in addition to the amount overdue, interest on such amount from
the day it was due until paid at one and a half
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percent (1.5%) per month or the maximum rate permitted by law, whichever is
less. Entitlement to such interest shall be in addition to any of the remedies
Licensor may have.
(4) A standard initial fee for additional guest rooms equal to the
higher of -(a) Three Hundred and Fifty Dollars ($350) per room; or (b) the
then-current per room charge for the Application Fee per room shall be paid by
you to Licensor on your submission of an application to add any Suites to the
Hotel. As a condition to Licensor granting its approval of such application,
Licensor may require you to upgrade the Hotel, subject to Paragraph 3.C.
(5) Local and regional marketing programs and related activities may
be conducted by you, but only at your expense and subject to Licensor's
requirements. Reasonable charges may be made by Licensor for optional
advertising materials ordered or used by you for such programs and activities.
4. Licensor's Responsibilities.
A. Training. During the License Term, Licensor shall continue to specify
and provide required and optional training programs at various locations that
Licensor shall designate. Reasonable charges may be made for required training
materials. Travel, lodging and other expenses of you and your employees shall be
borne by you. If such training is held at your Hotel, you must provide
Licensor's representatives lodging at the Hotel at no cost to Licensor.
B. Reservation Services. Provided that Licensee is in full compliance with
its material obligations under this Agreement, Licensor will afford License
access to reservation services for the Hotel.
C. Consultation on Operations, Facilities and Marketing. Licensor shall
provide you with a set a confidential prototypical plans and specifications,
which must be adapted by your architects and engineers. We will review your site
layout and working drawings prepared by your architects, and any other related
plans and specifications. In addition Licensor shall, from time to time at
Licensor's sole discretion, make available to you consultation and advice in
connection with operations, facilities and marketing, including lists of
suppliers for Hotel fixtures, furnishings, signs and other equipment. Licensor
shall also periodically evaluate the performance of the Hotel, but in any case
at least once each year, by giving your Hotel a Quality Assurance Score.
D. Use of Marketing/Reservation Contribution. The Marketing/Reservation
Contribution shall be used by Licensor for costs associated with advertising,
promotion, publicity, market research and other marketing programs and related
activities, cost of
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maintaining and producing a National Directory, as well as reservations
programs, services and overhead for individuals directly related to national and
local marketing and reservations. For the purpose of this Paragraph, overhead
shall be limited to individuals directly related to the Reservation or Marketing
departments such as the Vice President of Marketing and costs related to the
financial management of the fund. Licensor shall not use any of the funds in the
Marketing and Reservation Contributions to pay for marketing directly related to
the sale of franchises. Licensor is not obligated to expend funds for marketing
or reservation services in excess of the amounts received from licensees using
the Hotel System. In the event excess amounts remain at the end of any taxable
year, all expenditures in the following taxable year(s) shall be made first out
of accumulated earnings from previous years, next out of earnings in the current
year, and finally from contributions. Marketing and Reservation Contributions
shall not be an asset of Licensor, and an audit of the operation of the
Marketing and Reservation Contributions shall be prepared annually by an
independent certified public accountant selected by Licensor and shall be made
available to you on request. Licensor shall maintain the National Directory,
listing the address and telephone number of all Hawthorn Suites operating under
the Hotel System.
E. Application of Manual. Licensor shall provide you, on loan, one (1) copy
of the Manual. All hotels operated within the Hotel System shall be subject to
the Manual, as it may from time to time be modified or revised by Licensor,
including limited exceptions which may be made by Licensor based on local
conditions or special circumstances. Each change in the Manual must be explained
in writing to you at least thirty (30) days before it goes into effect.
F. Other Arrangements for Marketing Etc. Licensor may enter into
arrangements for development, marketing, operations, administrative, technical
and support functions, facilities, programs, services and/or personnel with any
other entity and may use any facilities, programs, services and/or personnel
used in connection with the Hotel System in connection with any business
activities of its parent, subsidiaries, divisions or affiliates.
G. Inspections/Compliance Assistance. Licensor has the right to inspect the
Hotel at any time, with or without notice to you, to determine if the Hotel is
in compliance with the standards and rules of operation set forth in the Manual.
If the Hotel fails to comply with such standards and rules of operation,
Licensor may, at its option and at your cost, require an action plan to correct
the deficiencies. You must then take all steps necessary to correct any
deficiencies within the times established by Licensor. Licensor's approval of an
action plan does not waive any rights it has or may have under this Agreement
not does it relieve you of any obligations under this Agreement.
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5. Proprietary Rights
A. Ownership of the Hotel System and Proprietary Marks. You acknowledges and
shall not contest, either directly or indirectly, Licensor's unrestricted and
exclusive right to license the Hotel System and any element(s) or component(s)
thereof, and acknowledges that Licensor has the sole right to grant licenses to
use all or any element(s) or component(s) of the Hotel System. You specifically
agree and acknowledge that HSA is the owner of all right, title and interest in
and to the Proprietary Marks together with the goodwill symbolized thereby and
that you shall not contest directly or indirectly the validity or ownership of
the marks either during the term of this Agreement or at any time thereafter.
All improvements and additions whenever made to or associated with the Hotel
System by the parties to this Agreement or anyone else, and all Proprietary
Marks, and all goodwill arising from your use of Licensor's marks shall inure to
the benefit of and become the property of HSA. Upon expiration or termination of
this Agreement, no monetary amount shall be assigned as attributable to any
goodwill associated with your use of the Hotel System or any element(s) or
component(s) of the Hotel System including the name or marks.
B. Trademark Disputes. Licensor and/or HSA shall have the sole right and
responsibility to handle disputes with third parties concerning use of all or
any part of the Hotel System, and you shall, at your reasonable expense, extend
your full cooperation to Licensor and/or HSA in all such matters. All recoveries
made as a result of disputes with third parties regarding use of the Hotel
System or any part thereof shall be for the account of Licensor and/or HSA.
Neither Licensor nor HSA need initiate suit against alleged imitators or
infringers and may settle any dispute by grant of a license or otherwise. You
shall not initiate any suit or proceeding against alleged imitators or
infringers or any other suit or proceeding to enforce or protect the Hotel
System.
C. Protection of Name and Marks. Both parties shall make every effort
consistent with the foregoing to protect and maintain the Proprietary Marks and
their distinguishing characteristics. You agree to execute any documents deemed
necessary by Licensor, HSA or their respective counsel to obtain protection for
Licensor's marks or to maintain their continued validity and enforceability. You
agree to use the names and marks associated with the Hotel System only in
connection with the operation of a Hawthorn Hotel and in the manner authorized
by Licensor and you acknowledge that any unauthorized use thereof shall
constitute infringement of Licensor's and HSA's rights. You must notify Licensor
immediately, in writing, of any infringement or challenge to your use of
Licensor's marks or of any unauthorized use or possible misuse of Licensor's
marks or Licensor's proprietary information.
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6. Records and Audits.
A. Monthly Reports. At least monthly, you shall prepare a statement which
shall include all information concerning Gross Rooms Revenue, other revenues
generated at the Hotel, room occupancy rates, reservation data and other
information required by Licensor that may be useful in connection with marketing
and other functions of Licensor, its parent, subsidiaries, divisions or
affiliates (the "Data"). The Data shall be the property of Licensor. By the
tenth (10th) of each month, you shall submit to Licensor a statement setting
forth the Data for the previous month and reflecting the computation of the
amounts then due under Paragraph 3.D hereof. The statement shall be in such form
and detail as Licensor may reasonably request from time to time, and may be used
by Licensor for its reasonable purposes. Licensor shall not willingly or
knowingly provide Data on your property as an inducement to develop other hotel
brands in your market area.
B. Preparation and Maintenance of Records. You shall, in a manner and form
satisfactory to Licensor and utilizing accounting and reporting standards as
reasonably required by Licensor, prepare on a current basis (and preserve for no
less than four (4) years), complete and accurate records concerning Gross Rooms
Revenue and all financial, operating, marketing and other aspects of the Hotel,
and maintain an accounting system which fully and accurately reflects all
financial aspects of the Hotel and its business. Such records shall include but
not be limited to books of account, tax returns, governmental reports, register
tapes, daily reports, and complete quarterly and annual financial statements
(profit and loss statements, balance sheets and cash flow statements).
C. Audit. Licensor or its designated agents shall have the right at any time
to examine and copy, at its expense, all books, records, and your tax returns
related to the Hotel and, at its option, to have an independent audit made. If
an inspection or audit should reveal that payments have been understated in any
report to Licensor, then you shall immediately pay to Licensor the amount
understated upon demand, in addition to interest from the date such amount was
due until paid, at one and one half percent (1.5%) per month or the maximum rate
permitted by law, whichever is less. In such event, Licensor shall also have the
right to require that all your future financial statements related to the Hotel
be audited at your expense for each fiscal year by an independent certified
public accounting firm selected by you and approved by Licensor. If an
inspection discloses an underpayment to Licensor of five percent (5%) or more of
the total amount that should have been paid to Licensor during any six (6) month
period, you shall, in addition to repayment of such understated amount, with
interest, reimburse Licensor for any and all costs and expenses incurred in
connection with the inspection or audit (including, without limitation,
reasonable
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accounting and attorneys' fees). The foregoing remedies shall be in addition
to any other remedies Licensor may have, including, without limitation the
remedies for default.
D. Annual Financial Statements. At Licensor's request, you shall submit to
Licensor as soon as available but not later than ninety (90) days after the end
of your fiscal year, complete financial statements for such year. You shall
certify them to be true and correct and to have been prepared in accordance with
generally accepted accounting principles consistently applied, and any false
certification shall be a breach of this Agreement. Licensor may also request,
from time to time, gross operating profits percentages and certain operating
statistics (i.e. energy and repairs costs) which you must provide.
7. Indemnity and Insurance.
A. Indemnity. It is understood and agreed that nothing in this Agreement
authorizes either party to make any contract, agreement, warranty or
representation on the other's behalf, or to incur any debt or other obligation
in the other's name, and that neither party shall in any event assume liability
for, or be deemed liable hereunder as a result of, any such action, or by reason
of any act or omission of the other party or any claim or judgement arising
therefrom. You shall indemnify and hold Licensor and HSA, their parents,
affiliates, subsidiaries, officers, directors, agents, and employees, harmless
against any and all claims arising directly or indirectly from, as a result of,
or in connection with, your operation of the Hotel, including claims of
intentional or negligent conduct by you, and any claims of acts or omissions by
Licensor or HSA relating to the operation of the Hotel System (even though
Neither HSA nor Licensor is actively involved in the operation or supervision of
the Hotels, as well as the costs, including reasonable attorney's fees, of
defending against them. You agree that all of the obligations of Licensor under
this Agreement are to you, and no other party is entitled to rely on, enforce,
or obtain relief for breach of such obligations either directly or indirectly or
by subrogation. Licensor shall not indemnify or hold you harmless against any
action or claim by any third party based upon Licensor's exercise of any of its
rights in accordance with the terms of this Agreement.
B. Insurance. During the License Term, you shall comply with all insurance
requirements of any lease or mortgage covering the Hotel, and Licensor's
specifications for insurance as to amount and type of coverage as may be
reasonably specified by Licensor from time to time in writing, and shall in any
event maintain as a minimum the following insurance underwritten by an insurer
approved by Licensor:
(1) employer's liability and workers' compensation insurance as
prescribed by applicable law; and
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(2) comprehensive general liability insurance (with products, completed
operations and independent contractors coverage) and comprehensive automobile
liability insurance, all on an occurrence basis naming Licensor and its then
current parent, subsidiaries, divisions, affiliates and their successors and
assigns as additional insureds and underwritten by an insurer approved by
Licensor with single-limit coverage for personal and bodily injury and property
damage of at least Five Million Dollars ($5,000,000) for each occurrence. In
connection with all significant construction at the Hotel during the License
Term, you shall cause the general contractor to maintain with an insurer
approved by Licensor comprehensive general liability insurance (with products,
completed operations and independent contractors coverage) in at least the
amount of Five Million Dollars ($5,000,000) for each occurrence with Licensor
and its then current parent, subsidiaries, divisions, affiliates and their
successors and assigns named as additional insureds.
C. Changes in Insurance. Simultaneously herewith, annually hereafter and
each time a change is made in any insurance or insurance carrier, you shall
furnish to Licensor certificates of insurance including the term and coverage of
the insurance in force, the persons insured, and the fact that the coverage may
not be cancelled, altered or permitted to lapse or expire without thirty (30)
days' advance written notice to Licensor.
8. Transfer.
A. Transfer by Licensor. Licensor shall have the right to transfer or
assign all or any part of its rights or obligations in this Agreement to any
person or legal entity, and you hereby consent to such transfer.
B. Transfer by Licensee.
(1) You understand and acknowledge that the rights and duties set forth
in this Agreement are personal to you, and that Licensor has granted this
license in reliance on your business skill, financial capacity, and character,
and that of your partners or shareholders. Accordingly, neither you nor any
immediate or remote successor to any part of your interest in this license, nor
any individual, partnership, corporation, or other legal entity which directly
or indirectly owns any interest in this license or in you shall sell, sign,
transfer, convey, give away, mortgage, or otherwise encumber any direct or
indirect interest in this License (including any ownership interest in you), the
Hotel, or a substantial portion of the assets (including building and real
estate) of the Hotel without the prior written consent of Licensor.
(2) If the transfer is equal to less than a fifty percent (50%) equity
interest in you and does not have the effect of transferring control (as
described in Paragraphs (3) and (4) below), the transfer shall not require
the prior approval of Licensor, provided that
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(3) If a transfer, alone or together with other previous, simultaneous, or
proposed transfers, would have the effect of transferring a controlling interest
in the License, you, the Hotel, or greater than fifty percent (50%) of the
assets (including building and real estate) of the Hotel, such transfer shall
require Licensor's prior approval, and Licensor may, in its sole discretion,
require any or all of the following as conditions of its approval, which
approval shall not be unreasonably withheld:
(a) all of your accrued monetary obligations to Licensor and its
subsidiaries and affiliates and all other outstanding obligations related to the
Hotel shall have been satisfied and you are not otherwise in default;
(b) the transferee, and all shareholders in the transferee, shall
demonstrate to Licensor's satisfaction that the transferee and its shareholders
or general partners, as appropriate, meet Licensor's then current qualifications
being applied to new applicants including, business standards, ability to
conduct the Hotel (as may be evidenced by prior related business experience or
otherwise), and have adequate financial resources and capital to operate the
Hotel;
(c) transferee and the shareholders or general partners in the
transferee shall execute the standard form license agreement then being offered
to new Hotel System licensees (provided, however, that the royalty fee and the
Marketing/Reservation Contribution shall be the greater of the then-current fees
or the same as the amount assessed on the date of the transfer, which amount
shall be adjusted in accordance with the terms of the license agreement
executed) and such other ancillary agreements as Licensor may require for the
Hotel and the general manager shall complete the initial training program then
in effect for new licensees;
(d) The Hotel shall be upgraded to conform to the then-current
standards and specifications for hotels operating under the Hotel System if the
most recent Quality Assurance Score was below four hundred and fifty (450). In
any event, all deficiencies noted on the most recent inspection must be remedied
by the transferee within ninety (90) days of such transfer. You shall complete
any upgrade required under this Paragraph within the time specified by Licensor;
(e) You shall pay a transfer fee equal to Two Thousand Five Hundred
Dollars ($2,500.00), for a term equal to the balance of the original term of
this License. No fee shall be required for transfers to the spouse, issue,
parent, or sibling of a partner or shareholder in you, or from one partner or
shareholder to another. If the transferee requests approval of a term greater
than the remaining term of this License, the then-current standard minimum
application fee, prorated according to the period of time requested which
exceeds the original term of this License, shall be paid to Licensor;
13
(f) the transferor shall have executed a general release, in a form
satisfactory to Licensor, of any and all claims against Licensor and its
officers, directors, shareholders, and employees, in their corporate and
individual capacities, including, without limitation, claims arising under
federal, state, and local laws, rules, and ordinances;
(g) the transferee, and all shareholders or general partners in the
transferee, shall enter into a written assignment, in a form satisfactory to
Licensor, assuming and agreeing to discharge all of your obligations under
this Agreement;
(h) you shall remain liable for all obligations to Licensor and its
subsidiaries and affiliates in connection with the Hotel prior to the
effective date of the transfer and shall execute any and all instruments
reasonably requested by Licensor to evidence such liability.
(4) For the purposes of this Agreement, "control" shall mean the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, corporation or other business entity,
whether through the ownership of voting securities, by contract, or otherwise.
(5) Any purported assignment or transfer, by operation of law or otherwise,
not having the prior written consent of Licensor shall be null and void and
shall constitute a material breach of this Agreement, for which Licensor may
then terminate without opportunity to cure pursuant to Paragraph 10.C. of this
Agreement, and seek injunctive relief as well as monetary damages.
C. Transfers of the License or Equity Interest in Licensee Upon Death. Upon
the death or mental incompetency of you or a person owning all or any interest
in you, the executor, administrator, or personal representative of such person
shall transfer within three (3) months after such death or mental incompetency
his interest to a third party approved by Licensor. Such transfers, including,
without limitation, transfers by devise or inheritance, shall be subject to the
same conditions as any inter vivos transfer. However, in the case of transfer by
devise or inheritance, if the heirs or beneficiaries of any such person are
unable to meet the conditions in this Paragraph 12, the personal representative
of the deceased shareholder shall have reasonable time to dispose of the
deceased's interest in you, which disposition shall be subject to all the terms
and conditions for transfers contained in this Agreement. If the interest is not
disposed of within nine (9) months, Licensor may terminate this Agreement.
14
D. Registration of a Proposed Transfer of Equity Interests. Securities in
you may be offered to the public only with the prior written consent of
Licensor, which consent shall not be unreasonably withheld. All materials
required by federal or state law for the sale of any interest in you shall be
submitted to Licensor for review prior to filing with any government agency; and
any materials to be used and any exempt offering shall be submitted to Licensor
for review prior to their use. No offering by you shall imply (by use of the
Proprietary Marks or otherwise) that Licensor is participating as an
underwriter, issuer, or officer of you or Licensor's securities; and Licensor's
review of any offering shall be limited solely to the subject of the
relationship between you and Licensor. You and other participants in the
offering must fully indemnify Licensor in connection with the offering. For each
proposed offering, you shall pay to Licensor a non-refundable fee of Five
Thousand Dollars ($5,000.00), or such greater amount as is necessary to
reimburse Licensor for its reasonable cost and expenses associated with
reviewing the proposed offering, including, without limitation, legal and
accounting fees.
E. Non-Waiver of Claims. Licensor's consent to a transfer of any interest
in the license granted herein shall not constitute a waiver of any claims it may
have against the transferring party, nor shall it be deemed a waiver of
Licensor's right to demand exact compliance with any of the terms of this
Agreement by the transferee.
F. Licensor's Right of First Refusal. If in the event that any party
holding any direct or indirect interest in this License, in you, or in all or
substantially all of the assets of the Hotel desires to accept any bona fide
offer from a third party to purchase such interest, you shall notify Licensor as
provided in Paragraph 13.F. hereof, and shall provide such information and
documentation relating to the offer as Licensor may require. Licensor shall have
the right and option, provided the third party wishes to remove the Hotel from
the Hotel System, exercisable within thirty (30) days after receipt of such
written notification, to send written notice to the seller that Licensor intends
to purchase the seller's interest on the same terms and conditions offered by
the third party. If Licensor elects to purchase the seller's interest, closing
on such purchase shall occur within ninety (90) days from the date of notice to
the seller of the election to purchase by Franchisor. If Licensor elects not to
purchase the seller's interest, any material change thereafter in the terms of
the offer from a third party shall constitute a new offer subject to the same
rights of first refusal by Licensor as in the case of the third party's initial
offer (minor changes to the offer shall not constitute a new offer and shall be
subject to the notice period of the initial offer). Failure of Licensor to
exercise the option afforded by this Paragraph 8.F. shall not constitute a
waiver of any other provision of this Agreement, including all of the
requirements of this Paragraph 8.F., with respect to a proposed transfer. In the
event the consideration, terms, and/or conditions offered by a third party are
such that Licensor may not reasonably be required to furnish the same
consideration, terms, and/or conditions, then Licensor may purchase the interest
proposed to be sold for the reasonable equivalent in cash. If the parties cannot
agree within thirty (30) days on the reasonable equivalent in cash of the
consideration, terms, and/or conditions
15
shall have no right of first refusal provided the third party meets the
qualifications set forth in Paragraph 8.
9. Condemnation and Casualty.
A. Condemnation. You shall, at the earliest possible time, give Licensor
full notice of any proposed taking of the Hotel by eminent domain. In the event
the Hotel is taken by eminent domain, Licensor shall give due and prompt
consideration, without any obligation, to transferring this Agreement to a
nearby location selected by you and approved by Licensor as promptly as
reasonably possible, and in any event within four (4) months of the taking. If
the new location is approved by Licensor and the transfer authorized by Licensor
and if you open a new hotel at the new location in accordance with Licensor's
specifications within two (2) years of the closing of the Hotel, the new hotel
shall thenceforth be deemed to be the Hotel licensed under this Agreement. If a
condemnation takes place and a new hotel does not, for whatever reason, become
the Hotel under this Agreement in strict accordance with this Paragraph (or if
it is reasonably evident to Licensor that such shall be the case), this
Agreement will terminate forthwith upon notice thereof by Licensor to you,
without the payment of liquidated damages hereunder.
B. Casualty. If the Hotel is damaged by fire or other casualty, you shall
expeditiously repair the damage. If the damage or repair requires closing the
Hotel, you shall immediately notify Licensor, shall repair or rebuild the Hotel
in accordance with Licensor's standards, shall commence reconstruction within
four (4) months after closing, and shall reopen the Hotel for continuous
business operations as soon as practicable (but in any event within twenty four
(24) months after closing of the Hotel), giving Licensor ample advance notice of
the date of reopening. If the Hotel is not reopened in accordance with this
Paragraph 9.B., this Agreement shall forthwith terminate upon notice thereof by
Licensor to you, with the payment of liquidated damages calculated in the manner
set forth in Paragraph 10.E.
C. No Extensions of Term. Nothing in this Paragraph 9 shall extend the
License Term but you shall not be required to make any payments pursuant to
Paragraphs 3.C. (1), (2) or (3) for periods during which the Hotel is closed by
reason of condemnation or casualty.
10. Termination
A. Expiration of Term. This Agreement shall expire without notice effective
20 years from the authorized opening date, subject to earlier termination as set
forth herein. The parties recognize the difficulty of ascertaining damages to
Licensor resulting from premature termination of this Agreement, and have
provided for liquidated damages in Paragraph 10.F. below, which liquidated
damages represent the parties' best estimate as to the damages arising from the
circumstances in which they are provided.
16
B. Default with Opportunity to Cure.
(1) Except as provided in Paragraphs 10.C. hereof, you shall have
thirty (30) days (unless otherwise specified herein or in the notice by
Licensor) from receipt of written notice of a default within which to remedy
such default. If any such default is not cured within that time, or such longer
period as applicable law may require (or such longer period as may be reasonably
required by you to cure any non-monetary default if you immediately commence,
diligently and in good faith pursues, and cures such default), this Agreement
shall terminate without further notice to you effective immediately upon the
expiration of the thirty (30) day period, expiration of any extended period as
described above, or such longer period as applicable law may require.
Alternatively, Licensor may, at its option, suspend your access to the
reservation system until such default has been cured to Licensor's satisfaction.
You shall be in default hereunder for any failure to comply with any of the
requirements imposed by this Agreement, as it may from time to time reasonably
be supplemented by the Manual, or to carry out the terms of this Agreement in
good faith.
(2) If during the twelve (12) months preceding a notice of default in
(1) above you shall have engaged in a violation of this Agreement for which a
notice of default was given and such default was remedied, the period given to
remedy defaults thereafter shall, if and to the extent permitted by law, be ten
(10) days instead of thirty (30).
(3) In any judicial proceeding in which the validity of termination is
at issue, Licensor shall not be limited to the reasons set forth in any notice
sent under this Paragraph.
(4) Licensor's notice of termination or suspension of services as
described in Section 10(B)(1) shall not relieve you of your obligations
hereunder.
C. Immediate Termination by Licensor. This Agreement shall immediately
terminate without notice to you if:
(1) (a) you, or any Guarantor of your obligations hereunder (a
"Guarantor"), shall generally not pay your debts as they become due or shall
admit in writing an inability to pay your debts, or shall make a general
assignment for the benefit of creditors; or
(b) you, or any Guarantor, shall commence or consent to any case,
proceeding or other action seeking reorganization, arrangement, adjustment,
liquidation, dissolution
17
or composition of you or your debts under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, or seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or
any substantial part of its property; or
(c) you, or any Guarantor, shall take any corporate or other action to
authorize any of the actions set forth above in Paragraphs (a) or (b); or
(d) any case, proceeding or other action against you or any such
guarantor shall be commenced seeking to have an order for relief entered against
it as debtor, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeking
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its property, and such case, proceeding or
other action (i) results in the entry of an order for relief against it which is
not fully stayed within seven (7) business days after the entry thereof or (ii)
remains undismissed for a period of forty-five (45) days; or
(e) an attachment remaining on all or a substantial part of the Hotel
or of your or any Guarantor's assets for thirty (30) days; or
(f) you or any Guarantor fails, within sixty (60) days of the entry of
a final judgment against you in any amount exceeding Fifty Thousand Dollars
($50,000), to discharge, vacate or reverse the judgment, or to stay execution of
it, or if appealed, to discharge the judgment within thirty (30) days after a
final adverse decision in the appeal; or
(2) you cease to operate the Hotel at the Location or under the
Proprietary Marks, or loses possession or the right to possession of all or a
significant part of the Hotel, except as otherwise provided in Paragraph 9
hereof; or
(3) you contest in any court or proceeding Licensor's ownership of the
Hotel System or any part of it, or the validity of any of the Proprietary
Marks; or
(4) a breach of Paragraph 8 hereof occurs; or
(5) you fail to continue to identify the Hotel to the public as a
Hawthorn Hotel; or
(6) any action is taken toward dissolving or liquidating you or any
Guarantor, if it is a corporation or partnership, except for death of a
partner; or
(7) you or any of your principals is, or is discovered to have been,
convicted of a felony (or any other offense if it is likely to adversely
reflect upon or affect the Hotel, the Hotel
18
(8) you knowingly maintains false books and records of account or
knowingly submits false reports or information to Licensor; or
(9) if you intentionally discloses or divulges the contents of the
Manual or other trade secrets or confidential information provided to you by
Licensor to any unauthorized person or fails to exercise reasonable care to
prevent such disclosure; or
(10) if you intentionally or negligently makes any material false
statements or omissions to Licensor in connection with your Application.
D. De-identification of Hotel Upon Termination. You shall take whatever
action is necessary to assure that no use is made of any part of the Hotel
system at or in connection with the Hotel or otherwise after the license term
ends. This shall involve, among other things, returning to Licensor the
Manual and all other materials proprietary to Licensor, removal of all
distinctive signs, changing the telephone listing and removal of all terms
bearing the Hawthorn Hotel logo, name, trademarks and/or service marks.
Further, until all modifications required by this Paragraph 10.D. are
completed, your shall (i) maintain a conspicuous sign at the registration
desk in a form specified by Licensor stating that the Hotel is no longer
associated with the Hotel System, and (ii) advise all customers or
prospective customers telephoning the Hotel that it is no longer associated
with the Hotel System. Anything not done by you within thirty (30) days after
the license term ends, may be done at your expense by Licensor or its agents,
who may enter upon the premises of the Hotel for that purpose.
E. Payment of Liquidated Damages. If this Agreement terminates pursuant
to Paragraphs 3.B., 9.B., 10.C. or 10.D. above at any time after the first
twenty four (24) months of operation, you shall promptly pay Licensor (in
addition to any amounts then due to Licensor, and only as liquidated damages
for the premature termination of this Agreement, and not as a penalty or as
damages for breaching this Agreement or in lieu of any other payment) a lump
sum based on the average occupancy rate for the twelve (12) months preceding
the termination as follows:
1. if the occupancy rate was less than fifty percent (50%) then you
shall pay no liquidated damages;
2. if the occupancy rate was fifty percent (50%) to fifty nine and
nine tenths percent (59.9%) then you shall pay an amount equal to twelve (12)
months of fees required under Paragraph 3.C.1;
19
3. if the occupancy rate was sixty percent (60%) to sixty nine and
nine tenths percent (69.9%) then you shall pay an amount equal to twenty four
(24) months of fees required under Paragraph 3.C.1;
4. if the occupancy rate was seventy percent (70%) or greater then you
shall pay an amount equal to thirty six (36) months of fees required under
Paragraph 3.C.1;
5. if this Agreement terminates at any time during the first twenty
four (24) months of operation, you shall promptly pay to Licensor liquidated
damages equal to thirty six (36) times the average monthly royalty paid under
Paragraph 3.C.1.
11. Renewal. Licensee may apply to renew this License Agreement for a term
of ten years. Licensor will require submission of a completed application on
Licensor's then current form, submission of an application fee in the amount
equal to the then current fee charged to new licensees, and Licensor's
approval of the application. Licensor may require reasonable renovation and
upgrading of the Hotel to applicable Hotel System standards as a condition or
pre-condition thereof.
12. Relationship of Parties.
A. No Agency Relationship. You are an independent contractor. Neither party
is the legal representative or agent of, or has the power to obligate (or has
the right to direct or supervise the daily affairs of) the other for any purpose
whatsoever. Licensor and you expressly acknowledge that the relationship
intended by them is a business relationship based entirely on, and defined by,
the express provisions of this Agreement and that no partnership, joint venture,
agency, fiduciary or employment relationship is intended or created by reason of
this Agreement.
B. Licensee's Notices to Public Concerning Independent Status. You shall
take such steps as are necessary and such steps as Licensor may from time to
time reasonably request to minimize the chance of a claim being made against
Licensor for anything that occurs at the Hotel, or for acts, omissions or
obligations of you or anyone associated or affiliated with you or the Hotel.
Such steps may, for example, include giving notice in private rooms, public
rooms and advertisements, on business forms and stationery, and any other
materials, making clear to the public that Licensor is not the owner or operator
of the Hotel and is not accountable for what happens at the Hotel. Unless
required by law, you shall not use the word "Hawthorn" or any similar words in
your corporate, partnership, or trade name, nor authorize or permit such use by
anyone else. You shall not use the word "Hawthorn" or any other name or mark
associated with the Hotel System to incur any obligation or indebtedness on
behalf of Licensor.
20
C. Third Party Beneficiary. You hereby acknowledge that HSA is a third
party beneficiary under this Agreement, with the independent right to enforce
your obligations hereunder and to obtain such remedies for any failure on your
part to perform your obligations to the full extent permitted by this Agreement
and in the place of the Licensor.
13. Miscellaneous.
A. Severability and Interpretation. The remedies provided in this Agreement
are not exclusive. In the event any provision of this Agreement is held to be
unenforceable, void or voidable as being contrary to the law or public policy of
the United States or any other jurisdiction entitled to exercise authority
hereunder, all remaining provisions shall nevertheless continue in full force
and effect unless deletion of the provision(s) deemed unenforceable, void or
voidable impairs the consideration for this Agreement in a manner which
frustrates the purpose of the parties or makes performance commercially
impracticable. In the event any provision of this Agreement requires
interpretation, such interpretation shall be based on the reasonable intention
of the parties in the context of this transaction without interpreting any
provision in favor of or against any party hereto by reason of the drafting of
the party or its position relative to the other party. Any covenant, term or
provision of this Agreement which, in order to effect the intent of the parties,
must survive the termination of this Agreement, shall survive any such
termination.
B. Binding Effect. This Agreement shall become valid when executed and
accepted by Licensor at Atlanta, Georgia. It shall be deemed made and entered
into in the state of Georgia and shall be governed and construed under and in
accordance with the laws of the state of Georgia. In entering into this
Agreement, you acknowledge that it has sought, voluntarily accepted and become
associated with Licensor who is headquartered in Atlanta, Georgia and that this
Agreement contemplates and shall result in business relationships with
Licensor's headquarter's personnel. The choice of law designation permits, but
does not require that all suits concerning this Agreement be filed in the state
of Georgia.
C. Exclusive Benefit. This Agreement is exclusively for the benefit of the
parties hereto and it shall not give rise to liability to a third party, except
as otherwise specifically set forth herein. No agreement between Licensor and
anyone else is for the benefit of you.
D. Entire Agreement. This is the entire Agreement (and supersedes all
previous agreements including without limitation, any commitment agreement
between the parties concerning the Hotel) between the parties relating to the
Hotel. Neither Licensor nor any other person on Licensor's behalf has made any
representation to you concerning this Agreement or relating to the Hotel System,
which representation is not fully set forth herein or in Licensor's "Offering
Circular for Prospective Franchisees." No change in this Agreement shall be
valid unless in writing signed by both parties. No failure to require strict
performance or to exercise
21
any right or remedy hereunder shall preclude requiring strict performance or
exercising any right or remedy in the future.
E. Licensor's Withholding of Consent. Licensor's consent, wherever
required, may be withheld if any default by you exists under this Agreement.
Approvals and consents by Licensor shall not be effective unless evidenced by a
writing duly executed on behalf of Licensor.
F. Notices. Any and all notices required or permitted under this Agreement
shall be in writing and shall be delivered by any means which shall provide
evidence of the date received, to the respective parties at the following
addresses unless and until a different address has been designated by written
notice to the other party:
Notices to LICENSOR: Hawthorn Franchising, Inc.,
13 Corporate Square, Suite 250
Atlanta, Georgia 30329
(404) 321-4045
Notices to you: [ENTITYNAMECAPS]
[PCADDRESS1]
[PCADDRESS2]
Attn: [PCNAME]
Any notice shall be deemed to have been given at the date and time it is
evidenced to have been received.
G. Descriptive Headings. The descriptive headings in this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any provision in this Agreement.
H. Management of the Hotel. You must at all times retain and exercise
direct management control over the Hotel's business. You shall not enter into
any lease, management agreement or other similar arrangement for the operation
of the Hotel or any part thereof (including without limitation, food and/or
beverage service facilities), with any independent entity without the prior
consent of Licensor.
J. Guest Room Rates. You acknowledge that it is your responsibility to
establish room rates for the Hotel. Rates must be submitted to Licensor prior to
the deadline for the upcoming National Directory and you may not charge a rate
in excess of the rate published in the National Directory for a particular time
period.
22
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first stated above.
LICENSEE:
[ENTITYNAMECAPS]
By: ____________________________
[SIGNEENAME]
[SIGNEETITLE]
Attest:_______________________
Secretary
LICENSOR:
HAWTHORN FRANCHISING, INC.
By:_____________________
Jon Leven
Attest:____________________
Asst. Secretary
23
GUARANTY
As an inducement to _______________________("Licensor") to execute the
above License Agreement, the undersigned, jointly and severally, hereby
unconditionally warrant to Licensor and its successors and assigns that all of
Licensee's representations in the License Agreement and the application
submitted by Licensee to obtain the License Agreement are true and guarantee
that all of Licensee's obligations under the above License Agreement, including
any amendments thereto whenever made (the "Agreement"), shall be punctually paid
and performed.
Upon default by Licensee or notice from Licensor, the undersigned shall
immediately make each payment and perform each obligation required of Licensee
under the Agreement. Without affecting the obligations of the undersigned under
this Guaranty, Licensor may without notice to the undersigned extend, modify or
release any indebtedness or obligation of Licensee, or settle, adjust or
compromise any claims against Licensee. The undersigned waive notice of
amendment of the Agreement and notice of demand for payment or performance by
Licensee.
Upon the death of an individual guarantor, the estate of such guarantor
will be bound by this Guaranty but only for defaults and obligations hereunder
existing at the time of death, and the obligations of the other guarantors shall
continue in full force and effect.
The Guaranty constitutes a guaranty of payment and performance and not of
collection, and each of the guarantors specifically waives any obligation of
Licensor to proceed against Licensee on any money or property held by Licensee
or by any other person or entity as collateral security, by way of set off or
otherwise. The undersigned further agree that this Guaranty shall continue to be
effective or be reinstated as the case may be, if at any time payment or any of
the guaranteed obligations is rescinded or must otherwise be restored or
returned by Licensor upon the insolvency, bankruptcy or reorganization of
Licensee or any of the undersigned, all as though such payment has not been
made.
IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as of the
date of the above Agreement. Witnesses: Guarantors:
________________________________ __________________________________
[GUARANTOR1], Legal Signature
________________________________ ________________________________
[GUARANTOR2], Legal Signature
ATTACHMENT A
Facilities (Paragraph 1):
Site - Area and general description:
Number of approved Guest Rooms (including suites):
Number of Suites included:
Ownership of Licensee (Paragraph 8):
ATTACHMENT B
EXCLUSIVE TERRITORY
The Exclusive Territory is defined as that area bordered by:
ATTACHMENT C
You acknowledge that every detail of the Hotel System is important to
Licensor and other licensees operating under the Hotel System in order to
develop and maintain the standards and public image of the Hotel System. You
agree to comply with the details of the Hotel System as specified by Licensor in
the Manual, or otherwise in writing, and not to deviate therefrom. Specifically,
you acknowledge that the Hotel is intended to offer minimal amenities and to
compete directly with hotels offering the lowest average room rate in each
target market. You therefore agree that it shall offer or install only those
amenities that are approved in advance by Licensor.
The dates below set forth the development schedule for the Hotel, whether new
development or upgrading an existing facility.
1) You shall submit preliminary plans, including site layout and outline
specifications adapting Licensor's then-prototypical plans by
____________________________________________________________________________
2) You shall submit complete working drawings and specifications for the Hotel
and Hotel premises, including its proposed equipment, furnishings, facilities
and signs with such detail and containing such information as Licensor may
request by .
_________________________________________________________________
The Plans as submitted to Licensor shall conform to then prevailing Hotel
System standards, including the construction standards set forth in the Manual.
Construction shall not begin unless and until Licensor has approved the Plans.
Thereafter, no change shall be made to the Plans without the advance consent of
Licensor. Notwithstanding the foregoing, after the Plans have been approved, if
in the course of actual construction any change in the Plans occurs, you shall
notify Licensor promptly. Licensor shall determine whether construction has been
completed in accordance with the Plans.
3) Construction of the Hotel shall commence on or before.
______________________________________________________________
Commencement of construction shall mean excavation and poured footings with
a finished building slab. Once the construction has commenced, it shall continue
uninterrupted (except for interruption by reason of events constituting force
majeure) until construction is completed. You shall, within five (5) days of the
commencement of construction, provide written notice to Licensor that
construction has begun. As used in this License, "force majeure" means an act of
God, war, civil disturbance, government action, fire, flood, accident,
hurricane, earthquake or other calamity, strike or other labor dispute, or other
action beyond the control of you.
4) The Hotel shall be furnished, equipped and shall otherwise be made ready
to open for business in accordance with the License not later than
_____________________________________("Completion Date").
5) If the Hotel shall be a conversion from an existing lodging facility to a
Hawthorn Suites Hotel, following is a required timetable for certain required
changes/upgrades.
Requirements By (date):
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
You shall, within ten (10) days of the Completion Date, submit a written
request to Licensor for Licensor to conduct a final inspection. Upon receipt of
such request, Licensor shall promptly conduct such final inspection. You shall
open for business within ten (10) days after receipt of Licensor's authorization
to do so. The date upon which you receive authorization to open for business
shall be the "Opening Date". You shall not open for business until Licensor
provides final approval and authorization in writing.
The Hotel shall not be opened for business as a Hawthorn Hotel unless and
until:
(i) Licensor has approved and accepted, in advance, in writing the
construction of the Hotel in accordance with the Plans; the installation of all
items of equipment, furniture, signs, computer terminals and related supplies;
and the hiring and training of staff necessary to operate the Hotel in
accordance with Licensor's requirements;
(ii) no accounts are past due to Licensor, its parent, divisions,
subsidiaries or affiliated companies by you;
(iii) you are in full compliance with all of the terms of this License
Notwithstanding anything else herein to the contrary, Licensor may authorize
License to open and operate the Hotel even though you have not fully complied
with the terms of this License, provided that you agree to fulfill all remaining
terms of this License on or before the dates designated by Licensor.