Exhibit 10.20

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (the “Agreement”), is dated as of the 9th day of
January 2006, between MHI Hospitality Corporation, a Maryland corporation (the
“Company” or “Employer”), and David R. Folsom (the “Executive”).

RECITALS:

WHEREAS, the Company is in the business of owning and developing hotels (“the
Company’s Business”); and

WHEREAS, the Company seeks to enter into an agreement with Executive to engage
him to serve as Executive Vice President and Chief Operating Officer of the
Company on the terms and conditions stated herein; and

WHEREAS, Executive seeks to enter into an agreement to take on such
responsibilities under the terms and conditions stated herein; and

WHEREAS, the Company desires to employ the Executive on the terms and conditions
set forth herein.

NOW, THEREFORE, on the basis of the foregoing premises and in consideration of
the mutual covenants and agreements contained herein, the parties hereto agree
as follows:

Section 1. Employment. The Company hereby agrees to employ the Executive and the
Executive hereby accepts such employment with the Company, on the terms and
subject to the conditions hereinafter set forth. Subject to the terms and
conditions contained herein, the Executive shall serve as Executive Vice
President and Chief Operating Officer of the Company and shall have such duties
as are typically performed by a chief operating officer of a corporation of
similar size and type as the Company. The Executive shall render his services at
the direction of and shall report solely to, the Chief Executive Officer of the
Company. The Executive agrees to use best efforts to promote and further the
business, reputation and good name of the Company. The Executive’s primary place
of employment shall be in the Williamsburg, Virginia area, or such other
location as determined by the Board of Directors of the Company.

Section 2. Commencement Date; Term. Unless terminated pursuant to Section 6
hereof the Executive’s employment hereunder shall commence on the date first
written above (“Commencement Date”), and shall continue during the period ending
on December 31, 2010. Thereafter, the term of the Agreement shall be extended
for an additional year, on each anniversary of the Commencement Date, unless
either party gives 180 days prior written notice that the term will not be
extended (the “Employment Term”). The Employment Term shall terminate upon any
termination of the Executive’s employment pursuant to Section 6.

Section 3. Compensation and Benefits During the Employment Term. The Executive
shall be entitled to the following compensation and benefits:

(a) Salary. As compensation for the performance of the Executive’s services
hereunder, the Company shall pay to the Executive a salary (the “Salary”) of One
Hundred Fifty Thousand Dollars ($150,000) per annum. The Salary shall be payable
in arrears in approximately equal

 

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semi monthly installments (except that the first and last such semi monthly
installments may he prorated if necessary) on the Company’s regularly scheduled
payroll dates, minus such deductions as may be required by law or reasonably
requested by the Executive. The Nominating, Corporate Governance and
Compensation Committee of the Company’s board of directors (the “Committee”)
shall review Executive’s Salary annually beginning with the 2007 fiscal year in
conjunction with its regular review of employee salaries and may increase his
Salary as in effect from time to time as the Committee shall deem appropriate it
being understood and agreed that the intent of the parties is, subject to the
satisfactory performance of Executive, to increase the Executive’s Salary over
the first three years of the Employment Term to a level commensurate with
salaries of executives with comparable duties for comparable entities in the
Company’s industry as such entities and comparable salaries may be determined in
the sole discretion of the Committee.

(b) Annual Performance Bonus. The Executive shall be eligible to receive, in
respect of each calendar year during the Employment Term beginning with 2006, an
annual cash performance bonus (the “Annual Performance Bonus”) in an amount
consistent with the bonus program in place to compensate other members of the
senior management team for that calendar year, based upon (other than as noted
below) the attainment of quantitative performance goals set forth in a
performance plan established by the Committee by January 31 of each year (the
“Performance Plan”). The Annual Performance Bonus shall he paid to the Executive
within thirty (30) days following the receipt of the audited results of the
Company for the plan year, but in no event later than sixty (60) days after the
close of the plan year. If necessary, the Annual Performance Bonus shall be
granted under a performance based plan that meets the requirements under
Section 162(m) of the Internal Revenue Code (the “Code”).

(c) Stock Options. The Company may grant to Executive stock options, performance
shares, performance units, deferred shares or restricted stock from time to time
under the terms of a separate agreement, and consistent with the terms of any
stock incentive plan which may be created by the Company.

(d) Deferred Stock Grant. Conditioned upon and in consideration of Executive’s
employment through the dates set forth immediately below, and subject to the
provisions regarding termination payments in Section 6(g), the following shares
of fully vested and transferable stock will be issued to Executive pursuant to
the Company’s 2004 Long-Term Incentive under the following schedule:

 

  a. 0 shares issued in 2006 & 2007;

 

  b. 10,000 shares issued and vested on January 1, 2008;

 

  c. 10,000 shares issued and vested on January 1, 2009;

 

  d. 10,000 shares issued and vested on January 1, 2010;

 

  e. 30,000 shares issued and vested on January 1, 2011.

Subject to section 6, provided Executive is employed by Company on December 31,
2010, the final grant of 30,000 shares of stock set forth in 3(d)(e) will be
granted regardless of whether this Agreement is renewed. Stock, once granted,
will accrue and pay dividends.

(e) Benefits. In addition to the Salary and the Annual Performance Bonus, the
Executive shall be eligible to participate in the Company’s health, insurance,
retirement, and other benefit plans and programs. The Executive shall also be
entitled to three (3) weeks of paid vacation for the first three (3) years of
the Employment term and four (4) weeks beginning the fourth year and every year
thereafter of the Employment Term. Additionally, the Executive will

 

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be entitled to two (2) weeks paid time for illness and personal leave, and all
Company holidays. The Executive shall be entitled to all other benefits as are
generally allowed to other senior executives of the Company, in accordance with
the Company’s policies in effect from time to time.

(f) Directors and Officers Liability Insurance. The Company will, at its
expense, provide the Executive with Directors and Officers Liability’ Insurance,
subject to the provisions governing such insurance and on such terms as the
Board may from time to time decide. The Company will indemnify Executive and
hold Executive harmless, to the maximum extent permitted by applicable law,
against all costs, charges and expenses incurred or sustained by him in
connection with any action, suit or proceeding to which he may be made a party
by reason of his being an officer, director or employee of the Company or of any
subsidiary or affiliate of the Company at any time.

(g) Insurance and Other Related Benefits. Company shall pay for one hundred
percent (100%) of all health insurance premiums under a policy covering
Executive and his immediate family. During the Employment Term, the Company
shall maintain on the life of Executive, provided he is insurable, at standard
rates a term life insurance policy in the amount of One Million Dollars
($1,000,000.00). Executive shall have the right to designate the beneficiary or
beneficiaries of such policy. In the event that Executive is not insurable
during the term of this Agreement due to illness, accident, injury or other
similar event, the Company shall maintain the term life insurance policy in the
amount of One Million Dollars ($1,000,000.00), but Executive agrees to pay the
difference between the normal standard rate premium for an equivalent insurable
person and the non-standard rate which is quoted given the circumstances
surrounding Executive’s reduced insurability. During the Employment Term, the
Company shall also maintain for the benefit of the Executive disability
insurance such that Executive will be entitled to receive monthly payments not
less than the monthly payments made pursuant to Section 3(a) hereof at the time
of any event causing his complete or partial disability. In addition to the
foregoing, Executive will be entitled to other executive benefits on the same
basis as the Company provides to its other executives and customary fringe
benefits and privileges that the Company makes generally available to
executives.

(h) Other Benefits. Executive is entitled to visit the hotels in the Company’s
portfolio and utilize same for Executive’s conduct of Company business or for
leisure on a space available basis at no cost to Executive. The Company agrees
to pay for relocation expenses, grossed up for the appropriate State and Federal
Tax liability. Relocation expenses will include moving of household goods by
recognized reputable carrier from Richmond, Virginia, to Williamsburg, Virginia,
and reasonable per diem costs (lodging, meals, misc. out-of-pocket expenses).

(i) Retirement. To the extent a retirement or profit sharing plan is created,
Executive shall be entitled to participate in said plan pursuant to applicable
law.

(j) No Other Compensation. Except as otherwise expressly provided herein, or in
any other written document executed by the Company and the Executive, no other
compensation or other consideration shall become due or payable to the Executive
on account of the services rendered hereunder.

(k) Taxation and Withholding. The compensation and benefits provided for in this
Section 3 (as well as the Termination Payments provided for in section 6(g))
shall be reported as income to Executive and subjected to tax withholding as
required under applicable Federal, state, and local laws.

 

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Section 4. Exclusivity. During the Employment Term, the Executive shall devote
his full time to the business of the Company, shall faithfully serve the
Company, shall in all respects conform to and comply with the lawful and
reasonable directions and instructions given to him by the Board. The Executive
shall use reasonable efforts to promote and serve the interests of the Company
and shall not engage in any other business activity, whether or not such
activity shall be engaged in for pecuniary profit, except that the Executive may
participate in the activities of professional trade organizations and, engage in
personal investing activities, provided that such activities do not interfere in
any material respect with the services to be provided by the Executive hereunder
and are not in companies that compete with the Company.

Section 5. Reimbursement for Expenses. In addition to, but without duplication
of the expenses described in Section 3(f), the Executive is authorized to incur
reasonable expenses in the discharge of the services to be performed hereunder,
including, without limitation, expenses for travel, entertainment, maintaining
professional licenses and certifications, trade association fees, attendance at
association meetings and conferences, lodging and similar items in accordance
with the Company’s expense reimbursement policy, as the same may be modified by
the Company from time to time. The Company shall reimburse the Executive for all
such proper expenses upon presentation by the Executive of itemized accounts of
such expenditures in accordance with the financial policy of the Company, as in
effect from time to time.

Section 6. Termination and Default.

(a) Death. The Executive’s employment shall automatically terminate upon his
death and upon such event, the Executive’s estate shall be entitled to receive
only the Accrued Compensation (as hereinafter defined) pursuant to
Section 6(g)(ii) hereof and no other severance compensation.

(b) Disability. If the Executive is unable to perform the duties required of him
under this Agreement because of illness, incapacity, or physical or mental
disability, the Employment Term shall continue and the Company shall pay all
compensation required to be paid to the Executive hereunder, unless the
Executive is unable to perform the duties required of him under this Agreement
for an aggregate of 120 days (whether or not consecutive) during any 12 month
period during the term of this Agreement (a “Disability”), in which event the
Executive’s employment shall terminate and Executive shall be entitled to
receive only the Accrued Compensation pursuant to Section 6(g)(ii) hereof and no
other severance compensation.

(c) Cause. The Company may terminate the Executive’s employment at any time,
with or without Cause. For purposes of this Agreement, “Cause” shall mean the
occurrence of any of the following: (i) the Executive’s failure (except where
due to a disability contemplated by subsection (b) hereof), neglect or refusal
to perform his duties hereunder, (ii) any breach of this Agreement by the
Executive (or any grossly negligent, willful or intentional act of the
Executive) that injures the reputation or business of the Company or its
affiliates in any material respect; (iii) material breach by the Executive of
his obligations under this Agreement; (iv) Executive’s gross negligence in the
performance or intentional, material nonperformance (continuing for ten
(10) days after receipt of written notice of need to cure) of any of Executive’s
material duties and responsibilities hereunder; (v) Executive’s dishonesty,
fraud or misconduct with respect to the business or affairs of the Company;
(vi) the Executive’s indictment of conviction of or pleading of no contest to a
felony or any misdemeanor involving fraud; (vii) the commission by the Executive
of an act of fraud or embezzlement, or any other act involving the
misappropriation of funds or assets; or (viii) chronic alcohol abuse or illegal
drug use by Executive. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or

 

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based upon the advice of counsel for the Company shall be conclusively presumed
to be done, or omitted to be done, by Executive in good faith and in the best
interests of the Company. Cause shall not exist pursuant to clause (i), (ii),
(iii) or (iv) of this Section 6(c) unless the Executive has failed to correct
the activity alleged to constitute “Cause” within twenty (20) days following
written notice from the Company of such activity, which notice shall
specifically set forth the nature of such activity and the corrective action
reasonably sought by the Company. Notwithstanding the foregoing, the termination
of the Executive’s employment for Cause shall be pursuant to the action of the
Board, taken in conformity with the Bylaws of the Company. In the event of
Executive’s termination for Cause as set forth above, Executive shall not be
entitled to any severance compensation.

(d) Without Cause. The Company may terminate the Executive’s employment during
the Employment Term without Cause at any time by giving written notice to the
Executive. A termination of the Executive’s employment without Cause shall mean
a termination initiated by the Company for any reason other than Cause or on
account of death or Disability. A termination without Cause shall be effective
immediately upon notice given by the Company to the Executive, or such later
date as may be mutually agreed between the Executive and the Company. Upon a
termination of employment without cause, Executive shall be entitled to the
compensation payments provided in Section 6(g).

(e) Resignation/Termination for Good Reason. The Executive shall have the right
to terminate his employment for Good Reason under any of the following
circumstances: (i) the failure by the Company to pay to the Executive the
compensation and benefits, or expense reimbursement in accordance with Sections
3 and 5 herein; (ii) a material diminution in the Executive’s responsibilities
or authority, or diminution of the Executive’s title; (iii) any material breach
of this Agreement by the Company; (iv) the failure of Mr. Andrew M. Sims, Chief
Executive Officer, to be nominated to the Board of Directors or his removal by
the Board of Directors as a result of shareholder vote; or (v) following a
Change in Control (as defined below) of Employer followed by a termination of
Executive’s employment within (12) months of such Change in Control; provided,
however, that Good Reason shall not exist upon a termination of employment
described in Section 6(b), (c) or (d) herein; provided, further, that the
Executive must provide written notice of termination of employment for Good
Reason within thirty (30) days following the Executive’s knowledge of an event
constituting Good Reason or such event shall not constitute Good Reason
hereunder. Upon termination pursuant to this Section 6(e), Executive shall be
entitled to the compensation payments provided in Section 6(g).

Notwithstanding the foregoing, Good Reason shall not be deemed to exist unless
the Company fails to cure the event giving rise to Good Reason within thirty
(30) days after receipt of written notice thereof given by the Executive. For
purposes of this Agreement, “Change in Control” shall mean the following events
or circumstances that occur after the Effective Date:

(A) The ownership or acquisition (whether by a merger contemplated by
Section 6(e)(v)(B) below, or otherwise) by any Person (other than a Qualified
Affiliate (as defined below)), in a single transaction or a series of related or
unrelated transactions, of Beneficial Ownership of more than fifty percent
(50%) of (1) the Company’s outstanding common stock (the “Common Stock”) or
(2) the combined voting power of the Company’s outstanding securities entitled
to vote generally in the election of directors (the “Outstanding Voting
Securities”);

(B) The merger or consolidation of the Company with or into any other Person
other than a Qualified Affiliate, if, immediately following the effectiveness of
such merger or consolidation, Persons who did not Beneficially Own Outstanding
Voting Securities immediately before the effectiveness of such merger or
consolidation directly or indirectly Beneficially Own more than fifty

 

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percent (50%) of the outstanding shares of voting stock of the surviving entity
of such merger or consolidation (including for such purpose in both the
numerator and denominator, shares of voting stock issuable upon the exercise of
then outstanding rights (including then exercisable conversion rights), options
or warrants) (“Resulting Voting Securities”), provided that, for purposes of
this Section 6(e)(v)(B), if a Person who Beneficially Owned Outstanding Voting
Securities immediately before the merger or consolidation Beneficially Owns a
greater number of the Resulting Voting Securities immediately after the merger
or consolidation than the number the Person received solely as a result of the
merger or consolidation, that greater number will be treated as held by a Person
who did not Beneficially Own Outstanding Voting Securities before the merger or
consolidation, and provided further that such merger or consolidation would also
constitute a Change in Control if it would satisfy the foregoing test if rights,
options and warrants were not included in the calculation;

(C) Any one or a series of related sales or conveyances to any Person or Persons
(including a liquidation) other than any one or more Qualified Affiliates of all
or substantially all of the assets of the Company;

(D) Incumbent Directors cease to be two-thirds (2/3) of the members of the Board
of Directors, where an “Incumbent Director” is (1) an individual who is a member
of the Board of Directors on the effective date of this Agreement or is
otherwise named in the Company’s registration statement on Form S-11 as
consenting to serve on the Board of Directors upon the closing of the initial
public offering of the Company’s common stock or (2) any new director whose
appointment by the Board of Directors or whose nomination for election by the
stockholders was approved by at least two-thirds (2/3) of the persons who were
already Incumbent Directors at the time of such appointment, election or
approval, other than any individual who assumes office initially as a result of
an actual or threatened election contest with respect to the election or removal
of directors or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors or as a result of
an agreement to avoid or settle such a contest or solicitation; or

(E) A Change in Control shall also be deemed to have occurred immediately before
the completion of a tender offer for the Company’s securities representing more
than fifty percent (50%) of the Outstanding Voting Securities, other than a
tender offer by a Qualified Affiliate.

(F) For purposes of this Agreement, the following definitions shall apply:

(a) “Beneficial Ownership,” “Beneficially Owned” and “Beneficially Owns” shall
have the meanings provided in Exchange Act Rule l3d-3;

(b) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended;

(c) “Person” shall mean any individual, entity, or group (within the meaning of
Section l3(d)(3) or 14(d)(2) of the Exchange Act), including any natural person,
corporation, trust, association, partnership, joint venture, limited liability
company, legal entity of any kind, government, or political subdivision, agency
or instrumentality of a government, as well as two or more Persons acting as a
partnership, limited partnership, syndicate or other group for the purpose of
acquiring, holding or disposing of the Company’s securities; amid

(d) “Qualified Affiliate” shall mean (i) any directly or indirectly wholly owned
subsidiary of the Company, (ii) any employee benefit plan (or related trust)
sponsored or

 

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maintained by the Company or by any entity controlled by the Company; or
(iii) any Person consisting or controlled in whole or in part of or by the
Employee or one or more individuals who are then the Company’s Chief Executive
Officer or any other named executive officer (as defined in Item 402 of
Regulation S-K under the Securities Act of 1933) of the Company as indicated in
its most recent securities filing made before the date of the transaction.

(f) Payment in Lieu. The Company may, in its sole discretion, at any time after
notice of termination without Good Reason has been given to the Company by the
Executive, terminate this Agreement, provided that, in addition to any amount
payable to the Executive under Section 6(g) herein, the Company shall pay to the
Executive (without duplication) his then current Salary and continue benefits
provided pursuant to Section 3(d) herein, for the duration of the unexpired
notice period. To the extent that any payment under this section 6(f) is
deferred compensation subject to section 409A of the Internal Revenue Code, no
payment will be made to Executive before the date that is six months after
Executive’s separation from service. The first payment made will include all
payments that otherwise would have been made during the six- month period after
separation.

(g) Termination Payments.

(i) Termination without Cause or By Executive for Good Reason. In the event that
during the Employment Term the Executive’s employment is terminated by the
Company without Cause or the Executive terminates his employment for Good
Reason, the Company shall pay to the Executive the sum of the following amounts:
(A) all amounts fully earned pursuant to the terms of this Agreement, but unpaid
hereunder through the date of termination, if any, in respect of Salary, any
accrued but not yet paid Annual Performance Bonus owed from the year prior to
Executive’s termination, granting and vesting of any previously issued stock
options or restricted stock (including those ungranted shares in Section 3(d)),
payment of life, health and disability insurance coverage for a period of three
years following termination, and unreimbursed expenses (the “Accrued
Obligations”); and (B), a severance payment equal to three (3) times of the
Executive’s combined Salary and actual bonus compensation for the preceding
fiscal year will be paid within five (5) days of the Executive’s last day of
employment; and (C) the Executive will be eligible to receive payments to
compensate the Executive for the additional taxes, if any, imposed on the
Executive under Section 4999 of the Internal Revenue Code by reason of receipt
of excess parachute payments described above. Executive agrees that he shall not
be entitled to any pro-rated payment of the Annual Performance Bonus for the
year of Executive’s termination. Notwithstanding any other provision in this
Agreement or the terms of any severance plan or policy maintained by the Company
or its affiliates to the contrary, if the Company pays the Executive the
severance benefit as provided in this Section 6(g)(i), the Executive shall not
be entitled to receive any other payments or benefits under any other severance
or similar plan maintained by the Company or its affiliates. To the extent that
any payment under this Section 6(g)(i) is deferred compensation subject to
section 409A of the Internal Revenue Code, no such payment will be made to
Executive before the date that is six months after Executive’s separation from
service. The first payment made will include all payments that otherwise would
have been made during the six- month period after separation. To the extent any
payment under this Section 6(g)(i) is otherwise required to be modified to
comply with section 409A of the Internal Revenue Code, Executive agrees to so
modify the terms of this Section 6(g)(i) in the same manner as the Agreements of
the Company’s other executives are modified.

(ii) Termination due to Death or Disability. In the event that during the
Employment Term the Executive’s employment is terminated by the Company due to
the Executive’s death or Disability, the Company shall pay to the Executive, or
the Executive’s estate, all amounts fully earned pursuant to the terms of this
Agreement, but unpaid hereunder through the date of termination, if

 

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any, in respect of Salary, and accrued but not yet paid Annual Performance Bonus
owed from the year prior to Executive’s termination (the “Accrued
Compensation”). Such payments shall be made no later than sixty (60) days after
the close of the year in which earned.

(iii) Termination for Cause or By Executive without Good Reason. In the event
that during the Employment Term the Executive’s employment is terminated by the
Company for Cause or by the Executive by resignation without Good Reason, the
Company shall pay to the Executive the Accrued Compensation. Executive shall not
be entitled to any ungranted shares in Section 3(d) if Executive’s employment is
terminated by the Company for Cause, or by the Executive by resignation without
Good Reason. Such payments shall be made no later than sixty (60) days after the
close of the year in which earned.

(iv) Expiration of Agreement. If either the Company or the Executive elects not
to renew this Agreement and it expires, the Executive shall not receive any
termination payments other than any amounts fully earned pursuant to the terms
of this Agreement, but unpaid hereunder through the date of expiration of this
Agreement, if any, in respect of Salary, and any accrued but not yet paid Annual
Performance Bonus owed with respect to the year of such expiration and any prior
year. Such payment shall be made no later than sixty (60) days after the close
of the year in which earned.

(h) No Mitigation or Offset. In the event of any termination of Executive’s
employment hereunder, Executive shall be under no obligation to seek other
employment or otherwise mitigate the obligations of the Company under this
Agreement, and there shall be no offset against amounts due Executive under this
Agreement on account of amounts purportedly owing by Executive to the Company or
amounts earned by Executive from any source. Any amounts due to Executive under
this Agreement upon termination of employment are considered to be reasonable by
the Company and are not in the nature of a penalty.

(i) Survival of Operative Sections. Upon any termination of the Executive’s
employment, the provisions of Sections 6(g) and 7 through 21 of this Agreement
shall survive to the extent necessary to give effect to the provisions thereof.

Section 7. Confidentiality and Non-Disclosure Covenants.

(a) Confidential Information. The Company considers one of its most valuable
assets to be its confidential and trade secret information, including, but not
limited to, potential real estate acquisition targets and client lists of the
respective hotel properties. Confidential Information shall not include
information which has: (i) previously been disclosed by the Company in published
papers; (ii) becomes part of the public domain, by publication or otherwise; and
(iii) not due to the direct or indirect acts or omissions of Executive. The
parties to this Agreement recognize that the Company has invested and will
invest considerable amounts of time and money in attaining and developing all of
the information described above (hereinafter collectively referred to as
“Confidential Information”), and any unauthorized disclosure or release of such
Confidential Information in any form would harm the Company.

(b) Non-Disclosure of Confidential Information. Executive shall refrain from
directly or indirectly disclosing to any third party, for any purpose other than
for the direct benefit of the Company, any of the Company’s Confidential
Information during his employ and thereafter, whatever the reason for his
leaving the Company’s employment.

 

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(c) Confidentiality of the Company’s Property. Executive recognizes that all of
the documents and other tangible items which contain any of the Company’s
Confidential Information are the Company’s property exclusively, including those
documents and items which Executive may have developed or contributed to
developing while employed by the Company, whether or not developed during
regular working hours or on the Company’s premises.

(d) Executive recognizes that all materials, identification information, keys,
computer software and hardware, computer programming libraries, manuals,
databases, disks, tapes, patent applications, technical notes and equipment the
Company provides for Executive are also the property of the Company exclusively.
All items described in this and the preceding paragraph are hereinafter
collectively referred to as “the Company’s Property”.

(e) Should Executive’s employment be terminated for any reason, Executive shall:

(i) Refrain from taking any of the Company’s Property or allowing any of the
Company’s Property to be taken from the Company’s premises;

(ii) Refrain from reproducing in any manner or allowing to be reproduced any of
the Company’s Property;

(iii) Refrain from removing any such reproduction from the Company’s premises;
and

(iv) Immediately return to the Company any original or reproduction of the
Company’s Property in his custody, control or possession.

Section 8. Non-Competition and Non-Solicitation Covenants. During his employment
with the Company and for a period of one (1) year thereafter, whatever the
reason for Executive’s termination of employment, unless Executive receives the
Company’s advance written waiver, Executive shall not, either directly or
indirectly, either on his own behalf or on behalf of another business, engage in
or assist others in the following activities:

(a) Soliciting, hiring, recruiting, or attempting to recruit, for any business
which competes with the Company’s Business any person employed or contracted
with by the Company or employed or contracted with by the Company during the
twelve (12) months immediately prior to Employee’s termination of employment
with the Company;

(b) Soliciting for any business which competes with the Company’s Business, any
competitive business from any of the Company’s customers during the twelve
(12) months immediately prior to Executive’s termination of employment, or
specific prospective customers solicited by the Company during the six
(6) months immediately prior to Executive’s termination of employment.

(c) In the Market Area (as hereinafter defined), entering into, engaging in,
being employed by, being connected to, consulting or rendering services for, any
business which competes with, or is similar to, the Company’s Business or
business known to Executive to be conducted by the Company or planned to be
conducted by the Company at the time of Executive’s separation from employment
with the Company, in a capacity performing management functions similar to those
performed or managed by

 

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Executive while employed by the Company. This provision shall not restrict
Executive from owning a passive investment interest of the outstanding equity
ownership or share in an organization represented by securities publicly traded
on a recognized national securities exchange for exchange including but not
limited to MHI Hotel Services, LLC and its affiliates. For purposes of this
provision, “Market Area” shall be defined as Savannah, Georgia; Raleigh, North
Carolina; Williamsburg, Virginia; Philadelphia, Pennsylvania; Wilmington, North
Carolina, Laurel, Maryland; and Jacksonville, Florida and any other city or
metropolitan area within the United States in which a hotel owned by the Company
or with respect to which the Company or an affiliate has an ownership interests
is located as of the last day of the Employment Term.

Section 9. Injunctive Relief. Without intending to limit the remedies available
to the Company, the Executive acknowledges that a breach of any of the covenants
contained in Sections 7 and 8 hereof may result in material irreparable injury
to the Company or its subsidiaries or affiliates for which there is no adequate
remedy at law, that it will not be possible to measure damages for such injuries
precisely and that, in the event of such a breach or threat thereof the Company
shall be entitled to obtain a temporary restraining order and/or a preliminary
or permanent injunction, without the necessity of proving irreparable harm or
injury as a result of such breach or threatened breach of Sections 7 and 8
hereof, restraining the Executive from engaging in activities prohibited by
Sections 7 and 8 hereof or such other relief as maybe required specifically to
enforce any of the covenants in Sections 7 and 8 hereof.

Section 10. Extension of Restricted Period. In addition to the remedies the
Company may seek and obtain pursuant to Section 9 of this Agreement, the
Restricted Period shall be extended by any and all periods during which the
Executive shall be found by a court to have been in violation of the covenants
contained in Sections 7 and 8 hereof.

Section 11. Representations and Warranties. The Executive and the Company
represent and warrant to the other as follows:

(a) This Agreement, upon execution and delivery by the Executive and the
Company, subject to approval by the Company’s Board of Directors, will be the
valid and binding obligation of the Executive and the Company enforceable
against the Executive and the Company in accordance with its terms.

(b) As to the Executive only, neither the execution and delivery of this
Agreement nor the performance of this Agreement in accordance with its terms
amid conditions by the Executive (i) requires the approval or consent of any
governmental body or of any other person or (ii) conflicts with or results in
any breach or violation of, or constitutes (or with notice or lapse of time or
both would constitute) a default under, any agreement, instrument, judgment,
decree, order, statute, rule, permit or governmental regulation applicable to
the Executive.

(c) The representations and warranties of the Executive and the Company
contained in this Section 11 shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby.

Section 12. Assignment; No Third-Party Beneficiaries. This Agreement shall inure
to the benefit of and be binding on, the successors and assigns of each of the
parties, including, but not limited to, the Executive’s heirs, the Executive’s
guardian in the event of the Executive’s disability, the personal
representatives of the Executive’s estate and any successor to all or
substantially all of the business and/or

 

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assets of the Company. This Agreement, and the Executive’s rights and
obligations hereunder, may not be assigned by the Executive: any purported
assignment by the Executive in violation hereof shall be null and void. The
Company may assign this Agreement and its rights hereunder, but in the event of
assignment, the assignee shall expressly assume all obligations of the Company
hereunder and the Company shall remain fully liable for the performance of all
of such obligations in the manner prescribed in this Agreement. Except as
otherwise provided herein, nothing in this Agreement shall confer upon any
person or entity not a party to this Agreement, or the legal representatives of
such person or entity, any rights or remedies of any nature or kind whatsoever
under or by reason of this Agreement.

Section 13. Waiver and Amendments. Any waiver, alteration, amendment or
modification of any of the terms of this Agreement shall be valid only if made
in writing and signed by the parties hereto. The parties agree to cooperate in
good faith to timely amend this Agreement, as required by guidance issued under
section 409A of the Internal Revenue Code, to conform with the requirements of
section 409A of the Internal Revenue Code. No waiver by either of the parties
hereto of their rights hereunder shall be deemed to constitute a waiver with
respect to any subsequent occurrences or transactions hereunder unless such
waiver specifically states that it is to be construed as a continuing waiver.

Section 14. Ethical Conduct. Executive shall conduct business in an ethical
manner by:

(a) Avoiding conflicts of interest;

(b) Complying with the Company’s Code of Conduct and Corporate Governance
Principles;

(c) Refusing to accept, and reporting to the Company the offering of anything of
material value, including a gift, loan on preferential terms, reward, promise of
future employment, favor or service which would influence a reasonably prudent
person in the discharge of his duties for the Company or which is based on any
understanding that his action would be influenced; and

(d) Abiding by policies and guidelines relating to ethical conduct which the
Company may issue as it deems appropriate.

Section 15. Indemnification. The Executive and the Company shall enter into an
indemnification agreement providing for the indemnification of Executive to the
fullest extent permitted by Maryland law.

Section 16. Severability, Governing Law. The Executive acknowledges and agrees
that the covenant set forth in Sections 7 and 8 hereof are reasonable and valid
in geographical and temporal scope and in all other respects. If any of such
covenants or such other provisions of this Agreement are found to be invalid or
unenforceable by a final determination of a court or arbitration panel of
competent jurisdiction (a) the remaining terms amid provisions hereof shall be
unimpaired and (b) the invalid or unenforceable term or provision shall be
deemed replaced by a term or provision that is valid and enforceable and that
comes closest to expressing the intention of the invalid or unenforceable term
or provision. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF MARYLAND APPLICABLE TO CONTRACTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO ITS CONFLICT OF LAWS
RULES.

 

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Section 17. Notices.

(a) All communications under this Agreement shall be in writing and shall be
delivered by hand or mailed by overnight courier or by registered or certified
mail, postage prepaid

 

If to the Company:

     MHI Hospitality Corporation      814 Capitol Landing Road     
Williamsburg, Virginia 23185

If to the Executive:

     David R. Folsom      814 Capitol Landing Road      Williamsburg, Virginia
23185

(b) Any notice so addressed shall be deemed to be given: if delivered by hand,
on the date of such delivery; if mailed by overnight courier, on the first
business day following the date of such mailing; and if mailed by registered or
certified mail, on the third business day after the day of such mailing.

Section 18. Section Headings. The headings of the sections and subsections of
this Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof affect the meaning or interpretation of this Agreement
or of any term or provision hereof.

Section 19. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto regarding the employment of
the Executive. This Agreement supersedes all prior negotiations, discussions,
correspondence, communications, understandings and agreements between the
parties relating to the subject matter of this Agreement.

Section 20. Severability. In the event that any part or parts of this Agreement
shall be held illegal or unenforceable by any court or administrative body of
competent jurisdiction, such determination shall not effect the remaining
provisions of this Agreement which shall remain in full force and effect.

Section 21. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.

Section 22. Arbitration, Service, Venue, Jury Trial. Any unresolved dispute or
controversy arising or in connection with this agreement shall be settled
exclusively by arbitration, conducted before a single arbitrator in Greenbelt,
Maryland in accordance with the rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to, detract
from, or modify any provision hereof nor to award punitive damages to any
injured party. The arbitrators shall have the authority to order back-pay,
severance compensation, vesting of options (or cash compensation in lieu of
vesting of options), reimbursement of costs, including those incurred to enforce
this agreement, and interest thereon in the event the arbitrators determine that
employee was terminated without disability or good cause, as defined in
Section 6, or that the Company has otherwise materially breached this agreement.
A decision by a majority of the arbitration panel shall be final and binding.
Judgment may be entered on the arbitrators’ award in any court having
jurisdiction. Nothing in this section shall effect or limit the Company’s right
to obtain any type of relief available to it in a court of law as a result of
the Employee’s breach of Sections 7 and 8. In the event either party seeks such
relief, the parties hereby (1) submit to the exclusive jurisdiction of the
courts of the State of Maryland and the U.S. federal courts in

 

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the State of Maryland, (ii) consent that any such action or proceeding may be
brought in any such venue, (iii) waive any objection that any such action or
proceeding, if brought in any such venue, was brought in any inconvenient forum
and agree not to claim the same, (iv) agree that any judgment in any such action
or proceeding may be enforced in other jurisdictions, (v) consent to service of
process at the address set forth in Section 16 herein, and (vi) to the extent
applicable, waive their respective rights to a jury trial of any claim or cause
of action based on or arising out of this agreement or any dealings between them
relating to the subject matter of this agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.

 

MHI HOSPITALITY CORPORATION

By:

 

 

  Andrew M. Sims   Chief Executive Officer

 

David R. Folsom

Executive Vice President and

Chief Operating Officer

 

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