Exhibit 10.5


 


CONSULTING
AGREEMENT


 


CONSULTING AGREEMENT (this “Agreement”),
made as of June 24, 2005 (the “Effective Date”) by and between
Morgans Hotel Group LLC (the “Company”) and Ian Schrager (“Consultant”).


 


WHEREAS, the
Company is engaged in the business of owning and managing hotels;


 


WHEREAS, the
business affairs of the Company are conducted pursuant to that certain Fifth
Amended and Restated Limited Liability Company Agreement of the Company, dated
as of the date hereof (the “Company Operating Agreement”);


 


WHEREAS, the
Company and Consultant are parties to that certain employment agreement, dated
as of January 1, 2004 (the “Original Employment Agreement”);


 


WHEREAS,
Consultant desires to perform certain services for the Company and the Company
desires to retain Consultant as an independent contractor providing such
services to the Company as more particularly set forth herein;


 


WHEREAS, on
the date hereof, Consultant and the Company are entering into a Services
Agreement (the “Services Agreement”);


 


NOW,
THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein contained, and intending to be legally bound hereby, the
Company and Consultant agree as follows:


 


1.                                       Agreement;
Consulting; Capitalized Terms.


 


a.                                                              All
capitalized terms not otherwise defined herein shall have the meaning ascribed
thereto in the Company Operating Agreement. 
For purposes of this Agreement, “the date hereof” shall mean the
Effective Date.


 


b.                                                             Effective
as of the Effective Date, Consultant shall resign as Chairman, President and
Chief Executive Officer of the Company. 
Prior to September 15, 2005, neither Consultant nor the Company
will issue any press release to the media relating to the terms of this
Agreement. During the period from September 15, 2005 through October 15,
2005, Consultant and the Company shall endeavor to agree on a joint press
release to the media in a form mutually acceptable to the Company and
Consultant.  Subject to Section 9
hereof, in the event the Company and Consultant are unable to agree upon the
terms of the joint press release, then from and after October


 





















 


15,
2005, either of the Company or Consultant may issue a press release on its own.


 


c.                                                              During
the Term (as defined below), the Company agrees to retain Consultant as an
independent contractor, and Consultant hereby agrees to be retained by the
Company as such, on a non-exclusive basis, to provide the services set forth in
Section 2 hereof.  Consultant
shall be issued a Form 1099 by the Company in connection with payment of
the compensation set forth in Section 5 hereof. Consultant
expressly agrees, however, that he (i) shall be, and hereby is, solely
responsible for payment of all federal, state and local taxes, as well as
workers’ compensation and unemployment compensation taxes, if applicable, in
connection with the Consultant’s compensation and benefits provided hereunder,
and (ii) shall, and hereby does, indemnify the Company and hold it harmless
for any claim or liability therefor.


 


d.                                                             As
of the Effective Date, the Original Employment Agreement shall be hereby
terminated and superceded in all respects by this Agreement and the Services
Agreement and neither party to the Original Employment Agreement shall have any
rights, privileges, duties or obligations to the other party hereto unless
expressly set forth herein.


 


e.                                                              Nothing
herein contained shall be construed to constitute the parties hereto as partners
or as joint venturers, or either as agent of the other, or as employer and
employee.  By virtue of the relationship
described herein, Consultant’s relationship to the Company during the Term
hereof shall only be that of an independent contractor and Consultant shall
perform all services pursuant to this Agreement and the Services Agreement as
an independent contractor.


 


f.                                                                The
manner, means, details or methods by which Consultant performs his obligations
under this Agreement and the Services Agreement shall be solely within the
discretion of Consultant.  The Company
shall not have the authority to, nor shall it, supervise, direct or control the
manner, means, details or methods utilized by Consultant to perform his
obligations under this Agreement and the Services Agreement and nothing in this
Agreement or in the Services Agreement shall be construed to grant the Company
any such authority.


 


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g.                                                             Nothing
contained herein shall, or shall be deemed to, limit or otherwise modify
Consultant’s duties and obligations pursuant to Section 6.10(c) of
the Company Operating Agreement.


 


2.                                       Duties and
Responsibilities. Consultant’s title with the Company shall be Consultant.
Consultant shall have the duties set forth below, each of which shall be
performed by the Consultant at the Company’s request and subject to the terms
and conditions hereof and at the sole cost and expense of the Company to the
extent expressly provided hereunder. In addition, in his capacity as an independent contractor, Consultant shall exercise
his own independent and professional judgment in performing his services
pursuant to this Agreement and the Services Agreement. 
Consultant, in his sole discretion, shall determine the manner, means,
details and methods used in performing his services.  The Company retains no control over the
manner, means, details and methods used by Consultant in performing the following
services:


 


a.                                                              consulting
with the senior executives of the Company on any matters relating to the
Company and its assets;


 


b.                                                             oversee
the renovation of the Existing Assets listed on Exhibit A attached hereto pursuant to the applicable
Business Plan and Budget and devote such time and attention as is reasonably
necessary to oversee the completion of any such renovation projects;


 


c.                                                              oversee
the conversion of the Morgans and Shore Club to condominium/condominium hotels
(including, without limitation, the review of feasibility studies, design and
development plans, marketing plans, regulatory matters, construction, sales and
any other matters reasonably necessary to complete any such conversion
projects);


 


d.                                                             upon
the Company’s request with respect to each specific asset, completing a
preliminary feasibility study and make a recommendation to the Company relating
to the conversion of the Royalton, Mondrian, Clift, Delano and Hudson to
residential, hotel condominium or other similar use based upon information
currently available to the Company;


 


e.                                                              assisting
with completing, overseeing and making recommendations with respect to any
other projects at the Existing Assets, including, without limitation, the
Barton Gym at the Hudson and a restaurant at the Royalton; and


 


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f.                                                                assisting
with marketing, public relations, special events and related activities at the
Existing Assets.


 


3.                                       Consulting.  Consultant agrees during the Term (as such
term is defined in Section 4) to devote a reasonable amount of time
to the performance of his duties under this Agreement. From and after the date
hereof, Consultant shall not be prohibited from (i) being simultaneously
employed during the Term by one or more entities, and (ii) engaging in any
business of any type whatsoever, whether or not such business is adverse to the
Company or Consultant’s role with the Company (any such business not engaged in
for the benefit of the Company or its affiliates is referred to herein as the “Schrager
Businesses”); provided, however, that, at any time prior to
the expiration or sooner termination of the Term, Consultant and his Affiliates
shall be prohibited from, directly or indirectly, soliciting for business the
management (including, without limitation, the property management, asset
management and the like) of the Shore Club and all duties and responsibilities
related to the foregoing, and Consultant and his Affiliates shall not serve in
any such capacity.


 


4.                                       Term.  The term of this Agreement shall commence on
the Effective Date and shall expire on December 31, 2007, unless sooner
terminated by the Company in accordance with this Agreement (the “Term”).


 


5.                                       Compensation.


 


a.                                       Base Compensation. 
The Company shall pay Consultant a minimum base compensation per year (“Consultant’s
Base Compensation”) as follows:


 


(i)                                     For calendar year 2005 - $1,067,240;


 


(ii)                                  For calendar year 2006 - $750,000;
and


 


(iii)                               For calendar year 2007 - $500,000.


 


Compensation
payments shall be made semi-monthly. 
Consultant’s Base Compensation for any calendar year during which the
services of Consultant are terminated pursuant to this Agreement shall be
pro-rated based upon the fraction of the calendar year for which Consultant is
providing services to the Company pursuant to this Agreement.


 


b.                                      Bonuses. 
Consultant shall receive an annual bonus (the “Bonus”) as
follows:


 


(i)                                     For calendar year 2005 - 5% of
Increased EBITDA (defined below);


 


(ii)                                  For calendar year 2006 – 3.51% of
Increased EBITDA, but in no event shall the Bonus exceed $750,000; and


 


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(iii)                               For calendar year 2007 – 2.34% of
Increased EBITDA, but in no event shall the Bonus exceed $500,000.


 


“Adjusted 2002
Company EBITDA” shall mean Company EBITDA for calendar year 2002, less Company
EBITDA (as defined below) attributable to calendar year 2002 with respect to
any Subsidiary or business division, unit or operation of the Company that was
sold, transferred, spun-off, or otherwise disposed of (collectively, a “Disposition”)
prior to the Applicable Year (defined below). 
With respect to any Subsidiary or business division, unit or operation
which is the subject of a Disposition during the Applicable Year, Company
EBITDA attributable to calendar year 2002 with respect to such Subsidiary or
business division, unit or operation shall be ratably reduced (on a straight
line basis) to reflect the portion of such year following the date of the
Disposition.


 


“Company
EBITDA” shall mean the Company’s Subsidiaries net operating income as reflected
on the Company’s unaudited income statements (excluding, however, the net
operating income of Morgans Hotel Group Management LLC), deducting therefrom
the interests of third parties in the (x) hotel properties, and (y) food and
beverage joint venture, but prior to deductions for interest expense, income
taxes and depreciation and amortization expenses, and excluding therefrom any
extraordinary items, including gains or losses from sales of assets or items of
a non-recurring nature to the extent such may have otherwise been reflected in
the Company’s audited financial statements. Company EBITDA shall not be reduced
for refinancing fees, penalties or similar charges, except to the extent paid
for out of refinancing proceeds. Company EBITDA for calendar year 2002 is
deemed to be $68,998,000.  Company EBITDA
for each subsequent year shall be calculated consistent with the manner in
which Company EBITDA for calendar year 2002 was calculated, as shown on Exhibit B hereto and eliminating
effects of changes in any exchange rates applicable thereto (and which is
consistent with the past practice of the Company in determining bonuses for
employees of the Company).


 


“Increased
EBITDA” shall mean the positive excess of (x) Company EBITDA for a calendar
year (the “Applicable Year”) over (y) Adjusted 2002 Company EBITDA.


 


c.                                       Payment of Bonuses. 
Bonuses hereunder will be determined by the Company on a calendar year
basis.  Estimated Bonuses (based on the
Company’s unaudited income statements) will be determined as of each December 31
falling within a year of this Agreement, and will be paid as soon after each
such December 31 as is practicable, but no later than thirty (30) days
thereafter (and shall be appropriately adjusted when the Company’s audited
consolidated statements of income are available, such that either (x)
Consultant shall repay to the Company any excess amounts paid by the Company to
Consultant on account of the estimated Bonus, or (y) the Company shall pay to
Consultant any shortage not paid by the Company to Consultant on account of the
estimated Bonus.) In each case, the party obligated to make any such payment
shall make such payment no later than thirty (30) days after the date on which
such audited consolidated statements of income are available, and in
conjunction


 


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with such payment,
Consultant will be given information, by the Company, providing the basis for
the determination of his Bonus. 
Consultant’s Bonus for any partial calendar year shall be pro-rated
based upon the fraction of the calendar year for which Consultant is retained
by the Company and shall be calculated based on the amount of Company EBITDA
and Adjusted 2002 Company EBIDTA attributable to such fraction of the
Applicable Year and calendar year 2002, respectively.  Any disputes relating to the calculation of
Consultant’s Bonus hereunder shall be submitted to arbitration in accordance
with Section 18 hereof. This Section 5(c) shall
survive the expiration or sooner termination of this Agreement.


 


6.                                       Expense
Reimbursement.  The Company shall
reimburse Consultant for (or pay directly) reasonable and customary business
and business travel expenses incurred by Consultant on behalf of the Company;
provided, with respect to private air travel by Consultant, the Company shall
pay to Consultant or an entity controlled by Consultant that owns or rents an
interest in a private aircraft (x) the sum of $500,000 for calendar year 2005,
(y) the sum of $250,000 for calendar year 2006, and (z) the sum of $0 for
calendar year 2007, each in equal monthly installments, regardless of actual
usage.  Consultant agrees to provide,
upon written request of the Company, written substantiation of all business
travel expenses in accordance with the Company’s policies from time to time in
effect.  At the time of execution of this
Agreement, the Company shall pay to Consultant all amounts, if any, accrued and
unpaid for the aforesaid aircraft reimbursement for the period from the
Effective Date through the date of execution of this Agreement.


 


7.                                       Consultant
Benefits.


 


a.                                       If and to the extent permitted under
the terms of the Company’s plans, during the Term, Consultant will be eligible
to participate in all medical insurance programs (including life insurance and
disability insurance programs, if and to the extent such programs are made
available directly through the Company’s plans) 
of the Company as are from time to time generally offered to the Company’s
senior level executives.  Prior to the
end of the Term, the Company hereby agrees that it will not, without Consultant’s
prior written consent, modify the Company’s plans as the same exist on the
Effective Date if a result of such modification would be to eliminate the
eligibility of the Consultant to participate in such programs or to decrease
the benefits available to the Consultant thereunder (such plans, the “Affected
Company Plans”); provided, however, that the Company shall be
permitted to modify, amend and/or terminate any Affected Company Plan if the
Company agrees to pay to Consultant annually the direct cost for Consultant to
obtain benefits to replace such eliminated coverage or the amount of the decrease
in coverage resulting therefrom, but in no event shall the Company be required
to pay Consultant more than $13,000 in the aggregate in any such year as a
result thereof.  In addition, (i) from
and after the Effective Date through December 31, 2005, Consultant shall
be entitled to receive support services which are identical to the support
services Consultant received in his capacity as chief executive officer of the
Company prior to the date hereof (the “Support Services”), (ii) from
and after January 1, 2006 and for the remainder of the Term, Consultant
will be entitled to the following: (a) an exclusive full time driver(s)
(such driver(s), together with


 


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any replacement
driver(s) from time to time, the “Driver”; such driver(s) to be
compensated at the salary rate and with the bonuses and benefits identical to
those currently (i.e., as of the date hereof) and historically received by
Consultant’s driver (the “Driver’s Compensation”)) to provide services
to Consultant on a five day week, twenty four hour per day basis; (b) a
full-time secretary (such secretary, together with any replacement secretary
from time to time, the “Secretary”; such secretary to be compensated at
the salary rate and with the benefits identical to those currently (i.e., as of
the date hereof) received by any of the Consultant’s secretaries assisting
Consultant in his capacity as chief executive officer of the Company prior to
the date hereof with raises and bonuses comparable to those given by the
Company to other secretaries (the “Secretary’s Compensation”)); (c) exclusive
use of an automobile leased by the Company and comparable to the automobile
currently leased for Consultant’s use, as well as reimbursement against
appropriate receipts of the expenses of maintenance, operation, repair and
garaging of such automobile; (d) expense reimbursements for business and
entertaining expenses incurred in furtherance of the objectives of the Company;
and (e) consistent with past practice, complimentary rooms at any of the
Company’s hotel properties (whether owned or managed) for (1) Consultant, (2) Consultant’s
immediate family members, and (3) any other person, whose presence at the
hotel properties Consultant deems, in his reasonable judgment, could advance,
or further, the objectives of the Company. The Company also acknowledges that
Consultant may designate up to twelve (12) weeks annually during which time
Consultant shall not provide any services to the Company, without reduction of
the Base Compensation, Bonuses or expense reimbursements to be paid under this
Agreement, provided, that the Company’s recourse for Consultant’s failure to
provide services hereunder at any other time shall be limited to the recourse set
forth herein.  Following the Term, at
Consultant’s request, the Company shall arrange to provide Consultant with
health insurance benefits substantially similar to those provided to Consultant
immediately prior to such date of expiration or earlier termination, at
Consultant’s cost.  At any time after the
Effective Date, Consultant shall not be prohibited from transferring the
Secretary and/or Driver to his payroll, or the payroll of another entity, in
which event the Company shall no longer be required to provide the Driver and the
Secretary to Consultant and shall reimburse Consultant, or such entity, for the
Secretary’s Compensation and/or the Driver’s Compensation, as applicable, as
the same is due and payable until the later of (i) December 31, 2005,
and (ii) the date this Agreement terminates; provided, however,
that in no event shall the Company’s reimbursement to Consultant and or such
entity exceed the cost that would have been incurred by the Company for (A) in
the case of the Secretary, the Secretary’s Compensation from the date the
Secretary is transferred to Consultant’s payroll or to the payroll of another
entity to the end of the Term and (B) in the case of the Driver, the
Driver’s Compensation from the date the Driver is transferred to Consultant’s
payroll or to the payroll of another entity to the end of the Term.


 


b.                                      The Company will continue to pay all
amounts necessary to maintain the COBRA benefits currently in effect for Rita
Norona Schrager until the expiration of such benefits. Rita Norona Schrager
shall be a third party beneficiary of this Section 7(b). This Section 7(b) shall
survive the expiration or sooner termination of this Agreement.


 


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c.                                       The Company will continue to pay all
amounts necessary to maintain the COBRA benefits currently in effect for Pamela
Gordon Beaton until the expiration of such benefits. Pamela Gordon Beaton shall
be a third party beneficiary of this Section 7(c). This Section 7(c) shall
survive the expiration or sooner termination of this Agreement.


 


8.                                       Termination.  This Agreement shall automatically terminate
prior to December 31, 2007 upon the occurrence of any one of the
circumstances described in this Section 8, in which event the Term
shall end at such earlier time:


 


a.                                       Death. 
This Agreement shall be terminated upon Consultant’s death.  Upon such termination, the Company shall pay
to Consultant’s estate in a lump sum all amounts due to Consultant which were
earned as of the date of such termination pursuant to Section 5
hereof, including his Base Compensation through date of death and an amount
equal to the Bonus for the then current calendar year pro-rated to the date of
death.  Consultant’s estate shall also
receive payment for any unreimbursed portion of the expenses to be reimbursed
pursuant to Section 6 hereof accrued for the then current calendar
year pro-rated to the date of death. 
Payment will be made within thirty (30) days of termination.


 


b.                                      Disability. 
The Company may terminate Consultant’s services hereunder because of Disability
(as defined below).  Upon such
termination, the Company shall pay to Consultant, or his conservator or
designated beneficiary, as the case may be, in a lump sum all amounts due to
Consultant which were earned as of the date of such termination pursuant to Section 5
hereof, including his Base Compensation through date of termination for
Disability and an amount equal to the Bonus for the then current calendar year
pro-rated to the date of termination for Disability, as well as payment for any
unreimbursed portion of the expenses payable pursuant to Section 6
for the then current calendar year pro-rated to the date of termination.  Payment will be made within thirty (30) days
of termination.  As used in this
Agreement, “Disability” shall mean Consultant’s physical or mental
incapacity which renders Consultant incapable (including with reasonable
accommodation to Consultant’s Disability that does not impose an undue hardship
on the Company) of carrying out his duties under this Agreement for a period of
one hundred and eighty (180) consecutive calendar days.  Any question as to the existence or extent of
a Disability upon which Consultant and the Company cannot agree shall be
determined by a qualified, independent physician, mutually satisfactory to the
parties.  Consultant, his legal
representative and any adult member of his immediate family shall have the
right to present to the Company and such physician such information and
arguments on Consultant’s behalf as they deem appropriate, including the opinion
of Consultant’s personal physician. 
During any period of absence due to a disabling condition but prior to
the termination of Consultant’s services for Disability, Consultant shall
continue to receive all compensation and benefits provided for under this
Agreement.


 


c.                                       Termination by Company for Any
Reason.  Notwithstanding anything contained herein to
the contrary, (i) the Company may terminate Consultant’s services for any
reason in its sole and absolute discretion, provided


 


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that no termination
of Consultant’s services by the Company for any reason shall occur except upon
the giving of at least thirty (30) days’ written notice of termination to
Consultant by the Company, and (ii) in the event Consultant’s services are
terminated for any reason prior to December 31, 2005, the Company’s only
obligation hereunder shall be to pay to Consultant simultaneously with delivery
of written notice (x) in a lump sum, his Base Compensation through December 31,
2005, (y) his estimated Bonus for calendar year 2005 in accordance with the
provisions of Section 5(c), and (z) any other compensation due, or
to become due, as well as expense reimbursements and other benefits owed to
Consultant, in each case, through December 31, 2005, and provide
Consultant with the Support Services through December 31, 2005.


 


d.                                      Intentionally Omitted.


 


e.                                       Intentionally Omitted.


 


f.                                         Notice of Termination. 
Any termination by the Company pursuant to this Section 8
for death or Disability shall be communicated to Consultant or, as applicable,
Consultant’s estate, conservator or designated beneficiary, by written notice
of termination stating the provision under which the termination is
effected.  Such notice of termination
shall be effective on the date on which notice shall be deemed given in
accordance with Section 19 hereof, subject to such additional
notice and cure requirements as may be specified in any particular subsection of
this Section 8.


 


g.                                      Disputes Concerning Termination. 
If either Consultant or the Company is the prevailing party in any
litigation regarding the Company’s attempt to terminate this Agreement for
Disability, the prevailing party shall be entitled to reimbursement for the
full cost of any proceedings commenced hereunder, and such other legal
proceedings as may be commenced in connection therewith, including payment of
the prevailing party’s reasonable attorney’s fees and disbursements.


 


9.                                       Confidentiality. 
During the Term, the Company and Consultant, other than Consultant in
the course of performing his duties hereunder, shall be obligated to
maintain the confidentiality of, and shall not use except for the benefit of
the Company, and except as may be required by law, all trade secrets and other
proprietary information of the other, except that Consultant may disclose
financial information of the Company to potential lenders and/or investors,
advisors and consultants in connection with the Buy/Sell provisions pursuant to
Section 11.13 of the Company Operating Agreement, provided, further,
however, that any such potential lenders and/or investors, advisors,
consultants or third parties who receive such confidential and proprietary
information shall agree to maintain the confidentiality of the same.  Proprietary information of the Company or
Consultant, as the case may be, shall not include any information which is or
has become generally publicly available (other than as a result of a breach by
the Company or Consultant under this Agreement or the Services Agreement) or was
disclosed to the Company or Consultant by a third party not under any
restriction of confidentiality.


 


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10.                                 Non-Disparagement.  During the Term and at all times thereafter,
neither the Company nor Consultant shall make disparaging remarks publicly
about the other.  The Company and
Consultant will cause its officers, directors, employees and Affiliates, as
applicable, to comply with the provisions of this Section 10.


 


11.                                 Intentionally
Omitted.


 


12.                                 Office Space.
Throughout the Term, the Company will supply Consultant with the same office as
Consultant currently occupies at the Company (or similar space if the Company
relocates its offices); provided, however, that Consultant shall
relinquish up to one-half of such office space if and when requested to do so
by the Company as a result of the Company’s space requirements.  On or before September 30, 2005 or such
earlier date elected by Consultant, Consultant shall, at Consultant’s own cost
and expense, procure separate office space from the Company for the conduct of
the Schrager Businesses. Consultant shall be permitted, however, to conduct any
business relating to Consultant’s duties pursuant to this Agreement at the
offices of the Company.


 


13.                                 Gramercy Park.
In connection with Consultant’s, or Consultant’s affiliates, development,
operation and management of the Gramercy Park hotel and cooperatives (the “Gramercy”),
the Company hereby acknowledges and agrees that the Company will for as long as
the Company is in the business of providing the same, to provide to the
residents of Gramercy the services identified on Exhibit C attached hereto and made a part hereof (the
“Gramercy Services”.)  For
providing the Gramercy Services, the Company shall have the right to charge the
Gramercy residents directly for (i) the actual incremental out-of-pocket
costs incurred by the Company and (ii) a reasonable administrative charge,
for providing such Gramercy Services to the Gramercy residents (collectively,
the “Incremental Gramercy Cost”). 
In addition, to the extent the Company charges a hotel guest for any
specific Gramercy Service, the Company shall have the right to charge the
Gramercy residents for such specific Gramercy Service provided (1) such
charge is the same for the hotel guests and the Gramercy residents, and (2) such
charge is not duplicative of that which is included within the Incremental
Gramercy Cost.  Notwithstanding anything
to the contrary contained herein, the Company shall not be required to provide
the Gramercy Services to any Gramercy resident who does not timely pay the
Company for any Gramercy Services previously provided to any such resident by
the Company.  The Company shall have the
right to terminate the obligation to provide the Gramercy Services only upon (i) a
bona fide sale of the Management Company to an unaffiliated third party, or (ii) the
Management Company ceasing to provide management services to all other hotels
owned by the Company.  This Section 13
shall survive the expiration or sooner termination of this Agreement.


 


14.                                 Condominium
Conversions.


 


a.                                       The Company
hereby agrees to indemnify Consultant for any claims arising after the date
hereof by any third party (other than Consultant or its Affiliates), including
for reasonable attorney’s fees and reasonable costs incurred in connection with
any claim, made against Consultant in connection with the conversion by


 


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the Company of the Shore Club or other
Existing Assets that (i) relate to any such conversion, and (ii) result
from Consultant’s diminished role in the Company (collectively, “Claims”);
provided, however, that nothing contained in this Section 14(a) shall
require the Company to, and the Company shall not, indemnify Consultant for any
Claims resulting from acts or omissions which constitute gross negligence,
willful misconduct or fraud by Consultant.


 


b.                                      Consultant hereby
represents and warrants to the Company that (i) to Consultant’s knowledge,
(A) no such Claims exist as of the date hereof, and (B) there is no
event that, with the giving of notice, the passage of time or otherwise, would
entitle a third party to any Claim, and (ii) that Consultant has made no
representation to any third party (whether written, oral or otherwise) that
Consultant will have a continued role after the date hereof in the conversion
by the Company of the Shore Club or other Existing Assets.


 


15.                                 Entire Agreement.  This Agreement and the Services Agreement
sets forth the entire agreement between the parties with respect to its subject
matter and merges and supersedes all prior discussions, agreements and
understandings of every kind and nature between them (including, without
limitation, the Original Employment Agreement) and neither party shall be bound
by any term or condition other than as expressly set forth or provided for in
this Agreement.  This Agreement may not
be changed or modified except by an agreement in writing, signed by the parties
hereto.


 


16.                                 Waiver.  Unless specifically set forth in a particular
provision of this Agreement, the failure of either party to this Agreement to
enforce any of its terms, provisions or covenants shall not be construed as a
waiver of the same or of the right of such party to enforce the same.  Waiver by either party hereto of any breach
or default by the other party of any term or provision of this Agreement shall
not operate as a waiver of any other breach or default.


 


17.                                 Severability.  In the event that any one or more of the
provisions of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity, legality or enforceability of the remainder of the
Agreement shall not in any way be affected or impaired thereby.  Moreover, if any one or more of the
provisions contained in this Agreement shall be held to be excessively broad as
to duration, activity or subject, such provisions shall be construed by
limiting and reducing them so as to be enforceable to the maximum extent
allowed by applicable law.


 


18.                                 Dispute Resolution.  Any disputes arising out of the
interpretation or application of this Agreement shall be resolved by
arbitration before a panel of three (3) arbitrators, to be selected in
accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association then pertaining. 
The panel’s award shall be final and binding on the parties hereto, and
such award may be entered as a judgment in any court of competent jurisdiction.


 


19.                                 Notices.  Any notice given hereunder shall be in
writing and shall be deemed to have been given when delivered by messenger or
courier service (against


 


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appropriate receipt), or mailed by registered
or certified mail (return receipt requested), addressed as follows:


 


If to the
Company:


 


MORGANS HOTEL GROUP LLC


c/o NorthStar Hospitality LLC


527 Madison Avenue


New York, NY 10022


Attn: 
W. Edward Scheetz


 


With a copy to:


 


WACHTELL, LIPTON, ROSEN & KATZ


51 West 52nd Street


New York, NY 
10019


Attn: 
Robin Panovka, Esq.


 


If to
Consultant:


 


IAN SCHRAGER


c/o Morgans Hotel Group LLC


475 Tenth Avenue


11th Floor


New York, NY 10018


 


With a copy
to:


 


SKADDEN, ARPS, SLATE,


MEAGHER & FLOM LLP


Four Times Square


New York, NY 10036


Attn: 
Benjamin F. Needell, Esq.


 


or at such
other address as shall be indicated to either party in writing.  Notice of change of address shall be
effective only upon receipt.


 


20.                                 Assignment.  The Company shall not have the right to
assign its rights and obligations under this Agreement to any third party
without the prior written consent of Consultant (which consent shall not be
unreasonably withheld, conditioned, or delayed); provided, however,
that the Company shall be permitted to assign its rights and obligations under
this Agreement to an Affiliate (as such term is defined in the Company
Operating Agreement) of the Company without the consent of, but upon prior
written notice to, Consultant.  This
Agreement is personal to Consultant, and Consultant may not assign his or her
rights and obligations under this Agreement to any third party, without the
prior written consent of the Company (which consent shall be granted or
withheld in the Company’s sole and absolute discretion).


 


12





















 


21.                                 Remedies.
Except in the event of Consultant’s bad faith or willful misconduct, the
Company’s sole remedy for any breach by Consultant of the terms of this
Agreement shall be to terminate this Agreement.  The Company acknowledges that the term willful
misconduct shall not be deemed to relate in any way to the manner, means, details and methods used by
Consultant in performing the duties and responsibilities required pursuant to
the terms hereof, nor to the amount of time invested by Consultant in the
performance of such duties.


 


22.                                 Governing Law.  This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to New York conflict of law rules.


 


23.                                 Descriptive
Headings.  The section headings
contained herein are for reference purposes only and shall not in any way
affect the meaning or interpretation of this Agreement.


 


24.                                 Counterparts.  This Agreement may be executed in one or more
counterparts, which, together, shall constitute one and the same agreement.


 


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


 


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


 


 


	
   

  	
  COMPANY

  
	
   

  	
   

  
	
   

  	
  MORGANS HOTEL GROUP LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ W. Edward Scheetz

  	
   

  
	
   

  	
   

  	
  Name:  W. Edward Scheetz

  
	
   

  	
   

  	
  Title:  Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CONSULTANT

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  /s/ Ian Schrager

  	
   

  
	
   

  	
   

  	
  Ian Schrager

  



 





















 


Exhibit A


 


Existing Asset Renovations


 


Renovation of Delano


Renovation of Royalton


Renovation of Morgans


Renovation of Mondrian


Completion of retail space at
Hudson, St. Martin’s Lane, Sanderson and Clift


 


15





















 


Exhibit B


 


Calculation of 2002 Company
EBITDA


 


Ian Schrager Hotels

NOI Summary

Year Ending December 31, 2002


 


	
   

  	
   

  	
  $000’s

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Morgans

  	
   

  	
  3,127

  	
  (1)

  
	
  Royalton

  	
   

  	
  4,457

  	
  (1)

  
	
  Paramount

  	
   

  	
  7,371

  	
  (1)

  
	
  Hudson

  	
   

  	
  20,241

  	
  (1), (2)

  
	
  Empire

  	
   

  	
  2,012

  	
  (1)

  
	
  Delano

  	
   

  	
  14,362

  	
  (1)

  
	
  Mondrian

  	
   

  	
  9,935

  	
  (1)

  
	
  Clift

  	
   

  	
  13

  	
  (1)

  
	
  St. Martins Lane

  	
   

  	
  8,464

  	
  (1), (2), (4)

  
	
  Sanderson

  	
   

  	
  5,269

  	
  (1), (2), (4)

  
	
   

  	
   

  	
   

  	
   

  
	
  NOI per 2003 Budget book

  	
   

  	
  75,251

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ISH’s 50% share of the NOI of SC London
  (London’s F & B JV)

  	
   

  	
  614

  	
  (3), (4)

  
	
   

  	
   

  	
   

  	
   

  
	
  Burford’s 50% share of the NOI of the
  London hotels

  	
   

  	
  (6,867

  	
  )(4)

  
	
   

  	
   

  	
   

  	
   

  
	
  Total net operating income for 2002

  	
   

  	
  68,998

  	
   

  











Notes


 


(1)          A management fee of 4%
is deducted from the NOI of all hotels.


 


(2)          A chain fee of 2.5% is
deducted from the NOI of Hudson and the London hotels only.


 


(3)          This is ISH’s 50% share
of the food and beverage operations at St. Martins Lane and Sanderson in US
dollars.


 


(4)          The UK exchange rate
used is $1.56 per £1.


 


16





















 


Exhibit C


 


Gramercy Services


 


•                  Specialized concierge services
provided by a five-star world class concierge team reachable at a toll free
number, including, without limitation


 


•                                          Assistance in
gaining access to all restaurants, bars, clubs and retail establishments;


•                                          In-depth
knowledge of restaurants, shopping and event planning in key international
cities;


•                                          Information
concerning nearest English-speaking doctors dentists and lawyers and
prescription replacements;


•                                          Assistance
in leasing and automobile or charter business jet;


•                                          Local
on-site currency conversion and exchange; and


•                                          Access
to all David Barton Gyms.


 


•                  Global Card Privileges (to be
effective in all hotels, bars and restaurants owned and/or managed by the
Company and its affiliates), including


 


•                                          Guaranteed
admittance to Global Card holder plus 2 guests to bars regardless of
reservation policies except in the case of a private event or if the bar is at
full capacity;


•                                          Priority
restaurant and hotel reservations if at all possible, or if the subject
property has no availability, the Global Card holder will be put on a priority
wait list and efforts will be made to accommodate walk-ins;


•                                          Hotel
upgrades to the best available accommodation at the time of check-in; and


•                                          All requests
processed within 24 hours and urgent requests processed as soon as possible.


 


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