Document:

Exhibit 10.2

 

FORM

AMENDED AND RESTATED

MANAGEMENT AGREEMENT

 

by and between

 

 

as “MANAGER”

 

HPT TRS MRP, INC.

 

as “TENANT”

 

Dated as of

 

 

	
ARTICLE I   APPOINTMENT OF MANAGER
    	
2
    
	
 
    	
 
    
	
1.01   Appointment
    	
2
    
	
1.02   Management of the Hotels
    	
2
    
	
1.03   Services Provided by Manager
    	
5
    
	
1.04   Employees
    	
6
    
	
1.05   Right to Inspect
    	
7
    
	
1.06   Right of Offset
    	
7
    
	
 
    	
 
    
	
ARTICLE II TERM
    	
8
    
	
 
    	
 
    
	
2.01   Term
    	
8
    
	
 
    	
 
    
	
ARTICLE III   COMPENSATION OF MANAGER
    	
9
    
	
 
    	
 
    
	
3.01   Management Fees
    	
9
    
	
3.02   Operating Profit
    	
9
    
	
 
    	
 
    
	
ARTICLE IV   ACCOUNTING, BOOKKEEPING AND BANK ACCOUNTS
    	
11
    
	
 
    	
 
    
	
4.01   Accounting, Interim Payment and Annual   Reconciliation
    	
11
    
	
4.02   Books and Records
    	
15
    
	
4.03   Accounts, Expenditures
    	
16
    
	
4.04   Annual Operating Projection
    	
18
    
	
4.05   Working Capital
    	
18
    
	
4.06   Fixed Asset Supplies
    	
19
    
	
 
    	
 
    
	
ARTICLE V   REPAIRS, MAINTENANCE AND REPLACEMENTS
    	
19
    
	
 
    	
 
    
	
5.01   Manager’s Maintenance Obligation
    	
19
    
	
5.02   Repairs and Maintenance to be Paid from   Gross Revenues
    	
20
    
	
5.03   Items to be Paid from Reserves
    	
20
    
	
5.04   Reserve Estimates
    	
21
    
	
5.05   Additional Requirements for Reserve
    	
22
    
	
5.06   Ownership of Replacements
    	
22
    
	
5.07   Obligation To Provide Additional Reserve   Funds
    	
22
    
	
5.08   Additional Requirements Relating to Certain   Capital Improvements
    	
24
    
	
 
    	
 
    
	
ARTICLE VI   INSURANCE, DAMAGE, CONDEMNATION, AND FORCE MAJEURE
    	
25
    
	
 
    	
 
    
	
6.01   Insurance
    	
25
    
	
6.02   Damage and Repair
    	
29
    

 

 

	
6.03   Damage Near End of Term
    	
31
    
	
6.04   Tenant’s Option to Obtain Insurance
    	
31
    
	
6.05   Condemnation
    	
32
    
	
6.06   Partial Condemnation
    	
33
    
	
6.07   Disbursement of Award
    	
33
    
	
6.08   Temporary Condemnation
    	
34
    
	
6.09   Allocation of Award
    	
34
    
	
6.10   Effect of Condemnation
    	
34
    
	
 
    	
 
    
	
ARTICLE VII   TAXES; OTHER CHARGES
    	
34
    
	
 
    	
 
    
	
7.01   Real Estate and Personal Property Taxes
    	
34
    
	
 
    	
 
    
	
ARTICLE VIII   OWNERSHIP OF THE HOTELS
    	
36
    
	
 
    	
 
    
	
8.01   Ownership of the Hotels
    	
36
    
	
8.02   No   Covenants, Conditions or Restrictions
    	
36
    
	
8.03   Liens; Credit
    	
37
    
	
 
    	
 
    
	
ARTICLE IX   DEFAULTS
    	
38
    
	
 
    	
 
    
	
9.01   Manager Events of Default
    	
38
    
	
9.02   Remedies for Manager Defaults
    	
39
    
	
9.03   Additional Remedies for Manager Recourse   Defaults
    	
41
    
	
9.04   Non-Recourse Provision
    	
41
    
	
9.05   Good   Faith Dispute By Manager
    	
42
    
	
9.06   Tenant Events of Default
    	
42
    
	
9.07   Remedies for Tenant Defaults
    	
44
    
	
9.08   Good   Faith Dispute By Tenant
    	
44
    
	
9.09   Landlord Defaults
    	
45
    
	
 
    	
 
    
	
ARTICLE X   ASSIGNMENT AND SALE
    	
45
    
	
 
    	
 
    
	
10.01   Assignment
    	
45
    
	
10.02   Sale   of the Hotel
    	
47
    
	
 
    	
 
    
	
ARTICLE XI   MISCELLANEOUS
    	
48
    
	
 
    	
 
    
	
11.01   Right to Make Agreement
    	
48
    
	
11.02   Actions By Manager
    	
48
    
	
11.03   Relationship
    	
48
    
	
11.04   Applicable Law
    	
49
    
	
11.05   Recordation
    	
49
    
	
11.06   Headings; Section References
    	
49
    
	
11.07   Notices
    	
49
    
	
11.08   Environmental Matters
    	
50
    

 

ii

 

	
11.09   Confidentiality
    	
51
    
	
11.10   Projections
    	
52
    
	
11.11   Actions to be Taken Upon Termination
    	
52
    
	
11.12   Trademarks, Trade Names and Service Marks
    	
54
    
	
11.13   Waiver
    	
55
    
	
11.14   Partial Invalidity
    	
55
    
	
11.15   Survival
    	
55
    
	
11.16   Negotiation of Agreement
    	
55
    
	
11.17   Intentionally Deleted
    	
55
    
	
11.18   Entire Agreement
    	
56
    
	
11.19   Affiliates
    	
56
    
	
11.20   Competing Facilities
    	
56
    
	
11.21   Trade Area Restriction
    	
57
    
	
11.22   Dispute Resolution; Arbitration and Expert   Resolution
    	
57
    
	
11.23   Permitted Contests
    	
59
    
	
11.24   Estoppel Certificates
    	
60
    
	
11.25   Indemnification
    	
60
    
	
11.26   Prohibited Transactions
    	
61
    
	
11.27   Remedies Cumulative
    	
61
    
	
11.28   Amendments and Modifications
    	
61
    
	
11.29   Construction; Nonrecourse
    	
61
    
	
11.30   Counterparts; Headings
    	
62
    
	
11.31   No   Political Contributions
    	
62
    
	
11.32   Single Agreement
    	
62
    
	
11.33   REIT Qualification
    	
62
    
	
11.34   Further Compliance With   Section 856(d) of the Code
    	
62
    
	
11.35   Adverse Regulatory Event
    	
63
    
	
11.36   Commercial Leases
    	
64
    
	
11.37   Waiver of Jury Trial
    	
64
    
	
 
    	
 
    
	
ARTICLE XII   DEFINITION OF TERMS
    	
64
    
	
 
    	
 
    
	
12.01   Definition of Terms
    	
64
    

 

	
Exhibit A
    	
The Sites
    
	
Exhibit B
    	
Trade Area
    
	
Addendum
    	
Property Information
    

 

iii

 

THIS AMENDED AND RESTATED MANAGEMENT AGREEMENT (this “Agreement”) is executed as of the        day of                       (the “Effective Date”), by HPT TRS MRP, INC., a Maryland corporation (“Tenant”); and                                         , a                        (“Manager”).

 

R E C I T A L S:

 

A.            HPTMI Properties Trust, a Maryland real estate investment trust (“Landlord”) is the owner of fee title to the parcels of real property (the “Sites”) described on Exhibit A attached to this Agreement and incorporated herein on which certain improvements have been constructed consisting of a building or buildings containing in each instance the number of Guest Rooms as specified on the Addenda hereto (as the same shall be amended and revised from time to time), and certain other amenities and related facilities (the “Buildings”).  Each Site and the Buildings on each such Site, in addition to certain other rights, improvements, and personal property, are individually referred to as a “Hotel” and are collectively referred to as the “Hotels” and more particularly described in the definition in Section 12.01.  Pursuant to the Lease, Landlord has leased the Hotels (except for certain assets of Tenant or Manager included within the definition of Hotels) which are subject to this Agreement, to Tenant.

 

B.            With respect to each Hotel, Tenant (either directly or by an assignment and assumption agreement between Tenant and Tenant’s predecessor-in-interest) and Manager have heretofore entered into a Management Agreement specified on the Addenda hereto (collectively, the “Prior Management Agreement”), pursuant to which Manager has managed and operated the Hotels for the account of Tenant, and Manager has accepted such engagement.  As of the Effective Date, Tenant and Manager desire to amend and restate the terms and conditions of the Prior Management Agreement in its entirety, upon the terms and conditions set forth in this Agreement.

 

C.            Pursuant to the Lease, Tenant has leased other hotels from Landlord or an Affiliate of Landlord managed by Affiliates of Manager (all properties subject to the Lease at any given time are collectively, the “Portfolio Properties”).  Manager and Tenant have agreed that revenues, working capital, reserves and other items from the Portfolio Properties will be pooled, disbursed and distributed in accordance with the terms and conditions of the Pooling Agreement.

 

NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement and other good and valuable consideration, the receipt of which is hereby acknowledged, Tenant and Manager agree as follows:

 

 

ARTICLE I

 

APPOINTMENT OF MANAGER

 

1.01  Appointment.  Subject to the provisions of this Agreement, Tenant hereby engages Manager to supervise, direct and control the management, promotion and operation of the Hotels throughout the Term.  Manager accepts said engagement and agrees to manage the Hotels during the Term in accordance with the terms and conditions of this Agreement.  The Hotels shall each be known as a                                             with such additional identification as may be necessary to provide local identification.  If the name of the                                is changed, Manager will change the name of the Hotels to conform thereto.  All capitalized terms shall have the meaning ascribed to them in Article XII hereof.

 

1.02  Management of the Hotels.

 

A.                    Manager shall manage and operate the Hotels in an efficient and economical manner consistent with standards prevailing in other hotels in the System, including all activities in connection therewith which are customary and usual to such an operation (all of the foregoing, the “Operating Standards”).  Manager shall, in connection with the Hotels and in accordance with the System Standards, the Operating Standards and the terms of this Agreement, perform each of the following functions (provided that in all cases, except as otherwise set forth in this Agreement, the costs and expenses of performing such functions shall be Deductions):

 

1.                     Recruit, employ, supervise, direct and (when appropriate) discharge all of the employees at the Hotels.

 

2.                     Establish prices, rates and charges for services provided in the Hotels, including Guest Room rates.

 

3.                     Establish and revise, as necessary, administrative policies and procedures, including policies and procedures for the control of revenue and expenditures, for the purchasing of supplies and services, for the control of credit, and for the scheduling of maintenance, and verify that the foregoing procedures are operating in a sound manner.

 

4.                     Manage expenditures to replenish Inventories and Fixed Asset Supplies, make payments on accounts payable and collect accounts receivable.

 

5.                     Arrange for and supervise public relations and advertising and prepare marketing plans.

 

6.                     Procure all Inventories and replacement Fixed Asset Supplies.

 

7.                     Prepare and deliver interim accountings, annual accountings, Annual Operating Projections, Reserve Estimates, and such other information as is required by this Agreement.

 

8.                     Plan, execute and supervise repairs, maintenance alterations and improvements at the Hotels.

 

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9.                     Provide, or cause to be provided, risk management services relating to the types of insurance required to be obtained or provided by Manager under this Agreement and provide such information related to risk management by Tenant as Tenant may from time to time reasonably request.

 

10.                   Obtain and keep in full force and effect, either in its own name or in Tenant’s name, as may be required by applicable law, any and all licenses and permits to the extent same is within the control of Manager (or, if same is not within the control of Manager, Manager shall use all due diligence and reasonable efforts to obtain and keep same in full force and effect).

 

11.                   Reasonably cooperate (provided that Manager shall not be obligated to enter into any amendments of this Agreement) in any attempt(s):

 

(a)                   to effectuate a Sale of a Hotel under the terms of this Agreement (provided that nothing herein shall affect the provisions of Section 10.02); or

 

(b)                   to effectuate a direct or indirect sale or other disposition of the Landlord’s interest in a Hotel as permitted under the Owner Agreement; or

 

(c)                   to obtain any Qualified Mortgage.

 

12.                   Subject to the requirements of Section 10.01 hereof, negotiate and administer, on behalf of Tenant, leases, subleases, licenses and concession agreements for all public space at the Hotels, including all stores, office space and lobby space.

 

13.                   On behalf of Tenant, negotiate, enter into and administer service contracts and licenses for the operation of the Hotels, including contracts and licenses for health and safety systems maintenance, electricity, gas, telephone, cleaning, elevator and boiler maintenance, air conditioning maintenance, laundry and dry cleaning, master television service, use of copyrighted materials (such as music and videos), entertainment and other services as Manager deems advisable.

 

14.                   Negotiate, enter into and administer contracts for the use of banquet and meeting facilities and guest rooms by groups and individuals.

 

15.                   Take reasonable action to collect and institute in its own name or in the name of Tenant or a Hotel, in each instance as Manager in its reasonable discretion deems appropriate, legal actions or proceedings to collect charges, rent or other income derived from the operation of the Hotels or to oust or dispossess guests, tenants, members or other persons in possession therefrom, or to cancel or terminate any lease, license or concession agreement for the breach thereof or default thereunder by the tenant, licensee or concessionaire.

 

16.                   Make representatives available to consult with and advise Tenant or Tenant’s designee at Tenant’s reasonable request concerning policies and procedures affecting the conduct of the business of the Hotels.

 

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17.                   Collect on behalf of Tenant and account for and remit to governmental authorities all applicable excise, sales, occupancy and use taxes or similar governmental charges collected by or at the Hotels directly from guests, members or other patrons, or as part of the sales price of any goods, services or displays, such as gross receipts, admission or similar or equivalent taxes, duties, levies or charges.

 

18.                   Keep Tenant advised of significant events which occur with respect to the Hotels which might reasonably be expected to have a material adverse effect on the financial performance or value of the Hotels.

 

19.                   Perform such other tasks with respect to the Hotels as are customary and consistent with the Operating Standards and the System Standards.

 

B.                    The operation of the Hotels shall be under the exclusive supervision and control of Manager which, except as otherwise specifically provided in this Agreement, shall be responsible for the proper and efficient operation of the Hotels.  Subject to the terms of this Agreement, Manager shall have discretion and control, free from interference, interruption or disturbance, in all matters relating to management and operation of the Hotels, including, without limitation, the following:  charges for Guest Rooms and commercial space; credit policies; food and beverage services; employment policies; granting of leases, subleases, licenses and concessions for shops and agencies within the Hotels consistent with the provisions of Section 10.01 hereof; receipt, holding and disbursement of funds; maintenance of bank accounts; procurement of Inventories (including initial inventories), supplies and services; promotion and publicity; payment of costs and expenses as are specifically provided for in this Agreement or are otherwise reasonably necessary for the proper and efficient operation of the Hotels; and, generally, all activities necessary for operation of the Hotels.

 

C.                    Manager shall use reasonable efforts to comply with and abide by all Legal Requirements and Insurance Requirements pertaining to its operation of the Hotels, provided that Manager shall have the right, but not the obligation, in its reasonable discretion, to contest or oppose, by appropriate proceedings, any such laws and regulations in accordance with Section 11.23 hereof.  Except as expressly provided to the contrary in this Agreement, all costs and expenses of such compliance with respect to each Hotel shall be paid from Gross Revenues as Deductions in the computation of Operating Profit of such Hotel or from the Reserve of such Hotel, whichever is applicable, and the reasonable expenses of any such contest shall be paid from Gross Revenues as Deductions with respect to such Hotel.

 

D.                    Manager shall use due diligence and exercise commercially reasonable efforts to obtain and maintain all approvals necessary to use and operate the Hotels in accordance with the System Standards, Operating Standards and Legal Requirements.  Tenant shall cooperate with Manager in this regard and, in connection therewith, shall execute all applications and consents required to be executed by Tenant in order for Manager to obtain and maintain such approvals.  All costs incurred by Tenant in this regard shall be included in Deductions for the applicable Hotel.

 

E.                     Manager shall not use, and shall exercise commercially reasonable efforts to prevent the use of, the Hotels and Manager’s personal property used in connection with the

 

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Hotels, if any, for any unlawful purpose.  Manager shall not commit, and shall use commercially reasonable efforts to prevent the commission, of any waste at the Hotels.  Manager shall not use, and shall use commercially reasonable efforts to prevent the use of, the Hotels in such a manner as will constitute an unlawful nuisance thereon or therein.  Manager shall use commercially reasonable efforts to prevent the use of the Hotels in such a manner as might reasonably be expected to impair Tenant’s or Landlord’s title thereto or any portion thereof or might reasonably be expected to give rise for a claim or claims for adverse use or adverse possession by the public, as such, or of implied dedication of the Hotels or any portion thereof.

 

F.                     Manager shall, to the extent within Manager’s control, use commercially reasonable efforts to cause Tenant to be in compliance with the Lease, and the costs of the same shall be paid as Deductions for the applicable Hotel hereunder except as otherwise specifically provided for in this Agreement.

 

1.03  Services Provided by Manager.  Commencing on the Effective Date with respect to each Hotel and thereafter during the Term, Manager shall cause to be furnished the following services:

 

A.                    System divisional executive management, divisional financial planning, divisional contracting, divisional product planning and development, divisional human resources planning and development, divisional marketing planning, and services of Manager’s technical and operational experts making periodic inspection and consultation visits to the Hotels (but specifically excluding “line management” personnel such as area managers and services of Manager’s architecture and construction personnel who provide design, procurement, construction or related services) (collectively, “System Services”) [each agreement to conform to relevant system services];

 

B.                    Marriott corporate planning and policy services, Marriott financial planning and corporate financial services, Marriott corporate executive management, in-house legal services, and protection of the “Marriott” trade name, logos, trademarks and service marks (“Central Office Services”) [each agreement to conform to relevant central office services]; and

 

C.                    Certain services which are furnished generally on a central or regional basis to other hotels in the System which are managed by Manager, Marriott, or any Affiliate, and which benefit each Hotel as a participant in the System as follows:  (i) national sales office services; central operational support for rooms, food and beverage and engineering; central training services; career development; management personnel relocation; central safety and loss prevention services; central advertising and promotion (including direct and image media and advertising administration); consumer affairs to the extent not charged or allocated directly to a Hotel as a Deduction; the national and regional reservations system service and inventory and revenue management services; centralized payroll and accounting services; computer system development, support and operating costs; central monitoring and management support from “line management” personnel such as area managers; and (ii) such additional central or regional services as are or may be, from time to time, furnished for the benefit of hotels in the System or in substitution for services now performed at individual hotels which may be more efficiently performed on a group basis (the items set forth in (i) and (ii) of this sentence, collectively, “Chain Services”).  Other than the charges for the national and regional reservation system services, the charges for the Chain Services which are listed in clause (i) above shall be included

 

5

 

in each Hotel’s First Incentive Management Fee; the charges for the national and regional reservation system services shall be paid from each Hotel’s Gross Revenues as Deductions.  Such charges shall be allocated to the Hotels in a manner consistent with other hotels in the System. [each agreement to conform to relevant chain services]

 

D.                    Manager shall have the option, at its sole discretion, to furnish the services described in this Section 1.03 at Marriott headquarters, Marriott’s regional offices or at other locations.

 

1.04  Employees.

 

A.                    All personnel employed at the Hotels shall at all times be the employees of Manager.  Subject to the terms of this Agreement, Manager shall have absolute discretion with respect to all personnel employed at the Hotels, including, without limitation, decisions regarding hiring (subject to Section 1.04.B), promoting, transferring, compensating, supervising, terminating, directing and training all employees at the Hotels, and, generally, establishing and maintaining all policies relating to employment; provided however that Manager shall use commercially reasonable efforts to comply with all Legal Requirements pertaining thereto and not enter into any written employment agreements with any person which purport to bind the Tenant and/or purport to be effective regardless of a Termination, without obtaining Tenant’s consent, which consent may be withheld in Tenant’s sole and absolute discretion.  Manager shall comply with all Legal Requirements regarding labor relations; if either Manager or Tenant shall be required, pursuant to any such Legal Requirement, to recognize a labor union or to enter into a collective bargaining with a labor union, the party so required shall promptly notify the other party pursuant to this Section 1.04.  Manager shall indemnify Landlord and Tenant for all costs and expenses (including reasonable attorneys’ fees) incurred by either of them if either of them are joined in or made party to any suit or cause of action alleging that Manager has failed to comply with all Legal Requirements pertaining to the employment of Manager’s employees at one or more of the Hotels, the costs of which shall not be a Deduction.

 

B.                    Manager shall have the authority to hire, dismiss or transfer each Hotel’s general manager; provided, however, that Manager shall keep Tenant reasonably informed with respect to such actions, including prior notification to Tenant of Manager’s desire to transfer the general manager, and shall give Tenant the opportunity to participate in the hiring process with respect to the general managers as follows:

 

1.                     Manager shall provide Tenant at least thirty (30) days’ prior notice of any proposed hiring of a general manager.  Manager shall consult with Tenant to obtain any suggestions by Tenant as to the preferred background and specific expertise of candidates for such Hotel position, which suggestions, if any, Manager shall utilize in arriving at a preferred profile for candidates for such position.

 

2.                     Manager shall submit to Tenant for its approval a reasonably qualified candidate for such position.  Tenant shall have a period of ten (10) Business Days from its receipt of the applicable candidate’s resume within which to interview and evaluate such candidate (provided that such candidate and the necessary representatives of Tenant are reasonably available during such period of time for such interview or evaluation, and such

 

6

 

candidate shall not be required to provide additional information or undertake testing of any sort as part of such process).  Tenant shall be deemed to have approved such candidate unless Manager receives Tenant’s written disapproval of such candidate within such ten (10) Business Day period.  If Tenant disapproves the first (1st) candidate (based on the process described above), Manager shall submit a second (2nd) candidate, using the same process described above.  If such second (2nd) candidate is disapproved by Tenant (based on the same process described above), Manager shall submit a third (3rd) candidate, using the same process as described above.  If Tenant disapproves three (3) candidates for the position submitted by Manager pursuant to the provisions of this Section 1.04.B, Manager shall have the right to select the person to be offered the position of general manager, in Manager’s sole discretion, from the three (3) candidates proposed to Tenant.

 

C.                    Manager shall decide which, if any, of the employees of the Hotels shall reside at the Hotels (provided that Tenant’s prior approval shall be obtained if more than two (2) such employees and their immediate families reside at any Hotel), and shall be permitted to provide free accommodations and amenities to its employees and representatives living at or visiting the Hotels in connection with its management or operation consistent with the Marriott Companies usual practices for Marriott-managed hotels in the System.  No person shall otherwise be given gratuitous accommodations or services without prior joint approval of Tenant and Manager except in accordance with usual practices of the hotel and travel industry.

 

D.                    Manager shall identify, appoint, assign, instruct and supervise employees in connection with the operation of the Hotels which Manager deems necessary or advisable for the operation of the Hotels.

 

1.05  Right to Inspect.  Manager shall permit Landlord and Tenant and their respective authorized representatives to inspect or show the Hotels during usual business hours upon not less than twenty-four (24) hours’ notice and to make such repairs as Landlord is permitted or required to make pursuant to the terms of the Lease, provided that any inspection or repair by Landlord or its representatives shall not unreasonably interfere with the use and operation of the Hotels and further provided that in the event of an emergency as determined by Landlord in its reasonable discretion, prior notice shall not be required.

 

1.06  Right of Offset.  Manager acknowledges that it shall not have, in any instance, a right of offset against Tenant’s Priority with respect to any Hotel under any circumstances (or against Aggregate Tenant’s Priority with respect to Hotels for which the Pooling Agreement is in effect).  Manager shall have the right to offset against amounts due to Tenant with respect to any Hotel pursuant to Section 3.02.B hereof (and against amounts due to Tenant pursuant to Section 2.02.A of the Pooling Agreement with respect to Hotels for which the Pooling Agreement is in effect) (but in all events excluding amounts due to Tenant as Tenant’s Priority or Aggregate Tenant’s Priority), including amounts (i) which Landlord or Tenant fail to advance to the Reserve for such Hotel which either of them is required to make as provided for herein or in the Lease or Owner Agreement (in each instance as determined by the Expert pursuant to Section 11.22.B, if applicable), or (ii) due under a final judgment against Tenant obtained by Manager with respect to such Hotel, or (iii) which Tenant fails to pay to Manager in violation of Section 4.01.D(2) of this Agreement with respect to such Hotel.  Except as expressly provided herein,

 

7

 

Manager shall not offset against the amounts owed to Tenant hereunder or under the Pooling Agreement.

 

ARTICLE II

 

TERM

 

2.01  Term.

 

A.                    The Term of this Agreement shall be, for each Hotel, from the Effective Date hereof to the expiration or earlier termination of the “Initial Term” and, if exercised in accordance with the terms hereof, the “Renewal Term(s).”  The Initial Term for each Hotel shall begin on the Effective Date for such Hotel as set forth in the preceding sentence, and, unless sooner terminated as provided in this Agreement, shall continue until the last day of the Fiscal Year ending closest to December 31, 2025.  Provided that (1) Manager and its Affiliates have renewed all of the Other Management Agreements for the first Renewal Term or second Renewal Term, as applicable in accordance with their terms, (2) all of the Franchise Agreements shall have been extended for the First Renewal Term or the Second Renewal Term, as applicable, and (3) there exists at the time of renewal no Manager Event of Default under this Agreement or any of the Other Management Agreements beyond the expiration of any applicable notice and cure period and for which Tenant has, at such time, the right to terminate this Agreement, the Term shall thereafter automatically be extended for each of two (2) successive periods of ten (10) Fiscal Years (each, a Renewal Term), unless Manager gives Tenant and Landlord written notice of Manager’s decision not to extend on or before the date which is twelve (12) months prior to the date of the expiration of the Initial Term or first Renewal Term (as the case may be), time being of the essence.  If Manager does not extend the Initial Term or first Renewal Term (as the case may be), then during such twelve (12) month period prior to the date of the expiration of the Initial Term or first Renewal Term (as the case may be), Tenant shall have the right to effect an earlier Termination of this Agreement with respect to such Hotel by written notice to Manager, which Termination shall be effective as of the effective date which is set forth in said notice, provided that said effective date shall be at least one hundred twenty (120) days after the date of said notice, and in no event earlier than July 1 of the year of such Termination, and such Termination shall be in accordance with the provisions of Section 11.11 of this Agreement.  Notwithstanding the foregoing, the parties acknowledge and agree that Tenant’s termination right pursuant to this Section 2.01A shall only be exercised with respect to all or none of the Hotels which are subject to this Agreement.

 

B.                    Each Renewal Term shall commence on the day succeeding the expiration of the Initial Term or the preceding Renewal Term, as the case may be.  All of the terms, covenants and provisions of this Agreement shall apply to each such Renewal Term, except that the Term shall not be extended beyond the last day of the Fiscal Year ending closest to December 31, 2045.  If Manager shall give notice that it elects not to extend the term in accordance with this Section 2.01, this Agreement shall automatically terminate at the end of the Term then in effect, or such earlier date as provided above, and Manager shall have no further option to extend the Term of this Agreement.  Otherwise, the extension of this Agreement shall be automatically effected without the execution of any additional documents; it being understood and agreed,

 

8

 

however, that Manager and Tenant shall execute such documents and agreements as either party shall reasonably require to evidence the same.

 

ARTICLE III

 

COMPENSATION OF MANAGER

 

3.01  Management Fees.  In consideration of the services provided to Tenant so that the Hotels become members of the System and in consideration of the management services to be performed during the Term, Manager shall be paid, with respect to each Hotel, the sum of the following as its management fees:

 

A.                    The System Fee;

 

B.                    The First Incentive Management Fee; plus

 

C.                    The Second Incentive Management Fee.

 

So long as the Pooling Agreement has not been terminated in accordance with its terms with respect to the Hotels, payments of the First Incentive Management Fee and the Second Incentive Management Fee with respect to periods for which the Pooling Agreement was in effect shall be made at the time, and in the amounts, provided for under the Pooling Agreement.  Notwithstanding anything herein to the contrary, if, in any Fiscal Year or portion thereof prior to the termination of the Pooling Agreement in accordance with its terms with respect to one or more of the Hotels, the First Incentive Management Fee or the Second Incentive Management Fee with respect to such Hotels are not payable in full under the Pooling Agreement, the Manager shall not be entitled to the payment of the portion of the First Incentive Management Fee or the Second Incentive Management Fee not payable under the terms of the Pooling Agreement for such Fiscal Year or partial Fiscal Year with respect to such Hotels, and in no event shall Tenant be liable for the payment of any such unpaid portion to Manager.  Notwithstanding anything herein to the contrary, if, in any Fiscal Year after the termination of the Pooling Agreement in accordance with its terms or with respect to a Hotel, the First Incentive Management Fee or the Second Incentive Management Fee with respect to such Hotel is not payable under Section 3.02.B hereof with respect to such Hotel, Manager shall not be entitled to the payment of the portion of the First Incentive Management Fee or the Second Incentive Management Fee not payable under Section 3.02.B hereof with respect to such Hotel, and in no event shall Tenant be liable for the payment of such portion of the First Incentive Management Fee or the Second Incentive Management Fee to Manager with respect to such Hotel.

 

3.02  Operating Profit.

 

A.                    So long as the Pooling Agreement has not been terminated in accordance with its terms with respect to one or more of the Hotels, Operating Profit for such Hotels with respect to periods for which the Pooling Agreement was in effect shall be distributed, to the extent available, as provided in the Pooling Agreement and the provisions of Section 3.02.B shall not apply.

 

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B.                    For any period during the Term after the termination of the Pooling Agreement in accordance with its terms with respect to one or more of the Hotels, Operating Profit for each such Hotel shall be distributed in the following order of priority:

 

1.                     First, to Tenant, in an amount equal to Tenant’s Priority for such Hotel.

 

2.                     Second, pari passu, to (i) Tenant, in an amount necessary to reimburse Tenant for all Tenant Working Capital Advances and Tenant Operating Loss Advances made by Tenant, from time to time (collectively, “Tenant Advances”) with respect to such Hotel which have not yet been repaid by distributions pursuant to this Section 3.02.B(2), and (ii) to Marriott, in an amount necessary to reimburse Marriott or any Affiliate for all Additional Marriott Advances made by Marriott or any Affiliate (including Manager) allocable to such Hotel and all Additional Manager Advances from time to time which have not yet been repaid by distributions pursuant to this Section 3.02.B(2).  If at any time the amounts available for distribution to Tenant and Marriott with respect to a Hotel pursuant to this Section 3.02.B(2) (“Available Funds”) are insufficient (a) to repay to Tenant all outstanding Tenant Advances with respect to a Hotel (the “Sum Due Tenant”), and (b) to repay to Marriott all outstanding Additional Marriott Advances and Additional Manager Advances with respect to a Hotel (the “Sum Due Marriott”), then (x) Tenant shall be paid from the Available Funds for such Hotel the amount obtained by multiplying a number equal to the amount of the Available Funds by a fraction, the numerator of which is the Sum Due Tenant and the denominator of which is the sum of the Sum Due Tenant plus the Sum Due Marriott, and (y) Marriott shall be paid from the Available Funds the amount obtained by multiplying a number equal to the amount of the Available Funds for such Hotel by a fraction, the numerator of which is the Sum Due Marriott and the denominator of which is the sum of the Sum Due Tenant plus the Sum Due Marriott.

 

3.                     Third, to Manager, in an amount equal to the First Incentive Management Fee.

 

4.                     Fourth, to Tenant, in an amount necessary for the Security Deposit Replenishment with respect to such Hotel.

 

5.                     Fifth, to Manager, in an amount equal to the Second Incentive Management Fee.

 

6.                     Finally, to Tenant, the balance, if any.

 

C.            For any period during which a Hotel is no longer subject to the terms of the Pooling Agreement pursuant to the terms thereof, pursuant to Section 4.03.B below, Tenant shall receive Tenant’s Priority on or before the first day of each Accounting Period subject, however, to the following terms of this Section 3.02.C.  If the projected Operating Profit for the applicable Accounting Period, as determined by Manager, is less than Tenant’s Priority with respect to such Accounting Period (a “Tenant’s Priority Shortfall”), such Tenant’s Priority Shortfall shall first be funded by Security Deposit Advances, and if the Security Deposit is depleted or otherwise insufficient to fund such Tenant’s Priority Shortfall, then the amount of the Tenant’s Priority Shortfall required to satisfy the Tenant’s Termination Threshold shall be

 

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funded by Marriott Guaranty Advances for so long as the Marriott Guaranty Agreement is in effect, or at Manager’s sole election as Additional Manager Advances.  Any amount of the Tenant’s Priority Shortfall not funded by Marriott or Manager shall accrue and be paid as provided in Section 4.01 hereof.  If Manager or Marriott elects not to fund up to the Tenant’s Termination Threshold as provided herein within ten (10) days of receiving written request from Tenant, Tenant shall have the right to effect a Termination of this Agreement with respect to such Hotel by written notice to Manager, which Termination shall be effective as of the effective date which is set forth in said notice, provided that said effective date shall be at least thirty (30) days after the date of said notice.  Such Termination (i) shall be in accordance with the provisions of Section 11.11 of this Agreement, (ii) shall constitute a Manager Default, and (iii) shall entitle Tenant to all rights and remedies available to it with respect to a Manager Default as provided for in Article IX hereof.  Notwithstanding the foregoing, the parties acknowledge and agree that Tenant’s termination right pursuant to this Section 3.02.C shall only be exercised with respect to all or none of the Hotels which are subject to this Agreement.

 

ARTICLE IV

 

ACCOUNTING, BOOKKEEPING AND BANK ACCOUNTS

 

4.01  Accounting, Interim Payment and Annual Reconciliation.

 

A.                    Within twenty (20) days after the close of each Accounting Period, Manager shall deliver an interim accounting (the “Accounting Period Statement”) to Tenant and Landlord showing for each Hotel, Gross Revenues, Gross Room Revenues, occupancy percentage and average daily rate, Deductions, Operating Profit, and applications and distributions thereof for the preceding Accounting Period.

 

Only if the Pooling Agreement has been terminated in accordance with its terms with respect to one or more Hotels, the following provisions for interim distributions shall apply with respect to such Hotels for periods subsequent to the termination date.  Notwithstanding the order of distribution of Operating Profit set forth in Section 3.02.B, for each Accounting Period, Manager shall, with each interim accounting, transfer to Tenant any interim amounts due Tenant, transfer to Marriott any interim amounts due to Marriott, and retain any interim amounts due to Manager under Section 3.02.B, including, without limitation, the First Incentive Management Fee calculated on a year-to-date basis for such Fiscal Year.  If the portion of Operating Profit to be distributed to Tenant pursuant to Sections 3.02.B(1), (2) or (4) is insufficient to pay each of such interim amounts then due in full following the end of any Accounting Period, any such interim amounts left unpaid shall be paid from and to the extent of Operating Profit available therefor at the time distributions are made following successive Accounting Periods until such interim amounts are paid in full, and such payments shall be made from such available Operating Profit in the same order of priority as other payments made on account of such items following such Accounting Periods.  If the portion of Operating Profit to be distributed to Marriott or Manager pursuant to Sections 3.02.B(2), (3) or (5) is insufficient to pay each of such interim amounts then due in full following the end of any Accounting Period, any such interim amounts left unpaid shall be paid from and to the extent of Operating Profit available therefor at the time distributions are made following successive Accounting Periods until such interim amounts are paid in full, and such payments shall be made from such available Operating Profit in the same

 

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order of priority as other payments made on account of such items following such Accounting Periods.  The portion of Operating Profit to be distributed as interim distributions to Tenant as Tenant’s Priority and as a Security Deposit Replenishment pursuant to Section 3.02.B for the then current Fiscal Year for each Hotel, as well as the portion of Operating Profit to be retained by Manager as the First Incentive Management Fee and Second Incentive Management Fee pursuant to Section 3.02B for each Hotel, shall be determined by applying in each instance a cumulative prorated amount to such Tenant’s Priority, Security Deposit Replenishment, First Incentive Management Fee and Second Incentive Management Fee (calculated on a year-to-date basis, with the prorated amount being one-thirteenth (1/13) of the total amount for each of such items for each Accounting Period of each Fiscal Year) to the year-to-date cumulative Operating Profit of such Hotel (all such portions being hereinafter collectively referred to as the “Prorated Portions”).  In each Accounting Period after the first Accounting Period of a Fiscal Year, inclusive, the Prorated Portions shall be adjusted to reflect distributions to Tenant, and retention by Manager, of Operating Profit with respect to such Prorated Portions for prior Accounting Periods during the then current Fiscal Year.  All the distributions shall be made in the order of priority as set forth in Section 3.02 hereof.

 

B.                    Intentionally Deleted.

 

C.                    1.     Calculations and payments of the First Incentive Management Fee, the Second Incentive Management Fee, and Tenant’s Priority for each Hotel and distributions of Operating Profit made with respect to each Accounting Period within a Fiscal Year for each Hotel shall be accounted for cumulatively within a Fiscal Year, but shall not be cumulative from one Fiscal Year to the next.  Calculations and payments of Reimbursable Advances and the Security Deposit Replenishment shall be accounted for cumulatively within a Fiscal Year, and shall be cumulative from one Fiscal Year to the next.

 

2.                     Within sixty (60) days after the end of each Fiscal Year, Manager shall deliver to Tenant and Landlord a statement (the “Annual Operating Statement”) in reasonable detail summarizing the operations of the Hotels with respect to which this Agreement was in effect for the immediately preceding Fiscal Year and an Officer’s Certificate certifying that such Annual Operating Statement is true and correct.  The parties shall, within ten (10) Business Days after Tenant’s receipt of such statement, make any adjustments, by cash payment, in the amounts paid or retained for such Fiscal Year as are needed because of the final figures set forth in such Annual Operating Statement; provided, however, that for any period prior to the termination of the Pooling Agreement in accordance with its terms with respect to any of the Hotels, the year-end adjustments for such Hotel shall be made pursuant to the Pooling Agreement.  Such final accounting shall be controlling over the interim accountings and shall be final subject to adjustments required as a result of an audit requested by Landlord or Tenant below.  No adjustment shall be made for any Operating Loss or Operating Profit for any Hotel in a preceding or subsequent Fiscal Year.

 

D.                    1.     In addition, on or before April 30 of each Fiscal Year, commencing on April 30, 2012, Manager shall deliver to Tenant and Landlord an Officer’s Certificate setting forth the totals of Gross Revenues, Deductions, and the calculation of the First Incentive Management Fee, the Security Deposit Replenishment and the Second Incentive Management Fee for each Hotel with respect to which this Agreement was in effect for the preceding Fiscal

 

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Year.  If Tenant desires, at its own expense, that an audit be delivered with the delivery of an Officer’s Certificate, Tenant shall notify Manager in writing no later than February 1 of the Fiscal Year in which such Officer’s Certificate will be delivered.  Such audit shall be completed by a firm of independent certified public accountants proposed by Manager and approved by Tenant and Landlord (which approval shall not be unreasonably withheld or delayed).  Any dispute concerning the correctness of an audit shall be settled by an Expert in accordance with Section 11.22.B.  Manager shall pay the cost of any such audit revealing an understatement of Operating Profit by more than five percent (5%), and such amount shall not be a Deduction.

 

2.             If the Security Deposit Replenishment or any other amounts due to Tenant as shown in the Officer’s Certificate provided in Section 4.01.D(1) above for any Hotel exceed the amounts previously paid with respect thereto to Tenant, Manager shall promptly pay such excess to Tenant at such time as the Officer’s Certificate is delivered, together with interest at the Disbursement Rate, which interest shall accrue from the close of such preceding Fiscal Year until the date that such certificate is required to be delivered and, thereafter, such interest shall accrue at the Overdue Rate, until the amount of such difference shall be paid or otherwise discharged.  Manager shall notify Tenant of such payment and the amount thereof and Manager shall promptly render a statement to Tenant setting forth the adjustments required to be made to the distributions under Section 3.02.B for such Fiscal Year and the parties shall promptly make, and cause their respective Affiliates to make, any adjustments or additional payments or reimbursements required to comply with such revised statement.  If the Security Deposit Replenishment due as shown in the Officer’s Certificate for any Hotel is less than the amount previously paid with respect thereto to Tenant, Tenant shall within ten (10) Business Days of receipt of written request from Manager, pay such excess to Manager, together with interest at the Disbursement Rate, which interest shall accrue from the date of such overpayment until it is repaid.  Manager shall notify Tenant of the requirement of such payment and the amount thereof and Manager shall promptly render a statement to Tenant setting forth the adjustments required to be made to the distributions under Section 3.02.B for such Fiscal Year and the parties shall promptly make, and cause their respective Affiliates to make promptly, any adjustments or additional payments or reimbursements required to comply with such revised statement.

 

E.                     To the extent there is an Operating Loss for any Accounting Period for any Hotel, Tenant shall have the right, without any obligation and in its sole and absolute discretion, to advance funds required to fund such deficiency within twenty (20) days after Manager has delivered written notice thereof to Tenant; provided, however, during any period in which any Hotel is subject to the Pooling Agreement the determination of any Operating Loss for such Hotel shall be made based on the aggregate of the Operating Profit and Operating Losses of all Portfolio Properties and Tenant’s rights shall be governed by the terms and provisions of the Pooling Agreement.  Any Operating Loss so funded by Tenant shall constitute a “Tenant Operating Loss Advance.”  If Tenant does not fund such Operating Loss, Manager shall also have the right, within twenty (20) days after such initial twenty (20) day period, without any obligation and in its sole and absolute discretion, to advance funds required to fund such Operating Loss, and any such advance shall constitute an Additional Manager Advance with respect to such Hotel.  Tenant Operating Loss Advances shall be repaid in accordance with Section 3.02.B(2) hereof, and Additional Manager Advances shall be repaid in accordance with Section 3.02.B(2) hereof.  If neither party elects to advance funds required to fund such deficiency pursuant to this Section 4.01.E, either party may elect by written notice to the other to

 

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terminate this Agreement with respect to such Hotel, which termination shall be effective thirty (30) days after the date such notice is given (such notice to be given no later than thirty (30) days after the last date by which Manager may elect to fund such Operating Loss) and otherwise in accordance with the provisions of Section 11.11 hereof.  Such Termination (i) shall be in accordance with the provisions of Section 11.11 of this Agreement, (ii) shall constitute a Manager Default, and (iii) shall entitle Tenant to all rights and remedies available to it with respect to a Manager Default as provided for in Article IX hereof; provided, however, as a condition to Manager so electing to terminate this Agreement with respect to such Hotel, Marriott shall make a binding written offer to Tenant and Landlord to terminate the Franchise Agreement for such Hotel and the Owner’s Agreement to the extent the same relates to the Hotel without cost or penalty to Tenant or Landlord, which offer shall be irrevocable for a period of one hundred twenty (120) days after such termination.

 

F.                     Intentionally Deleted.

 

G.                    1.     In addition, Manager shall provide Landlord and Tenant with information relating to the Hotels and public information relating to Manager and its Affiliates that (a) may be required in order for Landlord or Tenant as the case may be to prepare financial statements in accordance with GAAP or to comply with applicable securities laws and regulations and the SEC’s interpretation thereof, (b) may be required for Tenant or Landlord to prepare federal, state or local tax returns, or (c) is of the type that Manager customarily prepares for other hotel owners; provided, however, that (i) Manager reserves the right, in good faith, at Manager’s expense, to challenge and require Landlord and Tenant to use commercially reasonable efforts to challenge any assertion by the SEC, any other applicable regulatory authority, or Landlord’s or Tenant’s independent public accountants that applicable law, regulations or GAAP require the provision or publication of Proprietary Information, (ii) Landlord and Tenant shall not, without Manager’s consent (which consent shall not be unreasonably withheld, delayed or conditioned), acquiesce to any such challenged assertion until Landlord and Tenant have exhausted all reasonable available avenues of administrative review, and (iii) Landlord and Tenant shall consult with Manager in pursuing any such challenge and will allow Manager to participate therein, at Manager’s expense, if and to the extent that Manager so elects.  Landlord and Tenant acknowledge that the foregoing does not constitute an agreement by Manager either to join in Landlord and Tenant filing with or appearance before the SEC or any other regulatory authority or to take or consent to any other action which would cause Manager to be liable to any third party for any statement or information other than those statements incorporated by reference pursuant to clause (a) above.

 

2.                     Subject to such Person entering into a confidentiality agreement with Manager as Manager may reasonably require, Tenant may at any time, and from time to time, provide copies of any of the statements furnished under this Section 4.01 to any Person which has made or is contemplating making a Qualified Mortgage, or another lender, or a prospective lender with respect to one or more of the Hotels.

 

3.                     In addition, Landlord and Tenant shall have the right, from time to time at Landlord’s or Tenant’s (as the case may be) sole cost and expense, upon reasonable written notice, during Manager’s customary business hours, to cause Manager’s books and records with respect to the Hotels to be audited by auditors selected by Landlord or Tenant (as

 

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the case may be) at the place or places where such books and records are customarily kept, provided that, prior to conducting such audit, Landlord or Tenant, as the case may be, shall enter into a confidentiality agreement with Manager, such agreement to be in form and substance reasonably satisfactory to Landlord or Tenant (as the case may be) and Manager.

 

4.02  Books and Records.

 

A.                    Books of control and account pertaining to operations at the Hotels shall be kept on the accrual basis and in all material respects in accordance with the Uniform System of Accounts and with GAAP (provided that, to the extent of a conflict between the two, GAAP shall control over the Uniform System of Accounts), or in accordance with such industry standards or such other standards with which Manager and its Affiliates are required to comply from time to time, with the exceptions, if any, provided in this Agreement and the Pooling Agreement, to the extent applicable which will accurately record the Gross Revenues of the Hotels and applications thereof.  Manager shall retain, for at least three (3) years after the expiration of each Fiscal Year, reasonably adequate records showing Gross Revenues and applications thereof for the Hotels for such Fiscal Year (which obligation shall survive termination hereof).

 

B.                    Tenant may at reasonable intervals during Manager’s normal business hours examine such books and records including, without limitation, supporting data and sales and excise tax returns.  If Tenant desires, at its own expense, to audit, examine, or review the annual operating statement which is described in Section 4.01.C(2), Tenant shall notify Manager in writing within one (1) year after receipt of such statement of its intention to audit and begin such audit within such one (1) year after Manager’s receipt of such notice.  Tenant shall use commercially reasonable efforts to complete such audit as soon as practicable after the commencement thereof, subject to reasonable extension if Tenant’s or its accountant’s inability to complete the audit within such time is caused by Manager.  If Tenant does not make such an audit, then such statement shall be deemed to be conclusively accepted by Tenant as being correct, and Tenant shall have no right thereafter, except for adjustments made pursuant to an audit requested by Landlord under the Owner Agreement or in the event of fraud by Manager, to question or examine the same.  If any audit by Tenant or Landlord as aforesaid (1) discloses an understatement of any net amounts due Tenant and its Affiliates, in the aggregate, hereunder (and, prior to the termination of the Pooling Agreement in accordance with its terms with respect to the Hotels and the Other Management Agreements for the Fiscal Year in question) Manager shall, and shall cause its Affiliates, to promptly pay Tenant such net amounts found to be due, plus interest thereon at the Overdue Rate from the date such amounts should originally have been paid, or (2) discloses that Manager and its Affiliates have not received, in the aggregate, any net amounts due them hereunder (and, prior to the termination of the Pooling Agreement in accordance with its terms with respect to the Hotels and the Other Management Agreements for the Fiscal Year in question), Tenant shall, and shall cause its Affiliates, to promptly pay Manager such net amounts, plus interest thereon (at the Prime Rate plus one percent (1%) per annum) from the date such amounts should originally have been paid.  Manager shall promptly after completion of the adjustments required as a result of any such audit, render a statement to Tenant setting for that adjustments required to be made to the distributions under Section 3.02.B for such Fiscal Year which reflect all adjustments made to the amounts due Tenant, Marriott and/or Manager as a result of such audit and the parties shall make and cause their respective Affiliates

 

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to make any adjustments or additional payments or reimbursements required to comply with such revised statement.  Any dispute concerning the correctness of an audit shall be settled by the Expert in accordance with Section 11.22.B.  Manager shall pay the cost of any audit revealing understatement of Operating Profit by more than three percent (3%), and such amount shall not be a Deduction from Gross Revenues.

 

C.                    Manager shall have the right, at its option, to provide Tenant with automated delivery, in electronic format, of the data required under Sections 4.01.A, 4.01.C(2), 4.01.D(1), 4.02.A and 4.04 (consistent with the then-current standard operating procedures generally employed by Manager with respect to other hotels in the System), which delivery may be by means of a link to an intranet website of Manager or an Affiliate provided contemporaneous notice of the posting of data is provided to Tenant via electronic mail to a person designated in writing by Tenant to Manager.  The parties shall cooperate reasonably with each other in order to adapt to new technologies that may be available with respect to the transmission of such data.

 

4.03  Accounts, Expenditures.

 

A.                    Tenant irrevocably authorizes and directs Manager to pay and Manager agrees to pay (or repay, as applicable), without notice, demand or request therefor, but in each instance subject to the provisions of the Pooling Agreement, if applicable, and the Marriott Guaranty Agreement, if applicable, with respect to each of the Hotels:  (1) Tenant’s Priority (which shall be due on the first Business Day of each Accounting Period) to Tenant when due and payable hereunder, to the extent of the sufficiency of Operating Profit therefor, and (2) distributions to Tenant, Marriott and/or Manager with respect to the Tenant Advances, Additional Marriott Advances and Additional Manager Advances, (3) the First Incentive Management Fee to itself, (4) the Security Deposit Replenishment to Landlord, (5) the Second Incentive Management Fee to itself, and (6) the remaining balance, if any, following such payments to Tenant, in each of the foregoing instances set forth in this Section 4.03.A(1) through (6), at the time interim distributions are made pursuant to Section 4.01 hereof (except as otherwise set forth in Section 4.03.B(1) below), and to the extent of the sufficiency of, and in the order of, distribution of Operating Profit under Section 3.02.B.  Subject to Section 4.03.D, Manager is authorized to, and shall, make all expenditures required to be made hereunder with respect to the operation of the Hotels, but only from funds available for such payments under the terms of this Agreement or under the terms of the Pooling Agreement, if applicable, or under the Marriott Guaranty Agreement, if applicable.

 

B.                    1.     The parties acknowledge that Tenant, to ensure that Tenant has sufficient funds timely to pay Minimum Rent due pursuant to the Lease, must receive, and Manager agrees to pay to Tenant subject to the sufficiency of funds available therefor pursuant to this Agreement, the Security Deposit Agreement, and the Marriott Guaranty Agreement (in each case subject to the terms and provisions of such agreements) and in accordance with Section 3.02.C hereinabove, Tenant’s Priority on the first day of each Accounting Period.  As a result, it is possible that Manager will pay Tenant’s Priority prior to determining whether Operating Profit for such Accounting Period was adequate to cover such Tenant’s Priority.  If for any given Accounting Period it is determined that Operating Profit was inadequate to cover any such

 

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payments of Tenant’s Priority made by Manager with respect to such Accounting Period, then one of the following shall be applicable:

 

(a)                   if the Guaranty Term had not expired before the first day of such Accounting Period and Marriott’s obligation to advance funds had not terminated for any reason pursuant to the terms of the Marriott Guaranty Agreement (an expiration or termination as aforesaid, hereinafter, a “Guaranty Termination Event”), then (i) that portion of Tenant’s Priority paid with respect to such Accounting Period up to the amount of Tenant’s Termination Threshold with respect to such Accounting Period, not otherwise funded or required to be funded by a Security Deposit Advance, shall be deemed to be a Marriott Guaranty Advance made pursuant to the Marriott Guaranty Agreement, and (ii) the remaining portion of Tenant’s Priority paid with respect to such Accounting Period in excess of Tenant’s Termination Threshold may be deducted by Marriott and Manager from any payment of Tenant’s Priority to be made with respect to any successive Accounting Period until reimbursed to Marriott and Manager; or

 

(b)                   if a Guaranty Termination Event had occurred prior to the first day of such Accounting Period, then that portion of Tenant’s Priority paid with respect to such Accounting Period in excess of the amount of Operating Profit for such Accounting Period, not otherwise funded or required to be funded by a Security Deposit Advance, shall be, at Marriott’s option, (i) deemed to have been funded by Marriott as an Additional Marriott Advance or by Manager as an Additional Manager Advance, up to the amount of Tenant’s Termination Threshold, with any amount paid in excess of Tenant’s Termination Threshold to be deducted by Marriott and Manager from any payment of Tenant’s Priority to be made with respect to any successive Accounting Period until reimbursed to Marriott and Manager, or (ii) deducted by Marriott from any payment of Tenant’s Priority to be made with respect to any successive Accounting Period until reimbursed to Marriott.

 

2.                     Notwithstanding anything herein to the contrary, within twenty (20) days after the end of each Accounting Period, Manager or Marriott shall determine whether either of an Additional Manager Advance, an Additional Marriott Advance or a Marriott Guaranty Advance (pursuant to the terms of the Marriott Guaranty Agreement) was made with respect to such Accounting Period, and if Marriott or Manager has made such an advance with respect to such Accounting Period, Marriott or Manager shall advise Tenant in writing of the type and amount of such advance (each such notice, an “Advance Notice”).  Tenant may, in its sole discretion, elect immediately to repay any Additional Manager Advance.  This paragraph shall only be applicable with respect to advances made or deemed made to fund the payment of Tenant’s Priority.

 

C.                    Subject to the terms of the Pooling Agreement, as appropriate, all escrow reserve accounts and funds derived from the operation of the Hotels shall be deposited by Manager in a bank account(s) in a bank designated by Manager.  Withdrawals from said accounts shall be made solely by representatives of Manager whose signatures have been authorized.  Reasonable petty cash funds shall be maintained at the Hotels.

 

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D.                    Manager shall not be required to make any advance or payment hereunder or to or for the account of Tenant except out of funds available therefor pursuant to the terms of this Agreement except as otherwise set forth herein or in any of the Incidental Documents, and Manager shall not be obligated to incur any liability or obligation for Tenant’s account without assurances satisfactory to Manager that necessary funds for the discharge thereof will be provided by Tenant.  In any event, if any such liability or obligation is incurred by Manager for Tenant’s account and Marriott does not have funds available under the Pooling Agreement or Manager does not have funds hereunder if the Pooling Agreement is not in effect with respect to the applicable Hotel to pay such amount on or before twenty (20) days after the end of the Accounting Period in which such liability or obligation was paid, the amount advanced to pay such obligation shall be an Additional Manager Advance which shall be repaid as provided in Section 3.02.B hereof.

 

4.04  Annual Operating Projection.  Manager shall furnish to Tenant for its review, at least thirty (30) days prior to the beginning of each Fiscal Year (or such earlier date if that becomes the prevailing practice within the System), a statement of the estimated financial results of the operation of each such Hotel for the forthcoming Fiscal Year (“Annual Operating Projection”).  Such projection shall project the estimated Gross Revenues, departmental profits, Deductions, and Operating Profit for the ensuing Fiscal Year for each such Hotel.  Manager agrees to take reasonable steps to ensure that, at Tenant’s request, qualified personnel from Manager’s staff are available to explain such Annual Operating Projections to Tenant.  A meeting (or meetings) for such purpose shall be held, at Tenant’s request, within a reasonable period of time after the submission to Tenant of the Annual Operating Projection.  Manager will at all times give good faith consideration to Tenant’s suggestions regarding any Annual Operating Projection.  Manager shall thereafter submit to Tenant, by no later than seventy-five (75) days after the beginning of such Fiscal Year, a modified Annual Operating Projection if any changes are made following receipt of comments from Tenant.  Manager shall endeavor to adhere to the Annual Operating Projection.  It is understood, however, that the Annual Operating Projection is an estimate only and that unforeseen circumstances such as, but not limited to, the costs of labor, material, services and supplies, casualty, operation of law, or economic and market conditions may make adherence to the Annual Operating Projection impracticable, and Manager shall be entitled to depart therefrom due to causes of the foregoing nature; provided, however, that nothing herein shall be deemed to authorize Manager to take any action prohibited by this Agreement or to reduce Manager’s other rights or obligations hereunder.

 

4.05  Working Capital.

 

A.                    Subject to the terms of the Pooling Agreement, upon written notice from Manager, Tenant shall have the right, without any obligation and in its sole and absolute discretion, to advance funds necessary to maintain Working Capital at levels determined by Manager to be reasonably necessary to satisfy the needs of the Hotels as their operation may from time to time require within ten (10) Business Days of such request.  Any such request by Manager shall be accompanied by a reasonably detailed explanation of the reasons for the request.  All funds so advanced for Working Capital shall be utilized by Manager on behalf of Tenant for the purposes of this Agreement pursuant to cash-management policies established for the System provided, however, that so long as any of the Hotels are subject to the Pooling Agreement, the Working Capital for such Hotels will be pooled with working capital provided

 

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under the Other Management Agreements and may be used to fund working capital needs for all Portfolio Properties.  If Tenant does not advance such additional Working Capital within ten (10) days after notice, Manager shall have the right, without any obligation and in its sole and absolute discretion to advance such additional Working Capital within ten (10) Business Days after such initial ten (10) day period, and all such advances shall constitute Tenant Working Capital Advances or Additional Manager Advances, as applicable, and shall be repaid as provided in Section 3.02.B.2 hereof.  If neither party elects to advance funds required to fund such deficiency pursuant to this Section 4.05.A, either party may elect by written notice to the other to terminate this Agreement with respect to the affected Hotel, which termination shall be effective thirty (30) days after the date such notice is given and otherwise in accordance with the provisions of Section 11.11 hereof.  Such Termination (i) shall be in accordance with the provisions of Section 11.11 of this Agreement, (ii) shall constitute a Manager Default, and (iii) shall entitle Tenant to all rights and remedies available to it with respect to a Manager Default as provided for in Article IX hereof; provided, however, as a condition to Manager so electing to terminate this Agreement with respect to such Hotel, Marriott shall make a binding written offer to Tenant and Landlord to terminate the Franchise Agreement for such Hotel and the Owner’s Agreement to the extent the same relates to the Hotel without cost or penalty to Tenant or Landlord, which offer shall be irrevocable for a period of one hundred twenty (120) days after such termination.

 

B.                    Subject to the Pooling Agreement, upon a Termination, Manager shall disburse to Tenant all Working Capital remaining after payment of all Deductions and all amounts owed to Manager hereunder and amounts payable by Tenant hereunder (including funds to be held in escrow under Sections 6.01.F and 11.11.I).

 

4.06  Fixed Asset Supplies.  Any Fixed Asset Supplies that are necessary to maintain Fixed Asset Supplies at levels determined by Manager to be necessary to satisfy the needs of each Hotel, as their operation may from time to time require, shall be paid from Gross Revenues of such Hotel as Deductions.  Such additional Fixed Asset Supplies shall remain the property of Tenant throughout the Term of this Agreement and upon Termination, except for Fixed Asset Supplies purchased by Manager pursuant to Section 11.11.E.

 

ARTICLE V

 

REPAIRS, MAINTENANCE AND REPLACEMENTS

 

5.01  Manager’s Maintenance Obligation.  Except as provided in Section 5.02 hereof, and subject to the availability of sufficient funds in the applicable Reserves, Manager shall maintain the Hotels including all private roadways, sidewalks and curbs located thereon in good order and repair, reasonable wear and tear excepted (whether or not the need for such repairs occurs as a result of Tenant’s or Manager’s use, any prior use, the elements or the age of the Hotels, or any portion thereof), and in conformity with Legal Requirements, System Standards, Operating Standards and any Existing CC&R’s or Future CC&R’s (which Future CC&R’s must be approved in writing by Manager if the same may be reasonably expected to interfere in any material way with the operation of or financial performance of a Hotel).  Except as provided in Section 5.02 hereof, and subject to the availability of sufficient funds in the applicable Reserve for each Hotel with respect to capital items, and the sufficiency of Gross Revenue and Working

 

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Capital for each Hotel otherwise, in each instance, as applicable, Manager shall promptly make or cause to be made all necessary and appropriate repairs, replacements, renewals, and additions thereto of every kind and nature, whether interior or exterior, structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition existing prior to the commencement of the Term (concealed or otherwise).  All repairs, renovations, alterations, improvements, renewals, replacements or additions shall be made in a good, workmanlike manner, consistent with Manager’s and industry standards for like hotels in like locales, in accordance with all applicable federal, state and local statutes, ordinances, by-laws, codes, rules and regulations relating to any such work.  Subject to the availability of sufficient funds in the applicable Reserve for each Hotel or otherwise available pursuant to this Agreement, Manager shall not take or omit to take any action, with respect to the Hotel (and not the System as a whole) the taking or omission of which would materially and adversely impair the value of any Hotel or any part thereof for its use as a hotel.  The cost and expense incurred in connection with Manager’s obligations hereunder shall be paid either from funds provided by Tenant or Landlord as provided for herein, Gross Revenues, Working Capital or from the Reserves, pursuant to Sections 5.02 and 5.03 below.

 

5.02  Repairs and Maintenance to be Paid from Gross Revenues.  Manager shall promptly make or cause to be made, such routine maintenance, repairs and minor alterations as it determines are necessary to comply with Manager’s obligations under Section 5.01.  The phrase “routine maintenance, repairs, and minor alterations” as used in this Section 5.02 shall include only those which are normally expensed under GAAP.  The cost of such maintenance, repairs and alterations shall be paid from Gross Revenue for such Hotel (and not from such Hotel’s Reserve) and shall be treated as a Deduction in determining Operating Profit for such Hotel.

 

5.03  Items to be Paid from Reserves.

 

A.                    To the extent funds are in the applicable Reserves for each Hotel or such funds are provided by Tenant or Landlord under Section 5.07 hereof, Manager shall promptly make or cause to be made, all of the items listed in Section 5.03.B below as are necessary to comply with Manager’s obligations under Section 5.01 hereof.  The cost of such items shall be paid from the applicable Reserve and not from Gross Revenues of a Hotel.

 

B.                    Manager has established for each Hotel, and currently holds funds in, an interest bearing escrow reserve account (each a “Reserve” and collectively the “Reserves”), which Reserves shall not be comingled with any other funds except for the Reserves of other Portfolio Properties, in a bank or similar institution designated by Manager and reasonably acceptable to Tenant and Landlord, to cover the cost of:

 

1.                     Replacements, renewals and additions related to the FF&E at each Hotel; and

 

2.                     Subject to Section 5.02 hereof, routine or non-major repairs, renovations, renewals, additions, alterations, improvements or replacements and maintenance to each Hotel which are normally capitalized (as opposed to expensed) under GAAP, such as exterior and interior repainting; resurfacing building walls, floors, roofs and parking areas; and replacing folding walls and the like (but which are not major repairs, alterations, improvements,

 

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renewals, replacements, or additions to each Hotel’s structure, roof, or exterior façade, or to its mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation systems); and

 

3.                     Major repairs, renovations, additions, alterations, improvements, renewals or replacements to each Hotel including, without limitation, with respect to its structure, roof, or exterior façade, and to its mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation systems; and

 

4.                     All lease payments for equipment and other personal property reasonably necessary for the operation of each Hotel; and

 

5.                     Repairs, renewals or replacements, and other expenditures having a cost, in the aggregate, in excess of $25,000 per Fiscal Year at each Hotel that are, in each case, not otherwise covered under 1 through 3 above but are required to comply with Legal Requirements and Insurance Requirements.

 

C.                    After the Effective Date, Manager shall transfer into the Reserve for each Hotel amounts as provided on the applicable Addendum.  Transfers into each Reserve shall be made at the time of each interim accounting described in Section 4.01.A hereof.  All amounts transferred to each Reserve shall be deducted from Gross Revenues in determining Operating Profit for the applicable Hotel and shall be deposited in the special Reserve account described in Section 5.03.B.

 

D.                    Manager shall from time to time, with respect to each Hotel, make expenditures for the items described in Sections 5.03.B(1), B(2), B(3), B(4) and B(5), as it deems necessary without the approval of Landlord or Tenant.  At the end of each Fiscal Year, any amounts remaining in the Reserve for a Hotel shall be carried forward to the next Fiscal Year.  Proceeds from the sale of FF&E no longer necessary to the operation of a Hotel shall be added to the Reserve for such Hotel, and shall not be included in Gross Revenue for such Hotel.  The Reserves will be kept in interest-bearing accounts, and any interest which accrues thereon shall be retained in such Reserve.  Neither (1) proceeds from the disposition of FF&E, nor (2) interest which accrues on amounts held in the Reserves, shall (a) result in any reduction in the required contributions to the Reserves set forth in Section 5.03.C above, nor (b) be included in Gross Revenues.

 

5.04  Reserve Estimates.

 

Manager shall prepare and deliver to Tenant and Landlord for their review, at the same time the Annual Operating Projection is submitted, an estimate for each Hotel (each, a “Reserve Estimate”) of the Reserve expenditures necessary during the forthcoming Fiscal Year for (1) replacements, renewals, and additions to the FF&E of such Hotel and (2) repairs, renovations, additions, alterations, improvements, renewals or replacements to such Hotel of the nature described in Section 5.03.B, for the forthcoming Fiscal Year.  Manager agrees to take reasonable steps to ensure that, at Tenant’s or Landlord’s request, qualified personnel from Manager’s staff are available to explain each proposed Reserve Estimate with respect to expenditures described in Section 5.03.B(3).  A meeting (or meetings) for such purpose shall be held, at Tenant’s or

 

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Landlord’s request, within a reasonable period of time after the submission to Tenant or Landlord described in each Reserve Estimate. Any disputes as to items in each Reserve Estimate for expenditures described in Section 5.03.B(3) shall be resolved as set forth in Sections 5.07.C and 5.07.D hereof.  Such expenditures shall be funded from the applicable Reserve to the extent funds are available therefor or from funds provided under Section 5.07 hereof.

 

5.05  Additional Requirements for Reserve.

 

A.                    All expenditures from the Reserves shall be (as to both the amount of each such expenditure and the timing thereof) both reasonable and necessary given the objective that the Hotels will be maintained and operated to a standard comparable to competitive properties and in accordance with the Operating Standards and the System Standards.

 

B.                    Manager shall provide to Tenant and Landlord within forty (40) Business Days after the end of each Accounting Period, a statement setting forth, on a line item basis, Reserve expenditures made to date and any variances or anticipated variances and/or amendments from the applicable Reserve Estimate.

 

C.                    Notwithstanding anything contained herein to the contrary, it is understood and agreed that so long as the Pooling Agreement is applicable to the Hotels, the Reserves pursuant to this Agreement and the Other Management Agreements to which the Pooling Agreement is then applicable shall be maintained and used on a pooled basis such that all Reserve funds shall be deposited in a single account and Manager and the managers under the Other Management Agreements may apply any funds therein to any of the Portfolio Properties in accordance with the terms of this Agreement, the Other Management Agreements, and the Pooling Agreement.

 

D.                    Other than Tenant’s or Manager’s personal property, all materials which are scrapped or removed in connection with the making of any major or non-major repairs, renovation, additions, alterations, improvements, removals or replacements as described in Section 5.03.B above, or Section 5.08 below should be disposed of by Manager and the net proceeds thereof shall be deposited in the applicable Reserve and not included in Gross Revenue.

 

5.06  Ownership of Replacements.  All repairs, renovations, additions, alterations, improvements, renewals or replacements made pursuant to this Article V, and all amounts kept in the Reserves, shall, except as otherwise provided in this Agreement, be the property of Tenant or Landlord, as applicable, as provided under the Lease.

 

5.07  Obligation To Provide Additional Reserve Funds.

 

A.                    Notwithstanding anything contained herein to the contrary, no expenditures in excess of the applicable Reserves shall be made without the approval of the Tenant during the last two (2) years of a Lease Term (unless Tenant has exercised its rights for a renewal term under the Lease) except those required by reason of or under any Insurance Requirement or Legal Requirement, or otherwise required for the continued safe and orderly operation of each Hotel.

 

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B.                    If, at any time, the funds in any Reserve shall be insufficient or are reasonably projected to be insufficient for necessary and permitted expenditures thereof, Manager shall give Landlord and Tenant written notice thereof, which notice shall set forth, in reasonable detail, the nature of the required or permitted action, the estimated cost thereof (including the amount which is in excess of the amount of funds in such Reserve) and such other information with respect thereto as Landlord or Tenant may reasonably require, and the following shall apply:  Provided that (1) there then exists no Manager Default which arises from acts or failure to act by Manager with respect to such Hotel, and (2) Manager shall otherwise comply with the provisions of Section 5.08 hereof, if applicable, Tenant shall, within thirty (30) Business Days after such notice, or such later date as Manager may direct by reasonable prior notice, disburse (or cause Landlord to disburse) such required funds to Manager for deposit into the Reserves as one or more lump sum contributions, in which event Tenant’s Priority with respect to such Hotel shall be adjusted as provided for herein in the definition of Tenant’s Priority and the Addendum for such Hotel shall be revised in accordance therewith.

 

C.                    If Landlord or Tenant disputes Manager’s request for a lump sum contribution to a Reserve, Manager shall attempt to resolve such dispute through negotiation.  If after one meeting (or conference call) of direct negotiations between Manager and Landlord or Tenant, as applicable, any party determines that open issues cannot be resolved within sixty (60) days, such matters shall be settled by the Expert in accordance with Section 11.22.B.  Tenant and Landlord shall, to the extent possible, identify items in dispute on a line by line basis.

 

D.                    A failure or refusal by Landlord or Tenant to provide the additional funds required in accordance with Section 5.07.B above within the time period set forth in Section 5.07.B (including after any Expert resolution pursuant to Section 11.22.B, if applicable) shall entitle Manager, at its option, to notify Landlord and Tenant in writing that Manager may terminate this Agreement with respect to the applicable Hotel.  Tenant shall promptly thereafter fund the amounts required to be contributed to such Reserve.  If Tenant does not deposit in such Reserve the additional funds required in accordance with Section 5.07.B within thirty (30) days after receipt of such notice of intent to terminate, Manager may, in its sole and absolute discretion, (i) provided Landlord’s interest in the Hotel is not then subject to a Qualified Mortgage or owned by a Person who acquired such interest pursuant to a Qualified Mortgage (or a deed-in-lieu in connection therewith), elect to terminate this Agreement with respect to the applicable Hotel by written notice to Tenant and this Agreement shall terminate with respect to the applicable Hotel as of the date that is one hundred eighty (180) days after the date of Tenant’s receipt of Manager’s notice, and which termination shall otherwise be in accordance with the provisions of Section 11.11 hereof, or (ii) exercise any remedy available at law or in equity (except as specifically limited herein), or (iii) without obligation, fund all or a portion of the amounts required to be contributed to such Reserve (a “Manager Reserve Advance”).  Tenant agrees and authorizes Manager to make payments to reimburse Manager for such advances, by deducting such amounts from Operating Profit immediately after distributions of Tenant’s Priority and prior to any other deduction or other distribution therefrom.  Notwithstanding the foregoing, the parties acknowledge and agree that while the Pooling Agreement is in effect with respect to two or more Hotels, Manager’s termination right pursuant to this Section 5.07.D shall only be exercised with respect to all or none of the Hotels which are subject to the Pooling Agreement.

 

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5.08  Additional Requirements Relating to Certain Capital Improvements.

 

A.                    Prior to commencing construction of any additions or modifications to any structural elements of any Hotel, the cost of which is reasonably estimated to exceed $200,000 (as adjusted as provided below) (a “Capital Addition”) (other than any Capital Addition which is reasonably required to be made immediately in order to prevent imminent damage or danger to person or property or to subject Manager, Tenant or Landlord to criminal liability), Manager shall submit, to Tenant and Landlord in writing, a proposal setting forth, in reasonable detail, any such proposed improvement and cost estimate therefor and shall provide to Tenant and to Landlord such plans and specifications, and such permits, licenses, contracts and such other information concerning the same as Landlord or Tenant may reasonably request.  Landlord and Tenant shall have twenty (20) Business Days to approve or disapprove all materials submitted to Landlord or Tenant, as the case may be, in connection with any such proposal.  Failure of Landlord or Tenant to respond to the Manager’s proposal within twenty (20) Business Days after receipt of all information and materials requested by Landlord or Tenant (if applicable) in connection with the proposed improvement shall be deemed to constitute approval of the same by the failing party.

 

B.                    In the event any dispute shall arise with respect to the withholding of any approval by either Landlord or Tenant, Manager shall meet with Landlord and Tenant to discuss the objections of Landlord or Tenant, and Manager, Landlord and Tenant shall attempt in good faith to resolve any disagreement relating to the proposal submitted by Manager.  If after sixty (60) days such disagreement has not been resolved, any party may submit the issue to the Expert in accordance with Section 11.22.B.  No Capital Addition shall be made which would tie-in or connect a Hotel with any other improvements on property adjacent to such Hotel (and not part of the Site) including, without limitation, tie-ins of buildings or other structures or utilities (other than connections to public utilities).  Manager shall not finance the cost of any construction of such improvements by the granting of a lien on, or security interest in, such Hotel or Manager’s interest therein without the prior written consent of Landlord, which consent may be in Landlord’s sole discretion.

 

C.                    The $200,000 limit referred to above shall be increased from time to time to an amount equal to $200,000 multiplied by a fraction, the denominator of which shall be the Index for the nearest month prior to the Effective Date and the numerator of which shall be the Index for the nearest month for which the Index is available prior to the first day of the Accounting Period in which such determination is being made.

 

D.                    Landlord and Tenant may not withhold their approval of Capital Addition described in this Section 5.08 with respect to such items as are (1) required in order for the Hotels to comply with System Standards or Operating Standards; or (2) required by reason of or under any Insurance Requirement or Legal Requirement, or otherwise required for the continued safe and orderly operation of each Hotel.

 

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ARTICLE VI

 

INSURANCE, DAMAGE, CONDEMNATION, AND FORCE MAJEURE

 

6.01  Insurance.

 

A.                    Manager shall at all times during the Term and at any other times Manager shall be in possession of the Hotels, keep the Hotels and all property located therein or thereon, insured on behalf of Tenant and Landlord pursuant to the terms of this Agreement.  Manager shall obtain and maintain, either with insurance companies of recognized responsibility or by legally qualifying itself as a self insurer, a minimum of the following insurance:

 

1.

 

(a)                   “All-risk” property insurance, including insurance against loss or damage by fire, vandalism and malicious mischief, earthquake, explosion of steam boilers, pressure vessels or other similar apparatus, now or hereafter installed in the Hotels, with equivalent coverage as that provided by the usual extended coverage endorsements, in an amount equal to                          percent (      %) of the then full Replacement Cost thereof excluding foundations and excavation (as defined in Section 6.01.C).

 

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(b)                   Notwithstanding the foregoing, (i) if Manager or, if applicable, Tenant (if pursuant to Section 6.04 hereof, Tenant has exercised its option to procure and maintain the insurance) cannot procure and maintain earthquake insurance on commercially reasonable terms and rates, then Manager or Tenant, as applicable, shall notify the other party in writing and such other party shall have the right (but not the obligation) to procure and maintain earthquake insurance on commercially reasonable terms and rates, provided, however, that the foregoing shall not be construed to require either party to maintain earthquake insurance if the same is unavailable on commercially reasonable terms and rates, (ii) the amount of earthquake insurance shall be procured and maintained with limits adequate to protect the probable maximum loss, which may not necessarily be 100% of the then full Replacement Cost, and (iii) such earthquake insurance can be provided through a blanket earthquake insurance program with limits adequate to protect the regional aggregate probable maximum loss for all properties under the blanket program;

 

2.                     Business interruption and blanket earnings plus extra expense under a rental value insurance policy or endorsement covering risk of loss during the lesser of the first twelve (12) months of reconstruction or the actual reconstruction period necessitated by the occurrence of any of the hazards described in Section 6.01(A) above, in such amounts as may be customary for comparable properties managed or leased by Manager or its Affiliates in the surrounding area and in an amount sufficient to prevent Landlord or Tenant from becoming a co-insurer;

 

3.                     Commercial general liability insurance, including bodily injury and property damage occurring in conjunction with the operations of the Hotels, and automobile liability insurance on vehicles operated in conjunction with the Hotels with a combined single limit for each occurrence of not less than Fifty Million Dollars ($50,000,000);

 

4.                     Flood (if a Hotel is located in whole or in part within an area identified as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968, as amended, or the Flood Disaster Protection Act of 1973, as amended (or any successor acts thereto)) and such other hazards and in such amounts as may be available under the National Flood Insurance Program and customary for comparable properties in the area;

 

5.                     Worker’s compensation insurance coverage for all persons employed by Manager at the Hotels with statutory limits and otherwise with limits of and provisions in accordance with the requirements of applicable local, state and federal law, and employer’s liability insurance as is customarily carried by similar employers; and

 

6.                     Such additional insurance as may be required, from time to time by (A) the Existing CC&R’s in effect on the date hereof and Future CC&R’s approved in writing by Manager to the extent such approval is required pursuant to Section 8.02 hereof, or (B) Landlord, or (C) any Mortgagee under a Qualified Mortgage, and which, with respect to (B) and (C) above, is reasonably required and customarily carried by comparable lodging properties in the area.

 

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B.                    The insurance herein required may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Tenant (to the extent permitted hereby) or Manager, provided, that such blanket policies fulfill the requirements contained herein.

 

C.                    “Replacement Cost” as used herein, shall mean the actual replacement cost of the property requiring replacement from time to time, including an increased cost of construction endorsement, less exclusions provided in the standard form of fire insurance policy.  In the event Landlord, Tenant or Manager believes that the then full Replacement Cost has increased or decreased at any time during the Term, such party, at its own cost, shall have the right to have such full Replacement Cost redetermined by an independent accredited appraiser approved by the other parties, which approval shall not be unreasonably withheld or delayed.  The party desiring to have the full Replacement Cost so redetermined shall forthwith, on receipt of such determination by such appraiser, give written notice thereof to the other parties.  The determination of such appraiser shall be final and binding on the parties hereto until any subsequent determination under this Section 6.01.C and Manager shall forthwith conform the amount of the insurance carried to the amount so determined by the appraiser.  Such replacement value determination will not be necessary so long as a Hotel is insured through a blanket replacement value policy.

 

D.                    All policies of insurance required under Section 6.01.A shall be carried in the name of Manager.  The property policies required under Section 6.01.A.1, Section 6.01.A(2), Section 6.01A(4) and Section 6.01.A(6) shall include Tenant and Landlord as additional insureds as their interests may appear.  The liability policies required under Section 6.01.A(3) shall include Tenant and Landlord as additional insureds.  Upon notice by Tenant or Landlord, as applicable, Manager shall also have the policies required under Section 6.01.A(1), Section 6.01.A(2), Section 6.01.A(3) and Section 6.01.A(6) include any Mortgagee as an additional insured (or as Mortgagee/Loss Payee, as applicable).  Any property losses thereunder shall be payable to the respective parties as their interests may appear.  All insurance policies and endorsements required pursuant to this Section 6.01.A(1) through 6.01.A(4) shall be fully paid for, nonassessable and, except for umbrella, worker’s compensation, flood and earthquake coverage, shall be issued by insurance carriers authorized to do business in the State, having a general policy holder’s rating of no less than B++ in Best’s latest rating guide.  With respect to the coverages described in Sections 6.01.A(1) through 6.01.A(4), no deductible allocated to a Hotel shall exceed Two Hundred Fifty Thousand Dollars ($250,000) (excluding the insurance in Section 6.01.A(4) and other high hazard risks, including, but not limited to, earthquake, flood and windstorm with respect to which such deductibles shall be in an amount as is customarily carried by operators of similar facilities).  All loss adjustments shall be payable as provided in Section 6.01.G. hereof.  All such policies shall provide Tenant, Landlord and any Mortgagee under a Qualified Mortgage if required by the same thirty (30) days’ prior written notice of any material change or cancellation of such policy and the property insurance policies shall provide for a waiver of subrogation, to the extent available.

 

E.                     Manager shall deliver to Tenant and Landlord certificates of insurance with respect to all policies so procured and, in the case of insurance policies about to expire, shall deliver certificates with respect to the renewal thereof.  All certificates of insurance provided for under this Section 6.01 shall, to the extent obtainable, state that the insurance shall not be

 

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canceled or materially changed without at least thirty (30) days’ prior written notice to the certificate holder per the terms of the policy.  In the event Manager shall fail to effect such insurance as herein required, to pay the premiums therefor, or to deliver, within fifteen (15) days of a request therefor, such certificates to Tenant or any Qualified Mortgage, Tenant shall have the right, but not the obligation, to acquire such insurance and pay the premiums therefor, which amounts shall be payable to Tenant, upon demand, as a Deduction, together with interest accrued thereon at the Overdue Rate (which interest  shall not be a Deduction, but shall be paid by Manager) from the date such payment is made until (but excluding) the date repaid.

 

F.                     Insurance premiums and any other costs or expenses with respect to the insurance or self-insurance required under Section 6.01.A., including any Insurance Retention (as defined below), shall be Deductions.  Such premiums and costs shall be allocated on an equitable basis to the hotels participating under Manager’s blanket insurance or self-insurance programs.  Upon Termination, an escrow fund in an amount acceptable to Manager based on actuarial loss projections for Hotels in the System shall be established from Gross Revenues and used by Manager to cover the amount of any Insurance Retention and all other costs which will eventually have to be paid by either Tenant or Manager with respect to pending or contingent claims, including those which arise after Termination for causes arising during the Term.  If Gross Revenues are insufficient to meet the requirements of such escrow fund, then Tenant shall deliver to Manager, within ten (10) Business Days after receipt of Manager’s written request therefor, the sums necessary to establish such escrow fund; and if Tenant fails to timely deliver such sums to Manager, Manager shall have the right (without affecting Manager’s other remedies under this Agreement) to withdraw the amount of such expenses from Working Capital provided by Tenant or any other funds of Tenant held by or under the control of Manager or held by Marriott under the Pooling Agreement and available to pay Aggregate Deductions (as defined in the Pooling Agreement).  For purposes of this Section 6.01.F, “Insurance Retention” shall mean the amount of any loss or reserve under Manager’s blanket insurance or self-insurance programs which is allocated to the Hotel, not to exceed the higher of (A) the maximum per occurrence limit established for similar hotels participating in such programs, or (B) the insurance policy deductible on any loss which may fall within high hazard classifications as mandated by the insurer (e.g., earthquake, flood, windstorm on coastal properties, etc.).  If the Hotel is not a participant under Manager’s blanket insurance or self-insurance programs, “Insurance Retention” shall mean the amount of any loss or reserve allocated to the Hotel, not to exceed the insurance policy deductible.

 

G.                    Except as provided in the last clause of this sentence, all proceeds payable by reason of any loss or damage to a Hotel, or any portion thereof, and insured under any policy of property insurance required by Section 6.01.A(1) and Section 6.01.A(4), inclusive, (other than the proceeds of any business interruption insurance under Section 6.01.A(2) and liability insurance under Section 6.01.A(3)) shall be paid directly to Landlord as its interest may appear (subject to the provisions of Section 6.02) and all loss adjustments with respect to losses payable to Tenant shall require the prior written consent of Landlord; provided, however, that so long as no event of default under the Lease or under this Agreement shall have occurred or be continuing, all such proceeds less than or equal to Five Hundred Thousand Dollars ($500,000) shall be paid directly to Manager and such losses may be adjusted without Landlord’s consent. If Tenant is required to reconstruct or repair a Hotel as provided herein, such proceeds shall be paid out by Landlord from time to time for the reasonable costs of reconstruction or repair of the

 

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Hotel necessitated by such damage or destruction, subject to and in accordance with the provisions of Section 6.02.  Any excess proceeds of insurance shall be contributed to the Reserve, provided that any such contribution shall not be a Deduction or otherwise result in any adjustment to Tenant’s Priority hereunder.  In the event that the provisions of Section 6.02.A are applicable, the insurance proceeds shall be retained by the party entitled thereto pursuant to Section 6.02.A.  All salvage resulting from any risk covered by insurance shall belong to Landlord, provided any rights to the same have been waived by the insurer.

 

H.                    Insofar as and to the extent that such agreement may be effective without invalidating or making it impossible to secure insurance coverage from responsible insurance companies doing business in the State with respect to any insurance then being carried by Manager, Tenant or Landlord, the party carrying such insurance or suffering said loss releases Manager, Tenant and Landlord of and from any and all claims with respect to such loss and such party further agrees that any insurance companies shall have no right of subrogation against Tenant, Landlord or Manager on account thereof, even though extra premium may result therefrom.  In the event that any extra premium is payable by Tenant as a result of this provision, the same shall be paid from Gross Revenues or Working Capital as a Deduction.

 

I.                      Manager shall not take out separate insurance, concurrent in form or contributing in the event of loss with that required by this Article VI, or increase the amount of any existing insurance by securing an additional policy or additional policies, which may diminish the proceeds which will be paid pursuant to the policies required by this Article VI, unless all parties having an insurable interest in the subject matter of such insurance, including Tenant, Landlord and all Mortgagees, are included therein as additional insureds and the loss is payable under such insurance in the same manner as losses are payable under this policies required by this Article VI.  In the event Manager shall take out any such separate insurance or increase any of the amounts of the then existing insurance as described in the preceding sentence, Manager shall give prompt notice to Tenant thereof.

 

6.02  Damage and Repair.

 

A.                    If, during the Term with respect to any Hotel, such Hotel shall be totally or partially destroyed and the Hotel is thereby rendered Unsuitable for Its Permitted Use, (1) Manager may terminate this Agreement with respect to such Hotel by sixty (60) days written notice to Tenant and Landlord (which Termination shall not be deemed due to a Manager Default), or (2) if the Lease has been terminated as a result of such casualty, the Tenant may terminate this Agreement with respect to such Hotel by written notice to Manager and Landlord, whereupon, this Agreement and the Lease, with respect to such Hotel, shall terminate and Landlord shall be entitled to retain the insurance proceeds payable on account of such damage.

 

B.                    If, during the Term with respect to any Hotel, such Hotel is damaged or destroyed by fire, casualty or other cause but is not rendered Unsuitable for Its Permitted Use and the Lease is not terminated in accordance with its terms with respect to such Hotel, subject to Sections 6.02.C and 6.02.D below, and provided there then exists no Manager Default which arises from acts or failure to act by Manager with respect to such Hotel, then Tenant shall forward to Manager the funds necessary to repair or replace the damaged or destroyed portion of the Hotel to the same condition as existed previously and Manager shall have the right to

 

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discontinue operating the Hotel to the extent it deems necessary to comply with applicable law, ordinance, regulation or order or as necessary for the safe and orderly operation of the Hotel.

 

C.                    (1)       If the cost of the repair or restoration of a Hotel is less than the sum of the deductible plus the amount of insurance proceeds received by Landlord or Tenant, Tenant shall be required to make available the funds necessary (minus the amount of such deductible) to cause such Hotel to be repaired and restored to the extent of such insurance proceeds.  The amount of such deductible shall be funded first from the Reserve for the applicable hotel, and to the extent such Reserve is insufficient therefor, the balance shall be funded by Tenant, and any such funding by Tenant shall result in an adjustment to Tenant’s Priority with respect to such Hotel as if Tenant had made a lump sum deposit into the Reserve for such Hotel, in the manner set forth in the definition of Tenant’s Priority, and the Addendum applicable to such Hotel shall be revised in accordance therewith.

 

(2)           If the cost of the repair or restoration of such Hotel exceeds the amount of insurance proceeds received by Landlord, plus the deductible amount, Manager shall give notice to Tenant and Landlord setting forth in reasonable detail the nature of such deficiency, and Tenant shall promptly thereafter advise Manager in writing whether Tenant shall pay and assume the amount of such deficiency (Tenant having no obligation to do so, except that, if Tenant shall elect to make such funds available, the same shall become an irrevocable obligation of Tenant).  In the event Tenant shall elect not to pay and assume the amount of such deficiency, Landlord shall have the right (but not the obligation), exercisable at Landlord’s sole election by written notice to Tenant and Manager, given within sixty (60) days after Manager’s notice of the deficiency, to elect to make available for application to the cost of repair or restoration the amount of such deficiency.  In the event that neither Landlord nor Tenant shall elect to make such deficiency available for restoration, (a) Manager may effect Termination of this Agreement with respect to such Hotel by written notice to Tenant and Landlord (which Termination shall not be deemed due to a Manager Default), or (b) if the Lease has been terminated with respect to such Hotel as a result of such casualty, Tenant may effect a Termination of this Agreement with respect to such Hotel by written notice to Manager and Landlord, whereupon, this Agreement shall terminate with respect to such Hotel as provided in Section 6.02.A.

 

D.                    In the event Tenant is required to make available the funds necessary to restore a Hotel, Tenant shall promptly do so and such funds shall be used to perform the repair and restoration of such Hotel (hereinafter called the “Work”), so as to restore such Hotel in compliance with all Legal Requirements and so that such Hotel shall be, to the extent practicable, substantially equivalent in value and general utility to its general utility and value immediately prior to such damage or destruction and in compliance with System Standards and Operating Standards. Manager shall, at Tenant’s request, provide general supervisory services with respect to completion of such work as part of the services provided hereunder in consideration of the management fees paid to Manager, however, Manager shall not be obligated to provide additional secure services unless Tenant and Manager enter into separate arrangements to provide such services and for stated additional consideration. Subject to the terms of the Lease, Landlord shall advance the insurance proceeds and any additional amounts payable by Landlord pursuant to this Section 6.02.D to Tenant regularly during the repair and restoration period so as to permit payment for the cost of any such restoration and repair.  Any such advances shall be made not more than monthly within ten (10) Business Days after Tenant

 

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submits to Landlord a written requisition and substantiation therefor on AIA Forms G702 and G703 (or on such other form or forms as may be reasonably acceptable to Landlord).  Landlord may, at its option, condition advancement of said insurance proceeds and other amounts on (i) the absence of an “Event of Default” under the Lease, (ii) its approval of plans and specifications of an architect satisfactory to Landlord (which approval shall not be unreasonably withheld or delayed), (iii) general contractors’ estimates, (iv) architect’s certificates, (v) unconditional lien waivers of general contractors, if available, (vi) evidence of approval by all governmental authorities and other regulatory bodies whose approval is required and (vii) such other certificates as Landlord may, from time to time, reasonably require.

 

E.                     If this Agreement is not otherwise terminated with respect to a totally or partially destroyed Hotel as permitted herein, and Landlord and/or Tenant makes funds available to repair and restore any such Hotel, then, except for deductibles which are addressed in Section 6.02.C above, any reserves, losses, costs or expenses which are uninsured or are not otherwise self-insured because the same are not required to be insured or self-insured hereunder (as applicable, the “Uninsured Costs”), shall be accounted for in accordance with the following sentence.  Effective as of the first day of the Accounting Period immediately following the completion of the repair or restoration of the Hotel (or, if the Hotel, or any portion thereof, was closed as a result of the damage or destruction, then as of the first day of the Accounting Period immediately following the date the Hotel, or such portion thereof, is reopened), the Tenant’s Priority with respect to such Hotel shall be the greater of (i) the Tenant’s Priority for such Hotel as of the day immediately preceding any such damage or destruction, or (ii)        percent (   %) multiplied by the total cost (including any Uninsured Costs) to repair and restore the Hotel in accordance with the terms of this Agreement.

 

F.                     All business interruption insurance proceeds shall be paid to Manager and included in Gross Revenues.  Any casualty which does not result in a Termination of this Agreement with respect to the applicable Hotel shall not excuse the payment of sums due to Tenant hereunder with respect to such Hotel.

 

G.                    Manager hereby waives any statutory rights of termination which may arise by reason of any damage to or destruction of any Hotel.

 

6.03  Damage Near End of Term.  Notwithstanding any provisions of Section 6.01 or 6.02 hereof to the contrary, if damage to or destruction of any Hotel occurs during the last twelve (12) months of the then Term (including any exercised Renewal Term) and if such damage or destruction cannot reasonably be expected to be fully repaired and restored prior to the date that is nine (9) months prior to the end of such Term (including any exercised Renewal Term), the provisions of Section 6.02.A shall apply as if such Hotel had been totally or partially destroyed and such Hotel operated thereon rendered Unsuitable for its Permitted Use.

 

6.04  Tenant’s Option to Obtain Certain Insurance.  In addition to its rights under Section 6.01.E, Tenant may, at its option, from time to time by written notice to Manager which shall be delivered no later than sixty (60) days prior to the natural expiration of the insurance policies which Manager has obtained pursuant to Sections 6.01.A(1), (2) and (4), procure and maintain the insurance specified in Sections 6.01.A(1), (2) and (4) for one or more Hotels with terms and coverages consistent with this Article VI (in which case Manager shall allow such policies

 

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obtained by it under Sections 6.01.A(1), (2) and (4) to expire), subject to the following terms and conditions:

 

A.                    All policies of insurance shall be carried in the name of Tenant, with Manager as an additional insured.  Any property losses thereunder shall be payable to the respective parties as their interests may appear.

 

B.                    Tenant shall deliver to Manager and Landlord certificates of insurance with respect to all policies so procured and, in the case of insurance policies about to expire, shall deliver certificates with respect to the renewal thereof.

 

C.                    All such certificates of insurance shall, to the extent obtainable, state that the insurance shall not be canceled or materially changed without at least thirty (30) days’ prior written notice to the certificate holder per the terms of the policy.

 

D.                    Premiums for such insurance coverage shall be treated as Deductions, provided that if the cost of such insurance procured by Tenant exceeds the cost of Manager’s comparable coverage by more than ten percent (10%), all such excess costs shall be the sole responsibility of Tenant and shall not be a Deduction.

 

E.                     Should Tenant exercise its option to procure any of the insurance described in this Section 6.04, Tenant hereby waives its rights of recovery from Manager or any of its Affiliates (and their respective directors, officers, shareholders, agents and employees) for loss or damage to any Hotel, and any resultant interruption of business, resulting from an occurrence or event covered by the insurance so procured by Tenant.

 

F.                     Should Tenant exercise its rights to obtain the insurance described in this Section 6.04, Tenant acknowledges that until Tenant gives Manager not less than sixty (60) days advance notice that Tenant is rescinding such exercise Manager is under no obligation to thereafter include such Hotels in its blanket insurance program (with respect to the coverage described in Sections 6.01.A(1), (2) and (4) for the balance of the Term of this Agreement.  However, upon a Sale of a Hotel, a successor Tenant shall have the right to elect to have such Hotel included in Manager’s blanket insurance program by written request to Manager for such inclusion not later than thirty (30) days after the date of which such party becomes the Tenant provided that any such Hotel, as of that point in time, satisfies the applicable criteria for admission to Manager’s blanket insurance program (as established by the program’s insurance carriers).

 

G.                    All insurance procured by Tenant hereunder shall be obtained from reputable insurance companies reasonably acceptable to Manager and shall otherwise comply with the provisions of this Article VI.

 

6.05  Condemnation.  If either (i) the whole of a Hotel shall be taken by Condemnation, or (ii) a Condemnation of less than the whole of a Hotel renders such Hotel Unsuitable for Its Permitted Use, this Agreement shall terminate and Tenant and Landlord shall seek the Award for their interests in such Hotel as provided in the Lease.  In addition, Manager shall have the right to initiate such proceedings as it deems advisable to recover any damages to which Manager may be entitled; provided, however, that Manager shall be entitled to retain the award or

 

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compensation it may obtain through such proceedings which are conducted separately from those of Tenant and Landlord only if such award or compensation does not reduce the award or compensation otherwise available to Tenant and Landlord.  For this purpose, any award or compensation received by any holder of a Mortgage on a Hotel shall be deemed to be an award of compensation received by Landlord.

 

6.06  Partial Condemnation.  In the event of a Condemnation of less than the whole of a Hotel such that such Hotel is not rendered Unsuitable for Its Permitted Use, Manager shall, to the extent of the Award and any additional amounts disbursed by Tenant or Landlord as hereinafter provided, commence promptly and continue diligently to restore the untaken portion of such Hotel so that such Hotel shall constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as the Hotel located thereon existing immediately prior to such Condemnation, in full compliance with all Legal Requirements, subject to the provisions of this Section 6.06. Manager shall, at Tenant’s request, provide general supervisory services with respect to completion of such work as part of the services provided hereunder in consideration of the management fees paid to Manager, however, Manager shall not be obligated to provide additional services unless Tenant and Manager enter into separate arrangements to provide such services and for stated additional consideration. If the cost of the repair or restoration of the Hotel exceeds the amount of the Award, Manager shall give Landlord and Tenant written notice thereof, which notice shall set forth in reasonable detail the nature of such deficiency, and Tenant shall promptly thereafter advise Manager in writing whether Tenant will pay and assume the amount of such deficiency (Tenant having no obligation to do so, except that if Tenant shall elect to make such funds available, the same shall become an irrevocable obligation of Tenant pursuant to this Agreement).  In the event Tenant shall elect not to pay and assume the amount of such deficiency, Landlord shall have the right (but not the obligation), exercisable at Landlord’s sole election by Notice to Tenant and Manager given within sixty (60) days after Tenant’s notice of the deficiency, to elect to make available for application to the cost of repair or restoration the amount of such deficiency.  In the event neither Landlord nor Tenant shall elect to make such deficiency available for restoration, either Manager or Tenant may terminate this Agreement with respect to such Hotel.

 

6.07  Disbursement of Award.  Subject to the terms hereof, Tenant or Landlord, as applicable, shall contribute to the cost of restoration that part of the Award necessary to complete such repair or restoration, together with severance and other damages awarded for such Hotel and any deficiency Tenant or Landlord, as applicable, has agreed to disburse, to Manager regularly during the restoration period so as to permit payment for the cost of such repair or restoration.  Landlord may, at its option, condition advancement of such Award and other amounts on (i) the absence of any Event of Default, (ii) its approval of plans and specifications of an architect satisfactory to Landlord (which approval shall not be unreasonably withheld or delayed), (iii) general contractors’ estimates, (iv) architect’s certificates, (v) unconditional lien waivers of general contractors, if available, (vi) evidence of approval by all governmental authorities and other regulatory bodies whose approval is required, and (vii) such other certificates as Landlord may, from time to time, reasonably require.  Landlord’s and Tenant’s obligation under this Section 6.07 to disburse the Award and such other amounts shall be subject to (x) the collection thereof by Landlord and (y) the satisfaction of any applicable requirements of any Qualified Mortgage, and the release of such Award by the applicable Mortgagee.

 

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Tenant’s obligation to restore the applicable Hotel shall be subject to the release of the Award to Landlord by the applicable Mortgagee under a Qualified Mortgage.

 

6.08  Temporary Condemnation.  In the event of any temporary Condemnation of a Hotel or Tenant’s interest therein, this Agreement shall continue in full force and effect. The entire amount of any Award made for such temporary Condemnation allocable to the Term, whether paid by way of damages, rent or otherwise, shall be paid to Manager and shall constitute Gross Revenues.  Tenant shall, promptly upon the termination of any such period of temporary Condemnation, at its sole cost and expense, restore such Hotel to the condition that existed immediately prior to such Condemnation, in full compliance with all Legal Requirements, unless such period of temporary Condemnation shall extend beyond the expiration of the Term, in which event Tenant shall not be required to make such restoration.  For purposes of this Section 6.08, a Condemnation shall be deemed to be temporary if the period of such Condemnation is not expected to, and does not, exceed twelve (12) months.

 

6.09  Allocation of Award.  Except as provided in Section 6.07 and Section 6.08 and the second and third sentences of this Section 6.09, the total Award shall be solely the property of and payable to Landlord.  Any portion of the Award made for the taking of Tenant’s leasehold interest in a Hotel, loss of business, the taking of Tenant’s Personal Property, or Tenant’s removal and relocation expenses shall be the sole property of, and payable to, Tenant.  Any portion of the Award made for the taking of Manager’s interest in a Hotel or Manager’s loss of business during the remainder of the Term hereof shall be the sole property of, and payable to, Manager, subject to the provisions of Section 6.05 hereof.  In any Condemnation proceedings, Landlord, Tenant, and Manager shall each seek its own Award in conformity herewith, at its own expense.

 

6.10  Effect of Condemnation.  Any condemnation which does not result in a Termination of this Agreement in accordance with its terms with respect to the applicable Hotel shall not excuse the payment of sums due to Tenant hereunder with respect to such Hotel and this Agreement shall remain in full force and effect.

 

ARTICLE VII

 

TAXES; OTHER CHARGES

 

7.01  Real Estate and Personal Property Taxes.

 

A.                    Subject to Section 11.23 relating to permitted contests, Manager shall pay, from Gross Revenues for each Hotel, all Impositions with respect to such Hotel, before any fine, penalty, interest or cost (other than any opportunity cost as a result of a failure to take advantage of any discount for early payment) may be added for non-payment, such payments to be made directly to the taxing authorities where feasible, and shall promptly, upon request, furnish to Landlord and Tenant copies of official receipts or other reasonably satisfactory proof evidencing such payments.  Any such payments shall be a Deduction in determining Operating Profit for such Hotel.  If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Manager may exercise the option to pay the same (and any accrued interest on the unpaid

 

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balance of such Imposition) in installments and, in such event, shall pay such installments during the Term as the same become due and before any fine, penalty, premium, further interest or cost may be added thereto.  Manager shall, upon request, provide such data as is maintained by Manager with respect to any Hotel as may be necessary to prepare any required returns and reports by Landlord or Tenant.

 

Tenant shall give, and will use reasonable efforts to cause Landlord to give, copies of official tax bills and assessments which it may receive with respect to any Hotel and prompt notice to Tenant and Manager of all Impositions payable by Tenant under the Lease of which Tenant or Landlord, as the case may be, at any time has knowledge; provided, however, that Landlord’s or Tenant’s failure to give any such notice shall in no way diminish Manager’s obligation hereunder to pay such Impositions (except that Landlord or Tenant, as applicable, shall be responsible for any interest or penalties incurred as a result of Landlord’s or Tenant’s, as applicable, failure promptly to forward the same).

 

B.                    The word “Impositions” as used in this Agreement shall include, but not be limited to, franchise taxes under the laws of the State of Tennessee and gross receipt or general excise taxes or sales taxes payable on (i) Rent payable to Landlord, (ii) all sums payable to Tenant pursuant to this Agreement (or the Pooling Agreement with respect to Hotels to which the Pooling Agreement is applicable), and (iii) all sums payable to Manager pursuant to this Agreement as System Fees or management fees (or pursuant to the Pooling Agreement with respect to Hotels to which the Pooling Agreement is applicable), if any, but shall not include the following, all of which shall be paid from the applicable Reserve, and not from Gross Revenues:

 

1.                     Special assessments (regardless of when due or whether they are paid as a lump sum or in installments over time) imposed because of facilities which are constructed by or on behalf of the assessing jurisdiction (for example, roads, sidewalks, sewers, culverts, etc.) which directly benefit a Hotel (regardless of whether or not they also benefit other buildings), which assessments shall be treated as capital costs of construction and not as Deductions; and

 

2.                     “Impact Fees” (regardless of when due or whether they are paid as a lump sum or in installments over time) which are required as a condition to the issuance of site plan approval, zoning variances or building permits, which impact fees shall be treated as capital costs of construction and not as Deductions.

 

C.                    Notwithstanding anything herein to the contrary, each of Tenant and Manager shall pay from its own funds (and not from Gross Revenues of any Hotel or any Reserve) any franchise, corporate, estate, inheritance, succession, capital levy or transfer tax imposed on Tenant or Manager, as applicable, or any income tax imposed (but not gross receipt or general excise taxes) on any income of Tenant or Manager (including distributions to Tenant pursuant to Article III hereof).

 

D.                    Manager shall cause to be paid, with respect to each Hotel, when due, from Gross Revenues, as Deductions, for such Hotel, to the extent of the sufficiency of funds available therefore:

 

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1.                     Utility Charges — all charges for electricity, power, gas, oil, water and other utilities used in connection with each Hotel.

 

2.                     Insurance Premiums — all premiums for the insurance coverage required to be maintained pursuant to Section 6.01 hereof.

 

3.                     Other Charges — all other amounts, liabilities and obligations arising in connection with the operation of each Hotel except those obligations expressly assumed by Landlord or Tenant pursuant to the provisions of this Agreement or any of the Incidental Documents or expressly stated not to be paid from Gross Revenues of a Hotel pursuant to this Agreement.

 

ARTICLE VIII

 

OWNERSHIP OF THE HOTELS

 

8.01  Ownership of the Hotels.

 

A.                    Tenant hereby covenants that it will not hereafter impose or consent to the imposition of any liens, encumbrances or other charges, except as follows:

 

1.                     easements or other encumbrances that do not adversely affect the operation of a Hotel by Manager and that are not prohibited pursuant to Section 8.02 of this Agreement;

 

2.                     mortgages which constitute Qualified Mortgages and related security instruments;

 

3.                     liens for taxes, assessments, levies or other public charges not yet due or due but not yet payable; or

 

4.                     equipment leases for office equipment, telephone, motor vehicles and other property approved by Manager.

 

B.                    Subject to liens permitted by Section 8.01.A hereof and further subject to liens permitted to be placed by Landlord pursuant to the Owner Agreement, Tenant covenants that, so long as there then exists no Manager Default which arises from acts or failure to act by Manager with respect to such Hotel, Manager shall quietly hold, occupy and enjoy the Hotels throughout the Term hereof free from hindrance, ejection or molestation by Tenant or Landlord or other party claiming under, through or by right of Tenant or Landlord.  Tenant agrees to pay and discharge any payments and charges and, at its expense, to prosecute all appropriate actions, judicial or otherwise, necessary to assure such free and quiet occupation as set forth in the preceding sentence.

 

8.02  No Covenants, Conditions or Restrictions.

 

A.                    Tenant covenants that, as of the Effective Date and during the Term of this Agreement with respect to each Hotel, Tenant will not enter into (unless Manager has given its

 

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prior written consent thereto, which consent shall not be unreasonably withheld, conditioned or delayed) any covenants, conditions or restrictions, including reciprocal easement agreements or cost-sharing arrangements (collectively referred to as “Future CC&R’s”) affecting any Site or Hotel which would (i) prohibit or limit Manager from operating such Hotel in accordance with System Standards, including related amenities of such Hotel; (ii) allow such Hotel facilities (for example, parking spaces) to be used by persons other than guests, invitees or employees of such Hotel; (iii) allow the Hotel facilities to be used for specified charges or rates that have not been approved by Manager; or (iv) subject the Hotel to exclusive arrangements regarding food and beverage operation or retail merchandise. With respect to each Hotel, Manager hereby consents to (a) any easements, covenants, conditions or restrictions, including without limitation any reciprocal easement agreements or cost-sharing agreements, existing as of the date Landlord acquired title to such Hotel, and (b) any of the foregoing items with respect to such Hotel existing as of the date hereof and of which Manager has knowledge (all of the foregoing, collectively, the “Existing CC&R’s”).

 

B.                    All financial obligations imposed on Tenant or on a Hotel pursuant to any Future CC&R’s for which Manager’s consent is required under Section 8.02.A above shall be paid by Tenant from its own funds, and not from Gross Revenues of a Hotel or from the Reserve of a Hotel, unless Manager has given its prior written consent to such Future CC&R’s as required under Section 8.02.A.

 

C.                    Manager shall manage, operate, maintain and repair each Hotel in compliance with all obligations imposed on Tenant, Landlord or such Hotel pursuant to any Existing CC&R’s or Future CC&R’s (unless the Manager’s consent is required for such Future CC&R’s and Manager does not consent to such Future CC&R’s) to the extent such Existing CC&R’s and Future CC&R’s relate to the management, operation, maintenance and repair of such Hotel.

 

8.03  Liens; Credit.  Manager and Tenant shall use commercially reasonable efforts to prevent any liens from being filed against any Hotel which arise from any maintenance, repairs, alterations, improvements, renewals or replacements in or to such Hotels.  Manager and Tenant shall cooperate, and Tenant shall cause the Landlord to cooperate, fully in obtaining the release of any such liens, and the cost thereof, if the lien was not occasioned by the fault of a party, shall be treated the same as the cost of the matter to which it relates.  If the lien arises as a result of the fault of a party, then the party at fault shall bear the cost of obtaining the lien release.  In no event shall any party borrow money in the name of, or pledge the credit of, any other party.  Manager shall not allow any lien to exist with respect to its interest in this Agreement.

 

Subject to the right to contest matters set forth in Section 11.23 hereof and for encumbrances permitted under Section 8.01 hereof, Manager shall not, to the extent funds to pay the same are provided on a timely basis as required hereunder, directly or indirectly, create or allow to remain and shall promptly discharge any lien, encumbrance, attachment, title retention agreement or claim upon any Hotel, except (a) existing liens for those taxes of Landlord which Manager is not required to pay hereunder, (b) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (i) the same are not yet due and payable, or (ii) are being contested in accordance with Section 11.23, (c) liens of mechanics, laborers, materialmen, suppliers or vendors incurred in the ordinary course of  business that are not yet

 

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due and payable or are for sums that are being contested in accordance with Section 11.23 and (d) any Mortgages or other liens which are the responsibility of Landlord.

 

ARTICLE IX

 

DEFAULTS

 

9.01  Manager Events of Default.  Each of the following shall constitute a “Manager Event of Default” to the extent permitted by applicable law:

 

A.                    The filing by Manager or Marriott of a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any bankruptcy law, or the admission by Manager that it is unable to pay its debts as they become due, or the institution of any proceeding by Manager for its dissolution or termination.  Upon the occurrence of any Manager Event of Default as described under this Section 9.01.A, said Manager Event of Default shall be deemed a “Manager Default” under this Agreement.

 

B.                    The consent by Manager or Marriott to an involuntary petition in bankruptcy or the failure to vacate, within ninety (90) days from the date of entry thereof, any order approving an involuntary petition by Manager.  Upon the occurrence of any Manager Event of Default as described under this Section 9.01.B, said Manager Event of Default shall be deemed a “Manager Default” under this Agreement.

 

C.                    The entering of an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor, adjudicating Manager or Marriott as bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all or a substantial part of Manager’s or Marriott’s assets, and such order, judgment or decree’s continuing unstayed and in effect for an aggregate of sixty (60) days (whether or not consecutive).  Upon the occurrence of any Manager Event of Default as described under this Section 9.01.C, said Manager Event of Default shall be deemed a “Manager Default” under this Agreement.

 

D.                    The failure of Marriott or Manager or any Affiliate of either of them to make any payment required to be made in accordance with the terms of this Agreement, or any Incidental Document on or before the date due.  Upon the occurrence of any Manager Event of Default as described under this Section 9.01.D, said Manager Event of Default shall be deemed a “Manager Default” under this Agreement if Marriott or Manager or such Affiliate fails to cure such Manager Event of Default (1) within any applicable notice and cure period, if any, provided in the document pursuant to which such payment is to be made, or (2) otherwise, eight (8) days after receipt of written notice from the other party to such document demanding such cure.

 

E.                     The failure of Marriott or Manager or any Affiliate of either of them to perform, keep or fulfill any of the other covenants, undertakings, obligations or conditions set forth in this Agreement, or the occurrence of an “Event of Default” under any Incidental Document as a result of a material breach by the Manager thereunder, on or before the date required for the same.  Upon the occurrence of any Manager Event of Default as described under this Section 9.01.E, said Manager Event of Default shall be deemed a “Manager Default” under

 

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this Agreement if Marriott or Manager or such Affiliate fails to cure such Manager Event of Default within thirty (30) days after receipt of written notice from Tenant demanding such cure, or, if the Manager Event of Default is susceptible of cure, but such cure cannot be accomplished within said thirty (30) day period of time, if Marriott or Manager or such Affiliate fails to commence the cure of such Manager Event of Default within fifteen (15) days of such notice or thereafter fails to diligently pursue such efforts to completion.

 

F.                     The failure of Manager to maintain insurance coverages required to be maintained by Manager under Article VI hereof (excluding insurance maintained by Tenant pursuant to Section 6.04 hereof), and such failure shall constitute a Manager Default hereunder if it continues for eight (8) days after written notice thereof from Tenant (except that no notice shall be required if any such insurance coverage shall have lapsed).

 

G.                    Any material representation or warranty made by Manager or any Affiliate in this Agreement or in any Incidental Document proves to have been false in any material respect on the date when made or deemed made, and the same shall constitute a Manager Default if Manager fails to cure or change the fact or event which caused such representation or warranty to have been false when made within fifteen (15) Business Days of receiving notice of such falseness from Tenant, provided, however, that if such default is susceptible of cure but such cure can not reasonably be accomplished with the use of due diligence within such period of time and if, in addition, Manager commences to cure or cause to be cured such default within fifteen (15) Business Days after receiving notice thereof from Tenant and thereafter prosecutes the cure of such default with due diligence, such period of time shall be extended to such period of time as may be reasonably necessary to cure such default with due diligence.

 

H.                    The occurrence of any other event described in this Agreement as a Manager Default, including without limitation, the events described in Section 3.02.C, or the occurrence of a Manager Default as described in the Pooling Agreement.

 

9.02  Remedies for Manager Defaults.

 

A.                    In the event of a Manager Default, but subject in all events to Section 9.02.B below, Tenant shall have the right to:  (1) terminate this Agreement with respect to the applicable Hotel under which such Manager Default arose by written notice to Manager, which termination shall be effective as of the effective date which is set forth in said notice, provided that said effective date shall be at least thirty (30) days after the date of said notice; (2) institute forthwith any and all proceedings permitted by law or equity (provided they are not specifically barred under the terms of this Agreement), including, without limitation, actions for specific performance and/or damages; or (3) avail itself of the remedies described in Section 9.03.

 

B.                    Notwithstanding anything herein to the contrary, in the event of a Manager Default for which Tenant intends or desires to terminate this Agreement, Tenant shall have the right to do so provided that Tenant must simultaneously terminate this Agreement as to all Hotels which are at such time subject to this Agreement.

 

C.                    None of (i) the termination of this Agreement in connection with a Manager Default, (ii) the repossession of any Hotel or any portion thereof, (iii) the failure of Tenant to

 

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engage a replacement manager for any Hotel or any portion thereof, nor (iv) the engagement of any replacement manager for all or any portion of a Hotel, shall relieve Manager of its liability and obligations hereunder, all of which shall survive any such termination, repossession or engagement.  In the event of any termination of this Agreement with respect to a Hotel as a result of a Manager Default, Manager shall forthwith pay to Tenant all amounts due and payable with respect to such Hotel through and including the date of such termination.  Thereafter, Manager, until the end of what would have been the Term of this Agreement in the absence of such termination, and whether or not a replacement manager shall have been engaged for such Hotel or any portion thereof, shall be liable to Tenant for, and shall pay to Tenant, as current damages, the amounts which Tenant would have received hereunder for the remainder of the Term had such termination not occurred, less the net amounts, if any, received from a replacement manager, after deducting all reasonable expenses in connection with such engaging such replacement, including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys’ fees, advertising, expenses of employees, alteration costs and expenses of preparation for such engagement.  Manager shall pay such current damages to Tenant as soon after the end of each Accounting Period as practicable to determine the amount of the same.

 

D.                    At any time after such termination, whether or not Tenant shall have collected any amounts owing and due up to and including the date of termination of this Agreement, as liquidated final damages beyond the date of such termination and in lieu of Tenant’s right to receive any other damages due to the termination of this Agreement, at Tenant’s election, Manager shall pay to Tenant an amount equal to the present value (discounted at a rate equal to the interest rate published in The Wall Street Journal for U.S. Treasury Obligations having a maturity, closest in time to the last day of the Term) of the excess, if any, of the amounts which Tenant would have been entitle to receive hereunder from the date of such termination based on the then market conditions; provided, however, that Manager shall be entitled to a credit from Tenant in the amount of any unapplied balance of the Security Deposit, provided that thereupon Tenant and its Affiliates shall have no further obligation to pay the portion of the Security Deposit so credited to Manager or any of its Affiliates.  Nothing contained in this Agreement shall, however, limit or prejudice the right of Tenant to prove and obtain in proceedings for bankruptcy or insolvency an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater than, equal to, or less than the amount of the loss or damages referred to above.

 

E.                     In case of any Manager Default resulting in Manager being obligated to vacate a Hotel, Tenant may (i) engage a replacement manager for such Hotel or any part or parts thereof, either in the name of Tenant or otherwise, for a term or terms which may at Tenant’s option, be equal to, less than or exceed the period which would otherwise have constituted the balance of the Term and may grant concessions or other accommodations to the extent that Tenant reasonably considers advisable and necessary to engage such replacement manager(s), and (ii) may make such reasonable alterations, repairs and decorations in a Hotel or any portion thereof as Tenant, in its sole and absolute discretion, considers advisable and necessary for the purpose of engaging a replacement manager for such Hotel; and the making of such alterations, repairs and decorations shall not operate or be construed to release Manager from liability hereunder as aforesaid.  Subject to the last sentence of this paragraph, Tenant shall in no event be liable in any way whatsoever for any failure to engage a replacement manager for such Hotel, or,

 

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in the event a replacement manager is engaged, for failure to collect amounts due Tenant in connection therewith.  To the maximum extent permitted by law, Manager hereby expressly waives any and all rights of redemption granted under any present or future laws in the event of Manager being evicted or dispossessed, or in the event of Tenant obtaining possession of a Hotel, by reason of the occurrence and continuation of a Manager Default hereunder.  Tenant covenants and agrees, in the event of any termination of this Agreement as a result of a Manager Default, to use reasonable efforts to mitigate its damages.

 

F.                     Any payments received by Tenant under any of the provisions of this Agreement during the existence or continuance of a Manager Default (and any payment made to Tenant from others rather than Manager due to the existence of any Manager Default) shall be applied to Manager’s current and past due obligations under this Agreement in such order as Tenant may determine or as may be prescribed by applicable law.

 

G.                    If a Manager Default shall have occurred and be continuing, Tenant, after notice to Manager (which notice shall not be required if Tenant shall reasonably determine immediate action is necessary to protect person or property), without waiving or releasing any obligation of Manager and without waiving or releasing any Manager Default, may (but shall not be obligated to), at any time thereafter, make such payment or perform such act for the account and at the expense of Manager, and may, to the maximum extent permitted by law, enter upon a Hotel or any portion thereof for such purpose and take all such action thereon as, in Tenant’s sole and absolute discretion, may be necessary or appropriate therefor.  No such entry shall be deemed an eviction of Manager or result in the termination hereof.  All reasonable costs and expenses (including, without limitation, reasonable attorneys’ fees) incurred by Tenant in connection therewith, together with interest thereon (to the extent permitted by law) at the Overdue Rate from the date such sums are paid by Tenant until repaid, shall be paid by Manager to Tenant, on demand.

 

9.03  Additional Remedies for Manager Recourse Defaults.

 

A.                    Upon the occurrence of a Manager Default under the provisions of Section 9.01.D, the amount owed to Tenant or any Affiliate of Tenant pursuant thereto shall accrue interest, at an annual rate equal to the Overdue Rate, from and after the date on which such payment was originally due.

 

B.                    The rights granted under this Article IX shall not be in substitution for, but shall be in addition, to, any and all rights and remedies available to Tenant (including, without limitation, injunctive relief and damages) by reason of applicable provisions of law or equity.

 

C.                    Upon the occurrence of a Manager Default with respect to a Hotel, Manager shall permit Landlord and/or Tenant to enter upon the applicable Hotel for the purposes of effecting a cure for such Manager Default, provided (i) Landlord and/or Tenant, as applicable, act strictly in accordance with the terms of the Lease, and (ii) Landlord and/or Tenant, as applicable, do not unreasonably interfere with the operation of such Hotel.

 

9.04  Non-Recourse Provision.  Notwithstanding anything herein to the contrary, but subject to the balance of this Section 9.04 and further subject to Manager’s obligations in Section

 

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5.09 hereof, Manager’s obligations pursuant to this Agreement and the Pooling Agreement are in all instances non-recourse to Manager, and in the event of any claim, suit or cause of action by Tenant against Manager pursuant to or in connection with this Agreement or the Pooling Agreement or the transactions contemplated by either of them, Tenant’s sole recourse against Manager shall be with respect to amounts held by Marriott or Manager for the account of Tenant pursuant to this Agreement or the Pooling Agreement, and to amounts available pursuant to the Marriott Guaranty and to amounts available pursuant to the Security Deposit Agreement, and Manager shall have no other liability beyond the extent thereof with respect to any such claim, suit or cause of action.  Notwithstanding the foregoing, this Section 9.04 shall not be applicable with respect to (a) fraud committed by Manager, (b) misapplication or misappropriation of funds committed by Manager, (c) the willful misconduct of Manager, (d) the gross negligence of Manager, or (e) losses against which Manager has elected to self insure pursuant to Section 6.01 hereof.  This Section 9.04 shall not be construed to limit any right of set-off to which Tenant may be entitled with respect to any amount to which Manager or any Affiliate may be entitled pursuant to this Agreement, any Other Management Agreement or the Pooling Agreement, and Tenant shall be entitled to set-off against amounts owed by Tenant to Manager hereunder amounts owed to Tenant under this Agreement or any Incidental Document, but excluding in any event Systems Fees due to Manager hereunder or under any Other Management Agreement and any fees due to Marriott pursuant to any Franchise Agreement.

 

9.05  Good Faith Dispute By Manager.  If Manager shall in good faith dispute the occurrence of any Manager Default and Manager, before the expiration of the applicable cure period, shall give notice thereof to Tenant, setting forth, in reasonable detail, the basis therefor, no Manager Default shall be deemed to have occurred provided Manager shall escrow disputed amounts, if any, pursuant to an escrow arrangement reasonably acceptable to Tenant and Manager; provided, however, that in the event that any dispute is ultimately determined against Manager, then Manager shall pay to Tenant interest on any disputed funds at the Overdue Rate, from the date demand for such funds was made by Tenant until paid.  If Tenant and Manager shall fail, in good faith, to resolve any such dispute within ten (10) Business Days after Manager’s notice of dispute, either may submit the matter for resolution by Arbitration.  In the event that the determination in such Arbitration is that a Manager Default, in fact, exists, Manager shall have the applicable cure period from the date of such final determination to cure such Manager Default.

 

9.06  Tenant Events of Default.  Each of the following shall constitute a “Tenant Event of Default” to the extent permitted by applicable law:

 

A.                    The filing by Tenant or HPT of a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any bankruptcy law, or the admission by Tenant that it is unable to pay its debts as they become due, or the institution of any proceeding by Tenant for its dissolution or termination.  Upon the occurrence of any Tenant Event of Default as described under this Section 9.06.A, said Tenant Event of Default shall be deemed a “Tenant Default” under this Agreement.

 

B.                    The consent by Tenant or HPT to an involuntary petition in bankruptcy or the failure to vacate, within ninety (90) days from the date of entry thereof, any order approving an involuntary petition by Tenant.  Upon the occurrence of any Tenant Event of Default as

 

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described under this Section 9.06.B, said Tenant Event of Default shall be deemed a “Tenant Default” under this Agreement.

 

C.                    The entering of an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor, adjudicating Tenant or HPT as bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all or a substantial part of Tenant’s or HPT’s assets, and such order, judgment or decree’s continuing unstayed and in effect for an aggregate of sixty (60) days (whether or not consecutive).  Upon the occurrence of any Tenant Event of Default as described under this Section 9.06.C, said Tenant Event of Default shall be deemed a “Tenant Default” under this Agreement.

 

D.                    The failure of Tenant to make any payment (or cause to be made any payment by any Affiliate of Tenant which is a party thereto) required to be made in accordance with the terms of this Agreement or any Incidental Document on or before the date due.  Upon the occurrence of any Tenant Event of Default as described under this Section 9.06.D, said Tenant Event of Default shall be deemed a “Tenant Default” under this Agreement if Tenant fails to cure such Tenant Event of Default (1) within any applicable notice and cure period, if any, provided in the document pursuant to which such payment is to be made, or (2) otherwise, eight (8) days after receipt of written notice from the other party to such document demanding such cure.

 

E.                     The failure of Tenant to perform, keep or fulfill any of the other covenants, undertakings, obligations or conditions set forth in this Agreement or any Incidental Document.  Upon the occurrence of any Tenant Event of Default as described under this Section 9.06.E, said Tenant Event of Default shall be deemed a “Tenant Default” under this Agreement if Tenant fails to cure the Tenant Event of Default within thirty (30) days after receipt of written notice from Tenant demanding such cure, or, if the Tenant Event of Default is susceptible of cure, but such cure cannot be accomplished within said thirty (30) day period of time, if Manager fails to commence the cure of such Tenant Event of Default within fifteen (15) days of such notice or thereafter fails to diligently pursue such efforts to completion.

 

F.                     The failure of Tenant to maintain insurance coverages elected to be maintained by Tenant under Article VI hereof (excluding insurance maintained by Manager pursuant thereto), and such failure shall constitute a Tenant Default hereunder if it continues for eight (8) days after written notice thereof from Manager (except that no notice shall be required if any such insurance coverage shall have lapsed).

 

G.                    Any material representation or warranty made by Tenant or any Affiliate in this Agreement or in any Incidental Document proves to have been false in any material respect on the date when made or deemed made, and the same shall constitute a Tenant Default if Tenant fails to cure or change the fact or event which caused such representation or warranty to have been false when made within fifteen (15) Business Days of receiving notice of such falseness from Manager, provided, however, that if such default is susceptible of cure but such cure can not reasonably be accomplished with the use of due diligence within such period of time and if, in addition, Tenant commences to cure or cause to be cured such default within fifteen (15) Business Days after receiving notice thereof from Manager and thereafter prosecutes the cure of

 

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such default with due diligence, such period of time shall be extended to such period of time as may be reasonably necessary to cure such default with due diligence.

 

H.                    The occurrence of an event of default beyond any applicable notice and cure period under any obligation, agreement, instrument or document which is secured in whole or in part by Tenant’s or Landlord’s interest in any Hotel or should the holder of such security accelerate the indebtedness secured thereby or commence a foreclosure thereof.  Upon the occurrence of any Tenant Event of Default as described under this Section 9.06.G, said Tenant Event of Default shall be deemed a “Tenant Default” under this Agreement.

 

9.07  Remedies for Tenant Defaults.

 

A.                    In the event of a Tenant Default, Manager shall have the right to institute forthwith any and all proceedings permitted by law or equity (provided they are not specifically barred under the terms of this Agreement), including, without limitation, actions for specific performance and/or damages.  Except as expressly provided in this Agreement, Manager shall have no right to terminate this Agreement by reason of a Tenant Event of Default or a Tenant Default.  In the event of a termination as described in this Section 9.07 with respect to any Hotel, Manager shall retain all of its rights under the Owner Agreement with respect to such Hotel.

 

B.                    Upon the occurrence of a Tenant Default pursuant to any of Sections 9.06.A, 9.06.B or 9.06.C hereof, or which arises with respect to a violation by Tenant of Section 10.02 hereof with respect to a Sale of a Hotel in violation of such provision or by Landlord with respect to a violation of Article 6 of the Owner Agreement or Section 8.01.A(2) with respect to the encumbering of a Hotel by Tenant by a Mortgage which is not a Qualified Mortgage, or by Landlord with respect to a violation of Article 5 of the Owner Agreement, Manager shall have, in addition to all other rights and remedies provided for herein, the right to effect a Termination of this Agreement.  Notwithstanding the foregoing sentence, so long as a Hotel is subject to a Qualified Mortgage or owned by a Person who acquired such interest pursuant to a Qualified Mortgage (or a deed-in-lieu in connection therewith), Manager shall not exercise the termination right provided for in this Section 9.07.B if the Tenant Default described herein is also a default pursuant to the terms of such Qualified Mortgage so long as the mortgagee thereunder is diligently pursuing its remedies to cure the event or circumstance which created such Tenant Default as described in this Section 9.07.B.

 

C.                    Manager and/or any Affiliate shall be entitled, in case of any breach of the covenants of Section 11.11.E by Tenant or others claiming through it, to injunctive relief and to any other right or remedy available at law.  The provisions of this Section 9.07.C shall survive Termination.

 

9.08  Good Faith Dispute By Tenant.  If Tenant shall in good faith dispute the occurrence of any Tenant Default and Tenant, before the expiration of the applicable cure period, shall give notice thereof to Manager, setting forth, in reasonable detail, the basis therefor, no Tenant Default shall be deemed to have occurred and Tenant shall have no obligation with respect thereto until final adverse determination thereof; provided, however, that in the event that such dispute is ultimately determined against Tenant, then Tenant shall pay to Manager interest of any disputed funds at the Overdue Rate from the date demand for such funds was made by Manager

 

44

 

until paid.  If Manager and Tenant shall fail, in good faith, to resolve any such dispute within ten (10) days after Tenant’s notice of dispute, either may submit the matter for resolution by Arbitration.  In the event that the determination in such Arbitration is that a Tenant Default, in fact, exists, Tenant shall have the applicable cure period from the date of such final determination to cure such Default.

 

9.09  Landlord Defaults.  Each of the following shall constitute a “Landlord Default”:  (1) the failure of Landlord to provide funds to any Reserve on or before the date such funds are required to be paid under Section 5.07.B hereof or under the Owner Agreement (after any Expert resolution pursuant to Section 11.22.B, if applicable), (2) the failure of Landlord to make insurance or condemnation proceeds available for repair, restoration or replacement required under the Owner Agreement, (3) the imposition by Landlord of a Mortgage against any Hotel which is not a Qualified Mortgage, (4) the permitting by Landlord of a lien on Landlord’s interest in any Hotel in violation of the terms hereof or of the Owner Agreement, or (5) a Landlord Sale of any Hotel occurs in violation of the Owner Agreement.

 

If a Landlord Default occurs, Tenant shall have no remedies under this Agreement with respect to such Landlord Default, but reserves its rights and remedies under the Lease. Notwithstanding anything herein to the contrary, Manager shall be entitled to exercise any and all of the remedies of Manager with respect to a Landlord Default under the Owner Agreement.

 

ARTICLE X

 

ASSIGNMENT AND SALE

 

10.01  Assignment.

 

A.                    Except as provided in Section 10.01.D, Manager shall not assign mortgage, pledge, hypothecate or otherwise transfer its interest in all or any portion of this Agreement or any rights arising under this Agreement or suffer or permit such interests or rights to be assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in part, whether voluntarily, involuntarily or by operation of law, or permit the use or operation of the Hotels by anyone other than Manager or Tenant.  For purposes of this Section 10.01.A, an assignment of this Agreement shall be deemed to include the following (for purposes of this Section 10.01.A, a “Corporate Transfer”): any direct or indirect transfer of any interest in Manager such that Manager shall cease to be an Affiliate of Marriott or any transaction pursuant to which Manager is merged or consolidated with another entity which is not Marriott or an Affiliate of Marriott or pursuant to which all or substantially all of Manager’s assets are transferred to any other entity, as if such change in control or transaction were an assignment of this Agreement but shall not include any involuntary liens or attachments contested by Manager in good faith in accordance with Section 11.23 of this Agreement.

 

B.                    Notwithstanding the foregoing, if, after giving effect to a Corporate Transfer, Manager, or all or substantially all of Manager’s assets, would be owned or controlled by a Person who would, in connection therewith, acquire all or substantially all of the Courtyard business of Marriott, provided that (1) such Person ratifies in writing the obligations of Manager pursuant to this Agreement, and (2) in Tenant’s reasonable determination, such Person and its

 

45

 

controlling parties (a) shall have sufficient expertise and financial resources to carry on the such business consistent with historical practices, (b) shall not be known in the community as being of bad moral character, or have been convicted of a felony in any state or federal court, or be in control of or controlled by Persons who have been convicted of felonies in any state or federal court, (c) shall qualify as an “eligible independent contractor” under Section 856(d)(9) of the Code and (d) shall otherwise satisfy the requirements of Section 10.01.C hereunder, Tenant shall at Manager’s request, waive the restrictions set forth in this Section 10.01 with respect to such Corporate Transfer and no consent by Tenant shall be required with respect thereto.  If Tenant fails to give notice of such waiver (or the withholding thereof) within twenty (20) Business Days after Manger’s written request therefor, such waiver shall be deemed given.

 

C.                    Notwithstanding the terms of Section 10.01.A, Manager shall have the right, without Tenant’s consent, to (1) assign its interest in all or part of this Agreement to Marriott or any Affiliate of Marriott, (2) sublease or grant concessions or licenses to shops or any other space at a Hotel so long as the terms of any such subleases or concessions do not exceed the Term of this Agreement, provided that (a) such subleases or concessions are for newsstand, gift shop, parking garage, health club, restaurant, bar or commissary purposes or similar concessions, (b) such subleases do not have a term in excess of the lesser of five (5) years or the remaining Term under this Agreement and (c) do not demise, (i) in the aggregate, in excess of three thousand (3,000) square feet of any Hotel, or (ii) for any single sublease, in excess of 1,000 square feet of any Hotel, (d) any such sublease, license or concession to an Affiliate of a Manager shall be on terms consistent with those that would be reached through arms-length negotiation, (e) for so long as Landlord or any Affiliate of Landlord shall seek to qualify as a real estate investment trust, anything contained in this Agreement to the contrary notwithstanding, Manager shall not sublet or otherwise enter into any agreement with respect to a Hotel on any basis such that the rental or other fees to be paid by any sublessee thereunder would be based, in whole or in part, on either (i) the income or profits derived by the business activities of such sublessee, or (ii) any other formula such that any portion of such sublease rental would fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Internal Revenue Code of 1986, as amended, or any similar or successor provision thereto, and (f) such subleases or concessions will not violate or affect any Legal Requirement or Insurance Requirement, and Manager shall obtain or cause the subtenant to obtain such additional insurance coverage applicable to the activities to be conducted in such subleased space as Landlord and any Mortgagee under a Qualified Mortgage may reasonably require, (3) assign its interest in this Agreement in connection with a merger or consolidation or a sale of all or substantially all of the assets of Manager or Marriott, and (4) assign its interest in this Agreement in connection with a merger or consolidation or a sale of all or substantially all of the System assets (including associated management agreements) owned by Manager, Marriott or any Affiliate of Manager or Marriott.

 

D.                    Tenant shall not assign or transfer its interest in this Agreement without the prior written consent of Manager; provided, however, that Tenant shall have the right, without such consent to (1) assign its interest in this Agreement in connection with a Sale of a Hotel which complies with the provisions of Section 10.02 of this Agreement, (2) assign its interest hereunder to Landlord or an Affiliate of Landlord under the terms of the Lease or the Owner Agreement, (3) assign its interest hereunder to Manager or an Affiliate of Manager, and (4) assign its interest hereunder to an Affiliate of Tenant in a corporate restructuring of Tenant or

 

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any of its Affiliates, provided such assignment complies with the provisions of Section 10.02 of this Agreement.

 

E.                     In the event either party consents to an assignment of this Agreement by the other, no further assignment shall be made without the express consent in writing of such party, unless such assignment may otherwise be made without such consent pursuant to the terms of this Agreement.  An assignment by Tenant of its interest in this Agreement approved or permitted pursuant to the terms hereof shall relieve Tenant from its obligations under this Agreement with respect to the Hotel to which such assignment pertains arising from and after the effective date of such assignment.  An assignment by Manager of its interest in this Agreement shall not relieve Manager from its obligations under this Agreement with respect to the Hotel to which such assignment pertains unless such assignment occurs in the context of a sale of all or substantially all of the Courtyard business of Marriott and its Affiliates and which is otherwise permitted or approved, if required, pursuant to this Agreement, in which event Manager shall be so relieved from such obligations arising from and after the effective date of such assignment.

 

10.02  Sale of the Hotel.

 

A.                    Tenant may enter into a Sale of a Hotel to any Person which (1) is an Affiliate of Tenant, and (2) who assumes Tenant’s obligations with respect to such Hotel under this Agreement, the Owner Agreement (to the extent applicable to the Hotel being sold), the corresponding Franchise Agreement and, to the extent applicable with respect to the “deconsolidation” provisions thereof, the Pooling Agreement (or ratifies each of such obligations if such Sale of a Hotel is pursuant to a transfer of a Controlling Interest in Tenant).  Tenant shall not enter into any Sale of a Hotel to any Person (or any Affiliate of any Person) who (a) does not have sufficient financial resources and liquidity to fulfill Tenant’s obligations with respect to such Hotel under this Agreement, the Owner Agreement (to the extent applicable to the Hotel), the Franchise Agreement, and, to the extent applicable as set forth in the preceding sentence, the Pooling Agreement; (b) is known in the community as being of bad moral character, or has been convicted of a felony in any state or federal court, or is in control of or controlled by Persons who have been convicted of felonies in any state or federal court; (c) is engaged in the business of operating (as distinguished from owning) at least five (5) hotels or other lodging facilities in competition with Manager, Marriott or any Affiliate of either; (d) fails to expressly assume in writing the obligations of Tenant hereunder and under the Owner Agreement (to the extent applicable to the Hotel), the Franchise Agreement; or (e) is, or has an Affiliate that is, a Specially Designated National or Blocked Person.

 

B.                    Tenant shall provide written notice of any proposed Sale of a Hotel and shall provide to Manager such information concerning the proposed transferee’s financial condition, ownership and business interests and as may be reasonably necessary or appropriate in order for Manager to determine if such transfer is consistent with the above provisions.

 

C.                    In connection with any Sale of a Hotel, Manager and the purchaser or its tenant shall enter into a new management agreement with Manager, which new management agreement will be on all of the terms and conditions of this Agreement (with revisions as reasonably required to account for the fact that such management agreement may be applicable to less than all of the Hotels subject to this Agreement) except that the Initial Term and Renewal

 

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Term(s) of any such new management agreement shall consist only of the balance of the Initial Term and Renewal Term(s) remaining under this Agreement at the time of execution of such new management agreement.  Such new management agreement shall be executed by Manager and such new tenant at the time of closing of a Sale of the Hotel, and a memorandum of such new management agreement shall be executed by the parties and recorded immediately following recording of the deed or memorandum of lease or assignment and prior to recordation of any other documents.

 

D.                    Notwithstanding anything herein to the contrary, and in addition to the foregoing, a sale (or deemed sale) of an Exit Hotel may be consummated, in accordance with the terms and conditions of the Exit Hotel Agreement.

 

E.                     Notwithstanding anything herein to the contrary, including the foregoing provisions of this Article X, other than in connection with the sale (or deemed sale) of an Exit Hotel pursuant to Section 10.02.D above, (a) no Sale of a Hotel by Tenant shall or can occur prior to the completion of the Renovations pursuant to the Renovation-Related Agreements, and (b) following the completion of the Renovations pursuant to the Renovation-Related Agreements, Tenant may consummate a Sale of a Hotel, at no cost to Manager or Marriott, provided that (i) the applicable Landlord or an Affiliate thereof or HPT shall continue to own such Hotel, (ii) the permitted purchaser must meet and comply with the requirements of this Section 10.02 and those set forth in the Lease, (iii) the applicable Landlord, Tenant and the permitted purchaser shall execute and deliver such documents as Manager may reasonably require to reflect such assignment.

 

ARTICLE XI

 

MISCELLANEOUS

 

11.01  Right to Make Agreement.  Each party warrants, with respect to itself, that neither the execution of this Agreement nor the finalization of the transactions contemplated hereby shall violate any provision of law or judgment, writ, injunction, order or decree of any court or governmental authority having jurisdiction over it; result in or constitute a breach or default under any indenture, contract, other commitment or restriction to which it is a party or by which it is bound; or require any consent, vote or approval which has not been taken, or at the time of the transaction involved shall not have been given or taken.  Each party covenants that it has and  will continue to have throughout the term of this Agreement and any extensions thereof, the full right to enter into this Agreement and perform its obligations hereunder.

 

11.02  Actions By Manager.  Manager covenants and agrees that it shall not take any action which would be binding upon Tenant or Landlord except to the extent it is permitted to do so pursuant to the terms of this Agreement.

 

11.03  Relationship.  In the performance of this Agreement, Manager shall act solely as an independent contractor.  Neither this Agreement nor any agreements, instruments, documents or transactions contemplated hereby shall in any respect be interpreted, deemed or construed as making Manager a partner, joint venturer with, or agent of, Tenant.  Tenant and Manager agree that neither party will make any contrary assertion, claim or counterclaim in any action, suit,

 

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Expert resolution pursuant to Section 11.22.B, arbitration or other legal proceedings involving Tenant and Manager.  Nothing contained herein is intended to, nor shall be construed as, creating any landlord-tenant relationship between Manager and Tenant or between Manager and Landlord.  Each of Manager and Tenant shall prepare and shall cause their Affiliates to prepare their financial statements and tax returns consistent with the foregoing characterization.

 

11.04  Applicable Law.  The Agreement shall be construed under and shall be governed by the laws of the State of Maryland, without regard to its “choice of law” rules.

 

11.05  Recordation.  The terms and provisions of this Agreement shall run with the parcels of land designated as the Sites, and with Tenant’s interest therein, and shall be binding upon all successors to such interest.  The parties shall execute simultaneously with this Agreement sufficient copies of a “Memorandum of Management Agreement” in recordable form satisfactory to both parties, which Memorandum of Management Agreement shall, if legally permitted, be recorded or registered (or such other steps shall be taken by the parties as are necessary, to the extent legally permitted, to give official notice to all third parties that this Agreement binds the Hotels) promptly following the Effective Date of this Agreement in each jurisdiction in which a Hotel is located.  Any cost of such recordation shall be paid by Manager.

 

11.06  Headings; Section References.  The headings of Sections herein are inserted for convenience only and are in no way intended to describe, interpret, define or limit the scope or content of this Agreement or any provision hereto.  All references to Articles, Sections, paragraphs, clauses, exhibits, or addenda shall refer to the corresponding Article, Section, paragraph, clause of, or exhibit or addendum attached to, this Agreement unless otherwise specified.

 

11.07  Notices.  Notices, statements and other communications to be given under the terms of the Agreement shall be in writing and delivered by hand against receipt or sent by certified or registered mail or Express Mail service, postage prepaid, return receipt requested or by nationally recognized overnight delivery service, addressed to the parties as follows:

 

	
To Tenant:
    	
HPT TRS MRP, INC.
    
	
 
    	
c/o Hospitality Properties Trust
    
	
 
    	
Two Newton Place
    
	
 
    	
255 Washington Street
    
	
 
    	
Newton, Massachusetts 02458
    
	
 
    	
Attn: President
    
	
 
    	
Phone: (617) 964-8389
    
	
 
    	
Fax: (617) 969-5730
    
	
 
    	
 
    
	
To Manager:
    	
 
    
	
 
    	
c/o 
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
Attn: 
    
	
 
    	
Phone: 
    
	
 
    	
Fax: 
    

 

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with copy to:
    	
 
    
	
 
    	
c/o 
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
Attn: 
    
	
 
    	
Phone: 
    
	
 
    	
Fax: 
    

 

or at such other address as is from time to time designated by the party receiving the notice.  Any such notice that is mailed in accordance herewith shall be deemed received when delivery is received or refused, as the case may be.  Additionally, notices may be given by facsimile transmission, provided that a hard copy of said transmission shall be delivered to the addressee by nationally recognized overnight delivery service by no later than the second (2nd) business day following such transmission.  Facsimiles shall be deemed delivered on the date of such transmission, if received during the receiving party’s normal business hours or, if not received during the receiving party’s normal business hours, then on the next succeeding date on which the receiving party is open for normal business.

 

11.08  Environmental Matters.

 

A.                    Subject to Section 11.08.D hereof and the sufficiency of funds in each applicable Reserve, during the Term or at any other time while Manager is in possession of the Hotel, (1) Manager shall not store, spill upon, dispose of or transfer to or from any Hotel any Hazardous Substance, except in compliance with all Legal Requirements, (2) Manager shall maintain the Hotels at all times free of any Hazardous Substance (except in compliance with all Legal Requirements), and (3) Manager (a) upon receipt of notice or knowledge shall promptly notify Landlord and Tenant in writing of any material change in the nature or extent of Hazardous Substances at any Hotel, (b) shall file and transmit to Landlord and Tenant a copy of any Community Right to Know report which is required to be filed by the Manager with respect to any Hotel pursuant to SARA Title III or any other Legal Requirements, (c) shall transmit to  Landlord and Tenant copies of any citations, orders, notices or other governmental communications received by Manager with respect thereto (collectively, “Environmental Notice”), which Environmental Notice requires a written response or any action to be taken and/or if such Environmental Notice gives notice of and/or presents a material risk of any material violation of any Legal Requirement and/or presents a material risk of any material cost, expense, loss or damage (an “Environmental Obligation”), (d) shall observe and comply with all Legal Requirements relating to the use, maintenance and disposal of Hazardous Substances and all orders or directives from any official, court or agency of competent jurisdiction relating to the use or maintenance or requiring the removal, treatment, containment or other disposition thereof, and (e) shall pay or otherwise dispose of any fine, charge or Imposition related thereto, unless Tenant or the Manager shall contest the same in good faith and by appropriate proceedings and the right to use and the value of any Hotel is not materially and adversely affected thereby.

 

B.                    Subject to Sections 11.08.C and 11.08.D below and the sufficiency of funds in each applicable Reserve, in the event of the discovery of Hazardous Substances other than those maintained in accordance with Legal Requirements on any portion of any Site or in any Hotel

 

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during the Term of this Agreement, Manager shall promptly (i) clean up and remove from and about such Hotel all Hazardous Substances thereon, (ii) contain and prevent any further release or threat of release of Hazardous Substances on or about such Hotel, and (iii) use good faith efforts to eliminate any further release or threat of release of Hazardous Substances on or about such Hotel, and (iv) otherwise effect a remediation of the problem in accordance with (1) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as amended; (2) the regulations promulgated thereunder, from time to time; (3) all federal, state and local laws, rules and regulations (now or hereafter in effect) dealing with the use, generation, treatment, storage, disposal or abatement of Hazardous Substances; and (4) the regulations promulgated thereunder, from time to time (collectively referred to as “Environmental Laws”).

 

C.                    The actual costs incurred or the estimated costs to be incurred with respect to any costs that have been or are to be incurred under Section 11.08.B above are herein collectively referred to as, the “Environmental Costs”.  Any costs incurred by Tenant with respect to any judgment or settlement approved by Manager (such approval shall not be unreasonably withheld, conditioned or delayed with respect to any third party claims including, without limitation, claims by Landlord arising under the Lease), including reasonable attorney fees incurred with respect to such claims, as a result of release or threat of release of Hazardous Substances on or about any of the Hotels are herein referred to as the “Other Environmental Costs”.  The Environmental Costs and the Other Environmental Costs are collectively referred to herein as the “Section 11.08 Costs”.

 

D.                    All Environmental Costs, Other Environmental Costs and Section 11.08 Costs with respect to each Hotel shall be paid from the applicable Reserve for such Hotel; provided, however, that if any of the foregoing costs arise as a result of the gross negligence or willful misconduct of Manager or any employee of Manager, such costs shall be paid by Manager at its sole cost and expense and not as a Deduction, and Manager shall indemnify Tenant for any loss, cost, claim or expense (including reasonable attorneys’ fees) incurred by Tenant in connection therewith.

 

11.09  Confidentiality.

 

A.                    The parties hereto agree that the matters set forth in this Agreement are strictly confidential and each party will make every effort to ensure that the information is not disclosed to any outside person or entities (including the press) without the prior written consent of the other party except may be required by law, including the rules and regulations the SEC or any stock exchange applicable to Tenant or its Affiliates, in any report, prospects or other filing made by Tenant or its affiliates with the SEC or any such stock exchange,  and as may be reasonably necessary to obtain licenses, permits, and other public approvals necessary for the refurbishment or operation of the Hotels, or in connection with financing or proposed financing of the Hotels, a Sale of a Hotel, or a sale of a Controlling Interest in Tenant, Manager, or Marriott.

 

B.                    No reference to Manager or to any Affiliate will be made in any prospectus, private placement memorandum, offering circular or offering documentation related thereto (collectively referred to as the “Prospectus”), issued by Tenant or an Affiliate, which is

 

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designated to interest potential investors in a Hotel, unless Manager has previously received a copy of all such references.  However, regardless of whether Manager does or does not so receive a copy of all such references, neither Manager nor any Affiliate will be deemed a sponsor of the offering described in the Prospectus, nor will it have any responsibility for the Prospectus, and the Prospectus will so state.  Unless Manager agrees in advance, the Prospectus will not include any trademark, symbols, logos or designs of Manager or any Affiliates.  Tenant shall indemnify, defend and hold Manager harmless from and against all loss, costs, liability and damage (including attorneys’ fees and expenses, and the cost of litigation) arising out of any Prospectus or the offering described therein, and this obligation of Tenant shall survive any Termination of this Agreement.

 

11.10  Projections.  Tenant acknowledges that any written or oral projections, pro formas, or other similar information that has been, prior to execution of this Agreement, or will, during the Term of this Agreement, be provided by Manager, Marriott, or any Affiliate to Tenant is for information purposes only and that Manager, Marriott, and any such Affiliate do not guarantee that the Hotels will achieve the results set forth in any such projections, pro formas, or other similar information.  Any such projections, pro formas, or other similar information are based on assumptions and estimates, and unanticipated events may occur subsequent to the date of preparation of such projections, pro formas, and other similar information.  Therefore, the actual results achieved by the Hotels are likely to vary from the estimates contained in any such projections, pro formas, or other similar information and such variations might be material.

 

11.11  Actions to be Taken Upon Termination.  Upon a Termination of this Agreement with respect to any Hotel, the following shall be applicable:

 

A.                    Manager shall, within ninety (90) days after Termination of this Agreement with respect to one or more Hotels, prepare and deliver to Tenant a final accounting statement with respect to the applicable Hotels, as more particularly described in Section 4.01 hereof, along with a statement of any sums due from Tenant to Manager pursuant hereto, dated as of the date of Termination.  Within thirty (30) days of the receipt by Tenant of such final accounting statement, the parties will make whatever cash adjustments are necessary pursuant to such final  statement.  If any dispute shall arise with respect to the final accounting statement which cannot be resolved by the parties within the thirty (30) day period provided for making any cash adjustments, it shall be settled by the Expert in accordance with Section 11.22.B, provided however, that any cash adjustments relating to items which are not in dispute shall be made within the original thirty (30) day period.  The cost of preparing such final accounting statement shall be a Deduction, unless the Termination occurs as a result of a Default by either party, in which case the defaulting party shall pay such cost.  Manager and Tenant acknowledge that there may be certain adjustments for which the information will not be available at the time of the final accounting and the parties agree to readjust such amounts and make the necessary cash adjustments when such information becomes available, provided, however, that all accounts shall be deemed final as of the second (2nd) anniversary of the effective date of Termination.

 

B.                    Manager shall release and transfer to Tenant, or cause Marriott under the Pooling Agreement to release and transfer to Tenant, any of Tenant’s funds which are held or controlled by Manager or Marriott with respect to the applicable Hotels, with the exception of funds of Tenant to be held in escrow pursuant to Section 6.01.F and Section 11.11.I and

 

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otherwise in accordance herewith.  All amounts in the applicable Reserves shall be applied to any amounts payable from such Reserves hereunder or under the Owner Agreement and the balance shall be paid to Landlord.

 

C.                    Manager shall make available to Tenant such books and records respecting the applicable Hotels (including those from prior years, subject to Manager’s reasonable records retention policies) as will be needed by Tenant to prepare the accounting statements, in accordance with the Uniform System of Accounts, for the applicable Hotels for the year in which the Termination occurs and for any subsequent year.

 

D.                    Manager shall (to the extent permitted by law) assign to Tenant or to the new manager all operating licenses and permits for the applicable Hotels which have been issued in Manager’s name (including liquor and restaurant licenses, if any).

 

E.                     If any applicable Franchise Agreements have been terminated, Manager shall have the option, to be exercised within thirty (30) days after Termination, to purchase, at their then book value, any items of the applicable Hotels’ Inventories and Fixed Asset Supplies as may be marked with any Trade Name, or any Marriott or Courtyard by Marriott trademark, other trade name, symbol, logo or design.  In the event Manager does not exercise such option, Tenant agrees that it will use any such items not so purchased exclusively in connection with the applicable Hotels until they are consumed.

 

F.                     Manager shall, at Tenant’s sole cost and expense, use good faith commercially reasonable efforts to transfer to and cooperate with Tenant or Tenant’s designee in connection with the processing of all applications for licenses, operating permits and other governmental authorizations and all contracts entered into by Manager, including contracts with governmental or quasi-governmental entities which Manager has entered into with respect to the use and operation of the applicable Hotels as then operated (and Tenant will assume responsibility for all of the same), but excluding (i) all insurance contracts and multi-property contracts not limited in scope to the applicable Hotels or other Portfolio Properties (if applicable), (ii) all contracts and leases with Affiliates of Manager, (iii) utility deposits, and (iv) telephone numbers for the  applicable Hotels (which telephone numbers Manager shall be required to convey to Tenant only if this Agreement is terminated as the result of an Event of Default by Manager).  Tenant shall indemnify and hold Manager harmless for all claims, costs and expenses (including reasonable attorneys’ fees) arising from acts or omissions by Tenant or Tenant’s designee under such contracts subsequent to the earlier of the date of Termination or the date of transfer thereof to Tenant or Tenant’s designee.

 

G.                    Tenant shall have the right to operate the improvements on the applicable Sites without modifying the architectural design of same, notwithstanding the fact that such design or certain features thereof may be proprietary to Manager and/or protected by trademarks or service marks held by Manager or an Affiliate, provided that such use shall be confined to the applicable Sites.

 

H.                    Any computer software (including upgrades and replacements) at the applicable Hotels owned by Manager, Marriott, an Affiliate, or the licensor of any of them is proprietary to Manager, Marriott, such Affiliate, or the licensor of any of them and shall in all

 

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events remain the exclusive property of Manager, Marriott, the Affiliate or the licensor of any of them, as the case may be, and nothing contained in this Agreement shall confer on Tenant the right to use any of such software.  Subject to the terms and conditions of the Franchise Agreement, Manager shall have the right to remove from the applicable Hotels without compensation to Tenant any computer software (including upgrades and replacements), including, without limitation, the System software, owned by Manager, Marriott, any Affiliate or the licensor of any of them.  Furthermore, upon Termination, Manager shall be entitled to remove from the applicable Hotels without compensation to Tenant any computer equipment utilized as part of a centralized reservation system or owned by a party other than Tenant, unless a Franchise Agreement is in place and such equipment is to be provided pursuant to the Franchise Agreement.

 

I.                      If this Agreement with respect to one or more Hotels is terminated for any reason, other than a Termination by reason of a Manager Default hereunder, and in any event excluding a termination which occurs as a result of the expiration of the Term hereof, an escrow fund for each Hotel shall be established from Gross Revenues of such Hotel to reimburse Manager for all reasonable costs and expenses incurred by Manager in terminating its employees at such Hotel, such as severance pay, unemployment compensation, employment relocation, and other employee liability costs arising out of the termination of employment of Manager’s employees at such Hotel.  If Gross Revenues of each of such Hotels are insufficient to meet the requirements of such escrow fund for such Hotel, then Manager shall have the right to withdraw the amount of such expenses from Working Capital or any other funds of Tenant (specifically excluding any interest Tenant may have in the Reserve for such Hotel) with respect to such Hotel held by or under the control of Manager or Marriott hereunder or under the Pooling Agreement, if applicable.  Tenant shall have the right to offer employment to any employee whom Manager proposes to terminate and Manager shall cooperate with Tenant in connection therewith.

 

J.                     Various other actions shall be taken, as described in this Agreement, including, but not limited to, the actions described in Section 4.05 and Section 6.01.F.

 

K.                    Manager shall peacefully vacate and surrender the applicable Hotels to Tenant.

 

L.                     Upon expiration of the entire Term of this Agreement and expiration of the Lease in accordance with their respective terms (and not as a result of a Default or Event of Default), Tenant shall have no further liability for repayment of Additional Manager Advances, Additional Marriott Advances, and any other advances made by Marriott or Manager pursuant to this Agreement or the Pooling Agreement.

 

The provisions of this Section 11.11 shall survive Termination.

 

11.12  Trademarks, Trade Names and Service Marks.  The names “Marriott,” “                  ,” “                               ” and “                           ” (each of the foregoing names, together with any combination thereof, are collectively referred to as the “Trade Names”) when used alone or in connection with another word or words, and the Marriott or                                      trademarks, service marks, other trade names, symbols, logos and designs shall in all events remain the exclusive property of the Franchisor under the Franchise Agreements and

 

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nothing contained in this Agreement shall confer on Tenant the right to use any of the Trade Names, or the Marriott or                                      trademarks, service marks, other trade names, symbols, logos or designs affiliated or used therewith otherwise than in strict accordance with the terms of this Agreement.  Except as provided in Section 11.11.E and the Franchise Agreement, upon termination of this Agreement with respect to any Hotel, any use of or right to use any of the Trade Names, or any of the Marriott or                                       trademarks, service marks, other trade names, symbols, logos or designs by Tenant shall cease forthwith and Tenant shall promptly remove from such Hotel any signs or similar items which contain any of said Trade Names, trademarks, service marks, other trade names, symbols, logos or designs in accordance with the Franchise Agreement and this Agreement.  If Tenant has not removed such signs or similar items within ten (10) Business Days, Manager shall have the right to do so.  The cost of such removal shall be a Deduction for such Hotel attributable to the Accounting Period in which such Termination occurs.  Included under the terms of this Section are all trademarks, service marks, trade names, symbols, logos or designs used in conjunction with such Hotel, including but not limited to restaurant names, lounge names, etc., whether or not the marks contain the “Marriott” name or the                                              name.  The right to use such trademarks, service marks, trade names, symbols, logos or designs belongs exclusively to Marriott, and the use thereof inures to the benefit of Marriott whether or not the same are registered and regardless of the source of the same.  The provisions of this Section 11.12 shall survive Termination.

 

11.13  Waiver.  The failure of either party to insist upon a strict performance of any of the terms or provisions of the Agreement, or to exercise any option, right or remedy contained in this Agreement, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect.  No waiver by either party of any term or provision hereof shall be deemed to have been made unless expressed in writing and signed by such party.

 

11.14  Partial Invalidity.  If any portion of this Agreement shall be declared invalid by order, decree or judgment of a court, or otherwise, this Agreement shall be construed as if such  portion had not been so inserted except when such construction would operate as an undue hardship on Manager or Tenant or constitute a substantial deviation from the general intent and purpose of said parties as reflected in this Agreement.

 

11.15  Survival.  Except as otherwise specifically provided herein, the rights and obligations of the parties herein shall not survive any Termination.

 

11.16  Negotiation of Agreement.  Each of Manager and Tenant is a business entity having substantial experience with the subject matter of this Agreement and has fully participated in the negotiation and drafting of this Agreement.  Accordingly, this Agreement shall be construed without regard to the rule that ambiguities in a document are to be construed against the draftsman.  No inferences shall be drawn from the fact that the final, duly executed Agreement differs in any respect from any previous draft hereof.

 

11.17  Intentionally Deleted.

 

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11.18  Entire Agreement.  This Agreement and the Incidental Documents, together with any other writings signed by the parties expressly stated to be supplemental hereto and together with any instruments to be executed and delivered pursuant to this Agreement, constitutes the entire agreement between the parties and supersedes all prior understandings and writings, and may be changed only by a writing signed by the parties hereto.

 

11.19  Affiliates.  Manager shall be entitled to contract with companies that are Affiliates (or companies in which Manager has an ownership interest if such interest is not sufficient to make such a company an Affiliate) to provide goods and/or services to the Hotels; provided that the prices and/or terms for such goods and/or services are competitive.  Additionally, Manager may contract for the purchase of goods and services for the Hotels with third parties that have other contractual relationships with Manager, Marriott and their Affiliates, so long as the prices and terms are competitive.  In determining, pursuant to the foregoing, whether such prices and/or terms are competitive, they will be compared to the prices and/or terms which would be available from reputable and qualified parties for goods and/or services of similar quality, and the goods and/or services which are being purchased shall be grouped in reasonable categories, rather than being compared item by item.  Any dispute as to whether prices and/or terms are competitive shall be referred to the Expert as provided in Section 11.22.B.  The prices paid may include overhead and the allowance of a reasonable return to Manager’s Affiliates (or companies in which Manager has an ownership interest if such interest is not sufficient to make such a company an Affiliate), provided that such prices are competitive as provided for herein.  Tenant acknowledges and agrees that, with respect to any purchases of goods or services pursuant to this Section 11.19, and subject to the foregoing qualification that prices and/or terms are competitive, Manager’s Affiliates may retain for their own benefit any allowances, credits, rebates, commissions and discounts received with respect to any such purchases.

 

11.20  Competing Facilities.  Subject to Section 11.21, neither this Agreement nor anything implied by the relationship between Manager and Tenant shall prohibit any of the Marriott Companies from constructing, operating, promoting, and/or authorizing others to construct, operate, or promote one or more Marriott hotels, JW Marriott hotels, Marriott Resorts, Marriott Suites hotels, RITZ-CARLTON hotels, Bvlgari hotels, EDITION hotels, Autograph  Collection hotels, Renaissance hotels, Renaissance ClubSport hotels, Conference Centers by Marriott, Nickelodeon Resorts by Marriott, Residence Inn by Marriott hotels, Courtyard by Marriott hotels, Fairfield Inns, Fairfield Suites, TownePlace Suites by Marriott, SpringHill Suites by Marriott, Marriott Vacation Club, Grand Residences, RITZ-CARLTON Club, Horizons, or any other lodging concepts, Vacation Club Products, residential units, restaurants, or other business operations of any type, at any location, including a location proximate to the Sites.  Tenant acknowledges, accepts and agrees further that the Marriott Companies retain the right, from time to time, to construct or operate, or both, or promote or acquire, or authorize or otherwise license others to construct or operate, or both, or promote or acquire any hotels, lodging concepts or products, Vacation Club Products, restaurants or other business operations of any type whatsoever, including, but not by way of limitation, those listed above, at any location including one or more sites that may be adjacent, adjoining or proximate to the Sites, which business operations may be in direct competition with the Hotels and that any such exercise may adversely affect the operation of the Hotels.

 

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11.21  Trade Area Restriction.

 

A.                    From and after the Effective Date of this Agreement, Marriott and its Affiliates shall be free to open or operate, and authorize a third party to open and operate any hotel as a                                    hotel in any location, including without limitation within the areas designated on Exhibit B with respect to those certain hotels identified thereon (the “Restricted Trade Areas”), except that if Marriott or its Affiliates shall determine to obtain, either through development or purchase, any hotel to be operated as a                                    hotel within any applicable Restricted Trade Area, Manager shall or shall cause such Affiliates to give HPT notice thereof and to negotiate, in good faith, at the election of HPT, for the acquisition thereof by HPT and the lease thereof to an Affiliate of HPT on the terms and conditions of the Lease and the management of such property by Manager in accordance with the terms of this Agreement, except with respect to the amount of the purchase price, initial working capital, tenant’s priority, and the minimum rent payable with respect thereto.  Manager or its Affiliates, however, shall not be obligated to provide notice until the development or purchase of the                                    hotel has been fully approved by the Board of Directors of Marriott or its Affiliates.  Moreover, the foregoing requirement of good faith negotiation shall not bind Tenant, HPT, Marriott or any of their Affiliates to proceed with a transaction with respect to the identified hotel unless the purchase price thereof and minimum rent payable with respect thereto and tenant’s priority is agreed upon within thirty (30) business days after the commencement of negotiations with respect thereto.

 

B.                    The right to notice and negotiation afforded HPT in the foregoing Section 11.21.A above shall not apply to any hotel (1) that is developed, acquired, or owned by parties other than Marriott and its Affiliates, (2) that is part of an acquisition by Marriott or its Affiliates of an interest in a chain or group of at least five (5) hotels (in a single transaction or series of related transactions), (3) with respect to which HPT was notified prior to the Effective Date that Marriott or its Affiliates planned to develop, acquire, operate, manage or franchise, or (4) that is a replacement of any hotel identified in (1) through (3) above.

 

11.22  Dispute Resolution; Arbitration and Expert Resolution.

 

A.                    Arbitration.  Except with respect to those disputes, claims or controversies which pursuant to the terms of this Agreement are to be settled by an Expert pursuant to Section 11.22.B, all other disputes, claims or controversies between or among the parties hereto arising out of or relating to this Agreement or the transactions contemplated hereby, including disputes, claims or controversies relating to the meaning, interpretation, effect, validity, performance or enforcement of this Agreement (each, a “Dispute” and collectively, the “Disputes”), or relating in any way to such a Dispute or Disputes, shall on demand of any party to such Dispute be resolved through binding and final Arbitration administered by the American Arbitration Association (“AAA”) under its Commercial Arbitration Rules then in effect (the “Rules”), except as modified herein.  For the avoidance of doubt, a Dispute shall include a Dispute made derivatively on behalf of one party against another.

 

1.                     Notwithstanding any provision of the Rules to the contrary, there shall be three arbitrators, who shall be appointed as provided in this Section 11.22.A.  Each party shall appoint one arbitrator within fifteen (15) days after receipt by respondent of a copy of the demand for arbitration.  Affiliate claimants on the one hand, or Affiliate respondents on the other hand, shall be treated as one party, respectively, for purposes of determining the number of

 

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arbitrators and the means by which they are selected.  Pursuant to the Rules, the party-appointed arbitrators need not be impartial or independent and shall not be subject to disqualification for partiality or lack of independence.  If the claimants or respondents, as the case may be, fail to appoint their respective party-appointed arbitrator within fifteen (15) days, the party which has selected an arbitrator shall request the AAA to provide a list of three (3) arbitrators from the National Roster (as defined in the Rules) (or from the Large, Complex Commercial Case Panel thereof, if the Procedures for Large, Complex Commercial Disputes apply to the dispute), each of whom shall be neutral, impartial and unaffiliated with any party and the party that failed to timely appoint an arbitrator shall have ten (10) days to select one of the three as the second arbitrator; if such party shall gain fail to timely select an arbitrator, the AAA shall make the appointment.  The two arbitrators so appointed shall attempt to agree upon a third arbitrator, who shall chair the arbitration.  Such chairperson as may be agreed to by the party-appointed arbitrators need not be selected from the National Roster, but must meet the standards of the Rules and shall be neutral, impartial and unaffiliated with any party. If the party-appointed arbitrators fail to agree upon a chairperson within fifteen (15) days of the appointment of the second arbitrator, the chairperson shall be selected from the National Roster (or, if the Procedures for Large, Complex Commercial Disputes apply to the dispute, from the Large, Complex Commercial Case Panel thereof) in the manner provided in the Rules and who shall be neutral, impartial and unaffiliated with any party.

 

2.                     The place of Arbitration shall be Washington, D.C., unless otherwise agreed by the parties.

 

3.                     Any document discovery otherwise permissible within the Rules shall be limited to the documents bearing directly on the parties’ claims and defenses or otherwise necessary to the determination of the matter. Unless the parties otherwise agree, no more than three depositions of individuals affiliated with the claimaint(s) or respondent(s), respectively,  may be undertaken at the discretion of the chairperson in accordance with the Rules.  The discretion and/or authority committed by the Rules to the “arbitrator” or “arbitrator(s)” shall be vested in the chairperson, who may act individually or in consultation with the party-appointed arbitrators at the chairperson’s discretion.

 

4.                     Any question regarding the enforceability of this Section 11.22.A or the demand for arbitration shall be determined in accordance with the Federal Arbitration Act, 9 U.S.C. §1 et seq. and the body of law interpreting such Act.  The Arbitration Award shall be in writing and may, but shall not be required to, briefly state the findings of fact and conclusions of law on which it is based.

 

5.                     Unless, and then only to the extent the arbitrators in the award assess costs and expenses or any part thereof against any specified party or parties (a) each party involved in a Dispute shall bear its own costs and expenses (including attorneys’ fees); and (b) each party (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand, respectively) shall bear the costs and expenses of its (or their) selected arbitrator and the parties (or, if there are more than two parties to the Dispute, all claimants, on the one hand, and all respondents, on the other hand) shall equally bear the costs and expenses of the third appointed arbitrator.

 

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6.                     The Arbitration Award shall be final and binding upon the parties thereto and shall be the sole and exclusive remedy between such parties relating to the Dispute, including any claims, counterclaims, issues or accounting presented to the arbitrators.  Judgment upon the Arbitration Award may be entered in any court having jurisdiction.  To the fullest extent permitted by law, no application or appeal to any court of competent jurisdiction may be made in connection with any question of law arising in the course of Arbitration or with respect to any award made except for actions relating to enforcement of this Section 11.22.A to arbitrate or any arbitral award issued hereunder and except for actions seeking interim or other provisional relief in aid of arbitration proceedings in any court of competent jurisdiction.

 

7.                     Any monetary award shall be made and payable in U.S. dollars free of any tax, deduction or offset.  The party against which the Arbitration Award assesses a monetary obligation shall pay that obligation on or before the 30th day following the date of the Arbitration Award or such other date as the Arbitration Award may provide.

 

B.                    Expert Resolution.  Notwithstanding the terms and provisions of Section 11.22.A above, where this Agreement expressly calls for a matter or dispute to be referred to an Expert for determination, the following provisions shall apply:

 

1.                     The use of the Expert shall be the exclusive remedy of the parties and neither party shall attempt to adjudicate any dispute in any other forum.  The decision of the Expert shall be final and binding on the parties and shall not be capable of challenge, whether by arbitration, in court or otherwise;

 

2.                     Each party shall be entitled to make written submissions to the Expert, and if a party makes any submission it shall also provide a copy to the other party and the other party shall have the right to comment on such submission.  The parties shall make available to  the Expert all books and records relating to the issue in dispute and shall render to the Expert any assistance requested of the parties.  The costs of the Expert and the proceedings shall be borne as provided in Section 11.22.A hereof;

 

3.                     The Expert shall make its decision with respect to the matter referred for determination by applying the standards applicable to first-class hotels in the relevant market segment in accordance with the System Standards (including compliance with the requirements of any quality assurance program) and determining whether the matter at issue is necessary to satisfy such standards; and

 

4.                     The terms of engagement of the Expert shall include an obligation on the part of the Expert to:  (i) notify the parties in writing of the Expert’s decision within forty-five (45) days from the date on which the Expert has been selected (or such other period as the parties may agree or as set forth herein); and (ii) establish a timetable for the making of submissions and replies.

 

11.23  Permitted Contests.  Manager shall have the right to contest the amount or validity of any Imposition, Legal Requirement, Insurance Requirement, lien, attachment, levy, encumbrance, charge or claim (collectively, “Claims”) as to any Hotel, by appropriate legal proceedings, conducted in good faith and with due diligence, provided that (a) such contest shall

 

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not cause Landlord or Tenant to be in default under any Qualified Mortgage or reasonably be expected to result in a lien attaching to such Hotel, unless such lien is fully bonded or otherwise secured to the reasonable satisfaction of Landlord, (b) no part of a Hotel nor any Gross Revenues therefrom shall be in any immediate danger of sale, forfeiture, attachment or loss, and (c) Manager shall indemnify and hold harmless Tenant and Landlord from and against any cost, claim, damage, penalty or reasonable expense, including reasonable attorneys’ fees, incurred by Tenant or Landlord in connection therewith or as a result thereof.  Tenant agrees to sign all required applications and otherwise cooperate with Manager in expediting the matter, provided that Tenant shall not thereby be subjected to any liability therefor (including, without limitation, for the payment of any costs or expenses in connection therewith), and any such costs or expenses incurred in connection therewith shall be paid as a Deduction with respect to the applicable Hotel. Landlord shall, in the Owner Agreement, agree to join in any such proceedings if required legally to prosecute such contest, provided that Landlord shall not thereby be subjected to any liability therefor (including, without limitation, for the payment of any costs or expenses in connection therewith) and Manager agrees by agreement in form and substance reasonably satisfactory to Landlord, to assume and indemnify Landlord with respect to the same.  Any amounts paid under any such indemnity of Manager to Tenant or Landlord shall be a Deduction with respect to such Hotel.  Any refund of any Claims and such charges and penalties or interest thereon which amount shall be paid to Manager and included in Gross Revenues of such Hotel.

 

11.24  Estoppel Certificates.  Each party to this Agreement shall at any time and from time to time, upon not less than thirty (30) days’ prior notice from the other party, execute, acknowledge and deliver to such other party, or to any third party specified by such other party, a statement in writing:  (a) certifying that this Agreement is unmodified and in full force and effect (or if there have been modifications, that the same, as modified, is in full force and effect and stating the modifications); (b) stating whether or not to the best knowledge of the certifying party  (i) there is a continuing default by the non-certifying party in the performance or observance of any covenant, agreement or condition contained in this Agreement, or (ii) there shall have occurred any event which, with the giving of notice or passage of time or both, would become such a default, and, if so, specifying each such default or occurrence of which the certifying party may have knowledge; (c) stating the date to which distributions of Operating Profit have been made; and (d) stating such other information as the non-certifying party may reasonably request.  Such statement shall be binding upon the certifying party and may be relied upon by the non-certifying party and/or such third party specified by the non-certifying party as aforesaid, including, without limitation its lenders and any prospective purchaser or mortgagee of any Hotel or the leasehold estate created by the Lease.  The obligations set forth in this Section 11.24 shall survive Termination (that is, each party shall, on request, within the time period described above, execute and deliver to the non-certifying party and to any such third party a statement certifying that this Agreement has been terminated).

 

11.25  Indemnification.  Subject to the provisions of Section 9.04 hereof, and notwithstanding the existence of any insurance provided for herein and without regard to the policy limits of any such insurance, Manager shall protect, indemnify and hold harmless Tenant and Landlord for, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and reasonable expenses (including, without limitation, reasonable attorneys’ fees), to the maximum extent permitted by law, imposed upon or incurred by or asserted against

 

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Tenant or Landlord by reason of: (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Hotels or adjoining sidewalks or rights of way under Manager’s control, (b) any use, misuse, non-use, condition, management, maintenance or repair by Manager or anyone claiming under Manager of the Hotels or Tenant’s Personal Property or any litigation, proceeding or claim by governmental entities or other third parties to which Tenant is made a party or participant relating to the Hotel’s or Tenant’s Personal Property or such use, misuse, non-use, condition, management, maintenance, or repair thereof including, failure to perform obligations (other than Condemnation proceedings) to which Tenant is made a party, (c) any Impositions that are the obligations of Manager to pay pursuant to the applicable provisions of this Agreement, and (d) infringement and other claims relating to the propriety marks of Marriott or Manager with respect to any Hotel; provided, however, that Manager’s obligations hereunder shall not apply to any liability, obligation, claim, damage, penalty, cause of action, cost or expense to the extent the same arises from any negligence or willful misconduct of Tenant, its employees, agents or invitees.  Manager, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against Tenant (and shall not be responsible for any duplicative attorneys’ fees incurred by Tenant) or may compromise or otherwise dispose of the same, with Tenant’s prior written consent (which consent may not be unreasonably withheld or delayed).  In the event Tenant shall unreasonably withhold or delay its consent, Manager shall not be liable pursuant to this Section 11.25 for any incremental increase in costs or expenses resulting therefrom.  The obligations of Manager under this Section 11.25 are in addition to the obligations set forth in Section 11.08.D and shall survive a Termination of this Agreement.  The indemnification provided for in this Section 11.25 shall not be applicable to Environmental Costs, Other Environmental Costs or Section 11.08 Costs, with respect to which a specific indemnity is provided in Section 11.08 hereof, to the extent addressed therein.

 

11.26  Prohibited Transactions.  At any time during which an Event of Default shall have occurred and be continuing, Manager shall not permit to exist or enter into any agreement or arrangement (other than the Franchise Agreement) whereby it engages in a transaction of any kind with an Affiliate of Manager, except on terms and conditions which are commercially reasonable and have been negotiated at arm’s length.

 

11.27  Remedies Cumulative.  To the maximum extent permitted by law, each legal, equitable or contractual right, power and remedy of Tenant or Manager, now or hereafter provided either in this Agreement or by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Tenant or Manager (as applicable) of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Tenant of any or all of such rights, powers and remedies.

 

11.28  Amendments and Modifications.  This Agreement shall not be modified or amended except in writing signed by both parties.

 

11.29  Construction; Nonrecourse.  Anything contained in this Agreement to the contrary notwithstanding, all claims against, and liabilities of, Manager or Tenant arising prior to any date of termination or expiration of this Agreement with respect to any Hotel shall survive such termination or expiration.  In no event shall Tenant be liable for any consequential damages

 

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suffered by Manager as the result of a breach of this Agreement by Tenant.  Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by all the parties thereto.  All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns.  Each term or provision of this Agreement to be performed by Manager shall be construed as an independent covenant and condition.  Time is of the essence with respect to the exercise of any rights of Manager or Tenant under this Agreement.  Except as otherwise set forth in this Agreement, any obligations arising prior to the expiration or sooner termination of this Agreement of Manager (including without limitation, any monetary, repair and indemnification obligations) and Tenant shall survive the expiration or sooner termination of this Agreement.  Nothing contained in this Agreement shall be construed to create or impose any liabilities or obligations and no such liabilities or obligations shall be imposed on any of the shareholders, beneficial owners, direct or indirect, officers, directors, trustees, employees or agents of Tenant or its Affiliates or Manager or its Affiliates for the payment or performance of the obligations or liabilities of Tenant or Manager, as applicable, hereunder.

 

11.30  Counterparts; Headings.  This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but which, when taken together, shall constitute but one instrument and shall become effective as of the date hereof when copies hereof, which, when taken together, bear the signatures of each of the parties hereto shall have been signed.  Headings in this Agreement are for purposes of reference only and shall not limit or affect the meaning of the provisions hereof.

 

11.31  No Political Contributions.  Notwithstanding any provision in this Agreement to the contrary, no money or property of the Hotels shall be paid or used or offered, nor shall  Tenant or Manager directly or indirectly use or offer, consent or agree to use or offer, any money or property of the Hotels (i) in aid of any political party, committee or organization, (ii) in aid of any corporation, joint stock or other association organized or maintained for political purposes, (iii) in aid of any candidate for political office or nomination for such office, (iv) in connection with any election, (v) for any political purpose whatever, or (vi) for the reimbursement or indemnification of any person for any money or property so used.

 

11.32  Single Agreement.  The parties hereto acknowledge and agree that this Agreement and the Other Management Agreements are intended to constitute, and shall constitute, a single transaction.

 

11.33  REIT Qualification.  Manager shall not take any action which would cause Landlord’s rental income from Tenant under the Lease for the Hotels to fail to qualify as “rents from real property” pursuant to Sections 856(d)(8)(B) and 856(d)(9) of the Code.

 

11.34  Further Compliance With Section 856(d) of the Code.  Manager represents that, as of the date hereof, it is an “eligible independent contractor” as defined under Section 856(d)(9)(A) of the Code, and further agrees that it shall maintain such status except to the extent events outside of Manager’s control may affect Manager’s independent contractor status.  Landlord, Manager and Tenant agree to cooperate in good faith to the purpose and effect that Manager retain such status.  This covenant shall apply for so long as one or more of the Hotels

 

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are owned by Landlord (or a successor or permitted assignee) and leased to Tenant (or a successor or a permitted assignee) as part of an ownership structure that is subject to REIT tax requirements.  Without limiting the foregoing, Manager shall do each of the foregoing:

 

A.                    Manager shall exercise its powers, privileges, responsibilities and obligations under this Agreement (and related documents) so as to cause each Hotel to qualify as a “qualified lodging facility” pursuant to Section 856(d)(9)(D) of the Code.  In furtherance of the foregoing, Manager shall comply with any regulations or other administrative guidance now or hereafter existing with respect to qualification as an “eligible independent contractor” under said Section 856(d)(9)(A).  Without limiting any of the foregoing, Manager shall not authorize any wagering activities to be conducted at or in connection with any Hotel and Manager shall ensure that at least one-half of the guest rooms in each such Hotel are used on a transient basis and that no Hotel will include amenities and facilities which are not customary for similarly situated properties.

 

B.                    None of Manager or any of its Affiliates (either individually or collectively) shall own, within the meaning of Section 856(d)(5) of the Code, either directly or indirectly, more than thirty-five percent (35%) of the shares of HPT (whether by vote, value or number of shares).

 

C.                    To the extent within the reasonable control of Manager and each Affiliate, neither Manager nor any Affiliate shall permit more than thirty-five percent (35%) of the total combined voting power of Manager’s or such Affiliates outstanding stock (or thirty-five percent (35%) of the total shares of all classes of its outstanding stock) to be owned, within the meaning of Section 856(d)(5) of the Code, directly or indirectly, by one or more persons owning thirty-five percent (35%) or more of the outstanding stock of HPT and Manager and its Affiliates shall  otherwise comply with any regulations or other administrative guidance now or hereafter existing under said Section 856(d)(5) of the Code with respect to such ownership limits.

 

D.                    Manager, or a person who is a “related person” within the meaning of Section 856(d)(9)(F) of the Code (a “Related Person”), shall be actively engaged in the trade or business of operating or managing “qualified lodging facilities” for one or more persons who are not Related Persons with respect to HPT or Tenant (“Unrelated Persons”).  Manager or such Related Person shall derive at least ten percent (10%) of each of its revenue and profit from operating or managing “qualified operating facilities” within the meaning of Section 856(d)(9)(D) of the Code for Unrelated Persons and shall comply with any regulations or other administrative guidance now or hereafter existing under Section 856(d)(9) of the Code with respect to the amount of hotel management business that needs to be conducted with Unrelated Persons in order for Manager to qualify as an “eligible independent contractor” under said Section 856(d)(9).

 

11.35  Adverse Regulatory Event.  In the event of an Adverse Regulatory Event arising from or in connection with this Agreement, Tenant and Manager shall work together in good faith to amend this Agreement to eliminate the impact of such Adverse Regulatory Effect.  For purposes of this Agreement, the term “Adverse Regulatory Effect” means any time that a law, statute, ordinance, code, rule or regulation imposes upon Tenant (or could imposes upon Tenant in Tenant’s reasonable opinion), any material threat to either Landlord’s or Landlord’s Affiliate’s

 

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status as a “real estate investment trust” under the Code or to the treatment of amounts paid to Landlord as “rents from real property” under Section 856(d) of the Code.  Each of Manager and Tenant shall inform the other of any Adverse Regulatory Event of which it is aware and which it believes likely to impair compliance of any of the Hotels with respect to the aforementioned sections of the Code.

 

11.36  Commercial Leases.  For so long as one or more of the Hotels are owned by Landlord and leased to Tenant as part of an ownership structure that is subject to REIT tax requirements, Manager agrees that Manager shall not enter into any sublease with respect to any Hotel (or any part thereof) without first providing Landlord with a copy thereof.  Landlord shall have twenty (20) days from the date of its receipt of such proposed sublease to give written notice to Manager indicating whether such sublease would, in Landlord’s reasonable judgment, provide for a rental to be paid by the sublessee thereunder based (or considered to be based), in whole or in part, on the income or profits derived by the business activities of the sublessee, or any other formula, such that any portion of the rent payable under the sublease would fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Code, or any similar or successor provisions thereto.  If Landlord provides timely notice of its determination that such proposed sublease would provide for such a rental then Manager will not enter into such proposed sublease.  If Landlord shall fail to give Manager such written notice within such twenty (20) day period, Landlord shall be estopped from claiming that such sublease violates the terms of this Section 11.36.

 

11.37  Waiver of Jury Trial.  In the event there occurs a Dispute, or an aspect of a Dispute, which under the Rules must be referred to a court for determination, each of Tenant and Manager hereby absolutely, irrevocably and unconditionally waive trial by jury in connection with any litigation, action, suit or proceeding relating to the resolution of such Dispute.  With  respect to any Hotel located in the State of California, the foregoing provisions of this Section 11.37 constitute the written consent of Tenant and Manager to waive their right to a jury trial, as contemplated by CCP 631(d)(2) and either party may submit the provisions of this Section 11.37 to the applicable court or judicial body to evidence such consent of the parties.

 

ARTICLE XII

 

DEFINITION OF TERMS

 

12.01  Definition of Terms.

 

The following terms when used in this Agreement and the Addenda attached hereto shall have the meanings indicated:

 

“AAA” shall have the meaning ascribed to such term in Section 11.22.A hereof.

 

“Accounting Period” shall mean the four (4) week accounting periods having the same beginning and ending dates as Manager’s four (4) week accounting periods, except that an Accounting Period may occasionally contain five (5) weeks when necessary to conform Manager’s accounting system to the calendar. Manager shall have the right, at its discretion, to modify the definition of Accounting Period to mean a calendar month or such other period of

 

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time as is consistent with the accounting periods that Manager may implement, from time to time, with respect to the System.  If Manager makes such a modification, then references in this Agreement to a particular number of Accounting Periods shall be read as the number of Accounting Periods that most closely correspond to the same period of time (e.g. twenty-six (26) four (4) week Accounting Periods would correspond to twenty-four (24) calendar month Accounting Periods).

 

“Addenda” shall mean any addendum attached hereto from time to time.

 

“Additional Manager Advances” shall mean advances by Manager under Sections 4.01.E, 4.03.B, 4.03.D, and 4.05.A hereof, together with simple interest at the rate of nine percent (9%) per annum on the outstanding balance thereof from time to time.

 

“Additional Marriott Advance” shall mean an Additional Marriott Advance under the Pooling Agreement, and if the Pooling Agreement does not apply to any Hotel, the portion of such Additional Marriott Advances determined to be allocable to such Hotel in accordance with the Pooling Agreement, together with simple interest at the rate of nine percent (9%) per annum on the outstanding balance thereof from time to time.

 

“Advance Notice” shall have the meaning ascribed to such term in Section 4.03.B.2 hereof.

 

“Affiliate” shall mean, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person.  For purposes of this definition, the term “control” (including the terms “controlling,” “controlled by” and “under common control with”) of a Person means the possession, directly or indirectly, of the power:  (i) to vote fifty percent (50%) or more of the voting stock or equity interests of such Person; or  (ii) to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting stock or equity interests, by contract or otherwise.

 

“Agreement” shall mean this Management Agreement between Tenant and Manager, including the exhibits and the addenda from time to time attached hereto.

 

“Annual Operating Projection” shall have the meaning ascribed to such term in Section 4.04 hereof.

 

“Annual Operating Statement” shall have the meaning ascribed to such term in Section 4.01.C.

 

“Arbitration” shall mean the process described in Section 11.22.A hereof.

 

“Arbitration Award” shall have the meaning ascribed to such term in Section 11.22.A hereof.

 

“Available Funds” shall have the meaning ascribed to such term in Section 3.02.B hereof.

 

“Award” shall have the meaning ascribed to such term in the Lease.

 

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“Buildings” shall have the meaning ascribed to such term in Section A of the Recitals.

 

“Business Day” shall mean any day other than Saturday, Sunday, or any other day on which banking institutions in the Commonwealth of Massachusetts or the State of Maryland are authorized by law or executive action to close.

 

“Capital Addition” shall have the meaning ascribed to such term in Section 5.08.A hereof.

 

“Central Office Services” shall have the meaning ascribed to such term in Section 1.03 hereof.

 

“Chain Services” shall have the meaning ascribed to such term in Section 1.03; provided, however, that the First Incentive Management Fee for each Hotel is intended to cover only the services currently listed (as of the Effective Date) in clause (i) of the definition of Chain Services in Section 1.03 other than the charges for the national and regional reservations system service which shall be paid as a Deduction.  Accordingly, if there are expenditures that were originally treated as Deductions but that are later determined to be more properly treated as Chain Services, or if additional central or regional services are (after the Effective Date) furnished for the benefit of hotels in the System, each Hotels’ allocable share of such expenditures shall be treated as Deductions and shall not be covered by the First Incentive Management Fee for such Hotels.  Conversely, if there are expenditures that were (as of the Effective Date) listed in clause (i) of the definition of Chain Services and included in Chain Services (as of the Effective Date) but that are later determined to be more properly furnished at the Hotels instead of on a central or regional basis, such expenditures shall not later be treated as a Deduction but shall continue to be covered by the First Incentive Management Fee for each of such Hotels. Any fees for services  not included in the First Incentive Management Fee for the Hotels shall be consistent with fees established for the System. [each agreement to conform to relevant brand services]

 

“Claims” shall have the meaning ascribed to such term in Section 11.23 hereof.

 

“Code” shall mean the Internal Revenue Code of 1986, as amended.

 

“Condemnation” shall mean, with respect to any Hotel, (a) the exercise of any governmental power with respect to such Hotel or any interest therein, whether by legal proceedings or otherwise, by a Condemnor of its power of condemnation, (b) a voluntary sale or transfer of any Hotel or any interest therein, to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending, or (c) a taking or voluntary conveyance of any Hotel or any interest therein, or right accruing thereto or use thereof, as the result or in settlement of any Condemnation or other eminent domain proceeding affecting any Hotel or any interest therein, whether or not the same shall have actually been commenced.

 

“Condemnor” shall mean any public or quasi-public authority, or private corporation or individual, having the power of Condemnation.

 

“Controlling Interest” shall mean (i) if the Person is a corporation, the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the shares

 

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of such Person (through ownership of such shares or by contract), or (ii) if the Person is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the business, management or policies of such Person.

 

“Deduction” shall have the meaning ascribed to such term in the definition of Operating Profit.  Deductions shall not include (i) payments with respect to items for Manager has given an indemnity, to the extent of such indemnity, (ii) payments with respect to items for which Manager has agreed to be liable at its own cost and expense herein, (iii) any item specifically stated not to be a Deduction herein, and (iv) any item for which Manager or any Affiliate has agreed to be liable (other than at the cost and expense of Tenant or any Affiliate) under the terms of any Incidental Document or any other agreement between Manager or any Affiliate and Tenant or any Affiliate.

 

“Default” shall have the meaning ascribed to such term in Section 9.01.

 

“Disbursement Rate” shall have the meaning ascribed to such term in the Lease.

 

“Disputes” shall have the meaning ascribed to such term in Section 11.22.A.

 

“Effective Date” shall have the meaning ascribed to such term in the Preamble.

 

“Environmental Costs” shall have the meaning ascribed to such term in Section 11.08.C hereof.

 

“Environmental Laws” shall have the meaning ascribed to such term in Section 11.08.B hereof.

 

“Environmental Notice” shall have the meaning ascribed to such term in Section 11.08.A hereof.

 

“Environmental Obligation” shall have the meaning ascribed to such term in Section 11.08.A hereof.

 

“Estimated Costs” shall have the meaning ascribed to such term in Section 11.08.D hereof.

 

“Existing CC&R’s” shall have the meaning ascribed to such term in Section 8.02.A.

 

“Exit Hotel” shall mean a Hotel designated as a property to be sold in accordance with the terms of the Exit Hotel Agreement.

 

“Exit Hotel Agreement” shall mean the Exit Hotel Agreement dated as of                                among, inter alia, Landlord, Tenant and Manager.

 

“Expert” shall mean an independent, nationally recognized hotel consulting firm or individual consultant and which shall be a firm of independent certified public accountants with respect to disputes arising under Sections 4.01.D or 4.02.B, which is qualified to resolve the issue in question, which has not, as of the date of appointment, or within two (2) years prior to

 

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such date, been employed or otherwise engaged by either party, either directly or as a consultant or other service provider, in connection with any other matter and who is appointed in each instance by agreement of the parties or, failing agreement, each party shall select one (1) such Expert, provided the requirement that an Expert not have been employed or otherwise engaged by a party within two (2) years prior to the appointment shall not apply to the Experts selected by each party, and the two (2) respective Experts so selected shall select another Expert.  If either party calls for an Expert determination pursuant to the terms hereof, the parties shall have ten (10) days from the date of such request to agree upon an Expert and, if they fail to agree, each party shall have an additional ten (10) days to make its respective selection of an Expert, and within ten (10) days of such respective selections, the two (2) respective Experts so selected shall select another Expert.  If either party fails to make its respective selection of an Expert within the second ten (10) day period provided for above, or if the two (2) respective firms and/or individuals so selected shall fail to select a third Expert, then such Expert(s) shall be appointed by AAA, shall have at least ten (10) years recent professional experience as to the subject matter in question, and otherwise shall satisfy the standards herein for an Expert.

 

“Event of Default” shall have the meaning ascribed to such term in Section 9.01.

 

“FF&E” shall mean furniture, fixtures and equipment, including without limitation:  furnishings, fixtures, decorative items, signage, audio-visual equipment, kitchen equipment and appliances, cabinetry, laundry equipment, housekeeping equipment, telecommunications systems, security systems and front desk and back-of-the house computer equipment; provided, however, that the term “FF&E” shall not include Fixed Asset Supplies or Software.

 

“First Incentive Management Fee” shall mean, with respect to each Fiscal Year or portion thereof, an amount equal to thirty percent (30%) of Operating Profit remaining after deducting amounts paid or payable in respect of Sections 3.02.B(1) and (2) for such Fiscal Year.

 

“Fiscal Year” shall mean Manager’s Fiscal Year which as of the Effective Date ends at midnight on the Friday closest to December 31 in each calendar year; the new Fiscal Year begins on the Saturday immediately following said Friday.  Any partial Fiscal Year between the Effective Date and the commencement of the first full Fiscal Year shall constitute a separate Fiscal Year.  A partial Fiscal Year between the end of the last full Fiscal Year and the Termination of this Agreement shall also constitute a separate Fiscal Year.  If Manager’s Fiscal Year is changed in the future, appropriate adjustment to this Agreement’s reporting and accounting procedures shall be made; provided, however, that no such change or adjustment shall alter the term of this Agreement or in any way reduce or in any material respect delay the distributions of Operating Profit or other payments due hereunder, and provided further, that for so long as the Pooling Agreement is in force, Manager’s Fiscal Year shall not change unless conforming changes are made to the Fiscal Year applicable to all Portfolio Properties then subject to the Pooling Agreement.

 

“Fixed Asset Supplies” shall mean items included within “Operating Equipment” under the Uniform System of Accounts that may be consumed in the operation of the Hotel or are not capitalized, including, but not limited to, linen, china, glassware, tableware, uniforms, and similar items used in the operation of the Hotel.

 

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“Franchise Agreement” means, with respect to each Hotel, the Franchise Agreement entered into with respect to such Hotel by and between Marriott and Tenant, as the same may be amended, modified or supplemented from time to time.

 

“Franchisor” shall have the meaning ascribed to such term in each Franchise Agreement.

 

“Future CC&R’s” shall have the meaning ascribed to such term in Section 8.02.A hereof.

 

“GAAP” shall mean generally accepted accounting principles, consistently applied.

 

“Government Agencies” shall mean any court, agency, authority, board (including, without limitation, environmental protection, planning and zoning), bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit of the United States or the State or any county or any political subdivision of any of the foregoing, whether now or hereafter in existence, having jurisdiction over Tenant or the Hotels operated thereon.

 

“Gross Revenues” shall mean for any period with respect to each Hotel, all revenues and receipts of every kind derived from operating such Hotel and all departments and parts thereof during such period, including, but not limited to:  income (from both cash and credit transactions) after deductions for bad debts and discounts for prompt cash payments and refunds from rental of Guest Rooms and other spaces at the Hotel, telephone charges, stores, offices, exhibit or sales space of every kind; license, lease and concession fees and rentals (not including gross receipts of licensees, lessees and concessionaires); income from vending machines; income from parking; health club membership fees; food and beverage sales; wholesale and retail sales of merchandise; service charges; and proceeds, if any, from business interruption or other loss of income insurance; provided, however, that Gross Revenues shall not include the following:  gratuities to employees of the Hotels; federal, state or municipal excise, sales or use taxes or any other taxes collected directly from patrons or guests or included as part of the sales price of any goods or services; proceeds from the sale of FF&E; interest received or accrued with respect to the funds in the Reserves or the other operating accounts of the Hotels; any refunds, rebates, discounts and credits of a similar nature, given, paid or returned in the course of obtaining Gross Revenues or components thereof; insurance proceeds (other than proceeds from business interruption or other loss of income insurance; condemnation proceeds (other than for a temporary taking); or any proceeds from any Sale of a Hotel or from the refinancing of any debt encumbering any Hotel.

 

“Gross Room Revenues” shall include with respect to each Hotel, all gross revenues attributable to or payable for rental of guest rooms at such Hotel, after deductions for bad debts and discounts for prompt cash payments and refunds from Rental of Guest Rooms, including, without limitation, all credit transactions, whether or not collected, but excluding (i) any sales or room taxes collected by Manager for transmittal to the appropriate taxing authority, and (ii) any revenues from sales or rentals of ancillary goods, such as VCR rentals, telephone income and fireplace log sales and sales from in-room service bars.  Gross Room Revenues shall also include the proceeds from any business interruption insurance applicable to loss of revenues due to the non-availability of guest rooms and for guaranteed no-show revenue which is collected.  Gross Room Revenues shall be accounted for in accordance with the Uniform System of Accounts.

 

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“Guaranty Term” shall have the meaning given such term in the Marriott Guaranty Agreement.

 

“Guest Room” shall mean with respect to each Hotel, a lodging unit in such Hotel.

 

“Hazardous Substances” shall mean any substance:

 

the presence of which requires or may hereafter require notification, investigation or remediation under any federal, state or local statute, regulation, rule, ordinance, order, action or policy; or

 

which is or becomes defined as a “hazardous waste”, “hazardous material” or “hazardous substance” or “pollutant” or “contaminant” under any present or future federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. et  seq.) and the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et  seq.) and the regulations promulgated thereunder; or

 

which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, any state of the United States, or any political subdivision thereof; or

 

the presence of which at a Hotel causes or materially threatens to cause an unlawful nuisance upon such Hotel or to adjacent properties or poses or materially threatens to pose a hazard to such Hotel or to the health or safety of persons on or about such Hotel; or

 

without limitation, which contains gasoline, diesel fuel or other petroleum hydrocarbons or volatile organic compounds; or

 

without limitation, which contains polychlorinated biphenyls (PCBs) or asbestos or urea formaldehyde foam insulation; or

 

without limitation, which contains or emits radioactive particles, waves or material; or

 

without limitation, constitutes materials which are now or may hereafter be subject to regulation pursuant to the Material Waste Tracking Act of 1988, or any applicable laws promulgated by any Government Agencies.

 

“Hotel” shall mean each Site together with the Buildings and all other improvements constructed or to be constructed on such Site pursuant to this Agreement, and all FF&E installed or located on such Site or in the Buildings, and all easements or other appurtenant rights thereto owned by Landlord together with, for purposes of this Agreement, all office equipment, telephone equipment, motor vehicles, and other equipment leased by Tenant as permitted 

 

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hereunder and Fixed Asset Supplies at such Hotel, in each of the foregoing instances as and when the same hereunder subject to the terms of this Agreement.

 

“HPT” shall mean Hospitality Properties Trust, its successors and permitted assigns.

 

“Impositions” shall have the meaning ascribed to such term in the Lease with the exclusions set forth in Section 7.01.C hereof.

 

“Incidental Documents” shall mean all documents entered into by Marriott, Manager, Tenant, Landlord, HPT, and/or the managers under the Other Management Agreements in connection with the transactions contemplated, inter alia, by this Agreement, the Pooling Agreement, and the Marriott Guaranty Agreement.

 

“Index” shall mean the Consumer Price Index for Urban Wage Earners and Clerical Workers, All-Cities, All Items 1982-1984 = 100, as published by the Bureau of Labor Statistics or, in the event publication thereof ceases, by reference to whatever index then published by the United States Department of Labor at that time is most nearly comparable as a measure of general changes in price levels for urban areas, as reasonably determined by Manager and Tenant.

 

“Initial Term” shall have the meaning ascribed to such term in Section 2.01.A hereof.

 

“Insurance Requirements” shall mean all terms of any insurance policy required by this Agreement and all requirements of the issuer of any such policy and all orders, rules and regulations and any other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) binding upon the Hotels.

 

“Insurance Retention” shall have the meaning ascribed to such term in Section 6.01.F hereof.

 

“Inventories” shall mean “Inventories” as defined in the Uniform System of Accounts, such as, but not limited to, provisions in storerooms, refrigerators, pantries and kitchens; beverages in wine cellars and bars; other merchandise intended for sale; fuel; mechanical supplies; stationery; and other expensed supplies and similar items.

 

“Landlord” shall mean as of any date the landlord under the Lease as of such date.

 

“Landlord Default” shall have the meaning ascribed to such term in Section 9.01.F hereof.

 

“Landlord Sale of a Hotel” shall have the meaning ascribed to the term “Sale of a Hotel” in the Owner Agreement.

 

“Lease” shall mean the Amended, Restated and Consolidated Master Lease Agreement between Landlord and Tenant in effect from time to time relating to the Hotels and other Portfolio Properties and any replacement leases of the Hotels and other Portfolio Properties by the fee owner thereof to Tenant which provides for Landlord to fund additional capital investment as provided for under such Lease, which Lease may be amended from time to time,

 

71

 

without Manager’s consent, provided the same does not (a) impose any material cost, expense or obligation upon Manager, or (b) reduce any amounts that would otherwise be payable to Manager hereunder, or (c) otherwise be expected to interfere with the operation and maintenance of the Hotels or Manager’s obligations hereunder.  Tenant shall provide Manager a copy of any amendment promptly following execution.

 

“Lease Term” shall have the meaning ascribed to such term under the Lease.

 

“Lease Year” shall mean each Fiscal Year with the initial Lease Year commencing on the commencement of the Lease term and ending on the Friday closest to December 31.

 

“Legal Requirements” shall mean, with respect to each Hotel, all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting such Hotel or the maintenance, construction, alteration or operation thereof, whether now or hereafter enacted or in existence, including, without limitation, (a) all permits, licenses, authorizations, certificates and regulations necessary to operate such Hotels, and (b) all covenants, agreements, restrictions and encumbrances contained in any instruments at any time in force affecting such Hotels which either (i) do not require the approval of Manager, or (ii) have been approved by Manager as required hereby, including those which may (A) require material repairs, modifications or alterations in or to such Hotels or (B) in any way materially and adversely affect the use and enjoyment thereof, but excluding any requirements arising as a result of Landlord’s status as a real estate investment trust, and (c) all valid and lawful requirements of courts and other government agencies or authorities pertaining to reporting, licensing, permitting, investigation, remediation and removal of underground improvements (including, without limitation, treatment or storage tanks, or water, gas or oil wells), or emissions, discharges, releases or threatened releases of Hazardous Substances, chemical substances, pesticides, petroleum or petroleum products, pollutants, contaminants or hazardous or toxic substances, materials or wastes whether solid, liquid or gaseous in nature, into the environment, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances, underground improvements (including, without limitation, treatment or storage tanks, or water, gas or oil wells), or pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, liquid of gaseous in nature.

 

“License” shall mean any license, permit, decree, act, order, authorization or other approval or instrument which is necessary in order to operate each Hotel in accordance with Legal Requirements and pursuant to System Standards and otherwise in accordance with this Agreement.

 

“Manager” shall have the meaning ascribed to such term in the Preamble hereto or shall mean any successor or permitted assign, as applicable.

 

“Manager Default” shall have the meaning ascribed to such term in Section 9.01.

 

“Manager Event of Default” shall have the meaning ascribed to such term in Section 9.01.

 

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“Manager’s Reserve Advance” shall have the meaning ascribed to such term in Section 5.07.F hereof.

 

“Marketing Fund” shall mean that certain fund (or any successor to such fund) maintained by Marriott, to pay for the following System costs: all costs associated with developing, preparing, producing, directing, administering, conducting, maintaining and disseminating advertising, marketing, promotional and public relations materials, programs, campaigns, sales and marketing seminars and training programs, and similar activities of every kind and nature, including the Courtyard by Marriott directory; and conducting market research; provided, however, that any costs described in this definition of Marketing Fund may, at the option of the Manager and any association which may be formed by the Courtyard by Marriott franchisees, be charged directly to each hotel in the System on the basis of actual use by or benefit to each hotel and, in such event, shall become Deductions.  Tenant shall contribute to the Marketing Fund     percent (   %) of Gross Room Revenues of each Hotel or such other amount (not to exceed     percent (   %) of Gross Room Revenues as may be provided for members of the System by Franchisor from time to time), and such contribution shall be a Deduction. [each agreement to conform to relevant brand]

 

“Marriott” shall mean Marriott International, Inc., a Delaware corporation and its permitted successors and assigns.

 

“Marriott Companies” shall mean Manager, Marriott, and any Affiliate of Manager or Marriott.

 

“Marriott Guaranty Advances” shall mean advances under the Marriott Guaranty Agreement allocated to pay a portion of Tenant’s Priority (as more particularly set forth in the Marriott Guaranty Agreement) with respect to the Hotel.

 

“Marriott Guaranty Agreement” shall mean the Guaranty Agreement dated of even date herewith by and between Marriott and Tenant, which such guaranty is personal to Tenant and to any Affiliate of HPT or Tenant that may succeed Tenant under this Management Agreement.

 

“Master Funding Agreement” shall mean that certain Master Funding Agreement dated as of January 1, 2011 among Landlord, Tenant and Marriott.

 

“Minimum Rent” shall, for each Hotel, for any period, mean the amount of Minimum Rent allocable to such Hotel which accrues under the Lease for such period.

 

“Mortgage” shall mean any mortgage indebtedness obtained by Landlord to finance a Hotel, and may take the form of a mortgage, deed of trust or security document customarily in use in the jurisdiction in which the Site for such Hotel is located.

 

“Mortgagee” shall mean the holder of any Mortgage.

 

“Officer’s Certificate” shall mean a certificate executed by a vice president of Manager which certifies that with respect to the Annual Operating Statement delivered under Section 4.01.C(2) and the annual accounting delivered under Section 4.01.D(1) hereof, that the accompanying statement or accounting has been properly prepared in accordance with GAAP and fairly presents the financial operations of the Hotels.

 

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“Operating Loss” shall mean, with respect to each Hotel, a negative Operating Profit for such Hotel.

 

“Operating Profit” shall mean, with respect to each Hotel, the excess of Gross Revenues over the following deductions, but excluding (i) payments with respect to items for Manager has given an indemnity, to the extent of such indemnity, (ii) payments with respect to items for which Manager has agreed to be liable at its own cost and expense herein, (iii) any item specifically stated not to be a Deduction herein, and (iv) any item for which Manager or any Affiliate has agreed to be liable (other than at the cost and expense of Tenant or any Affiliate) under the terms of any Incidental Document or any other agreement between Manager or any Affiliate and Tenant or any Affiliate (“Deductions”) [each agreement to conform to relevant brand] incurred by Manager in accordance with the Operating Standards and the terms of this Agreement, on behalf of Tenant, in operating the Hotel:

 

1.                     the cost of sales, including, without limitation, compensation, fringe benefits, payroll taxes and other costs related to Hotel employees (the foregoing costs shall not include salaries and other employee costs of executive personnel of Manager who do not work at the Hotel on a regular basis; except that the foregoing costs shall include the allocable portion of the salary and other employee costs of any general manager or other supervisory personnel assigned to a “cluster” of hotels which includes the Hotel);

 

2.                     departmental expenses incurred at departments within the Hotel; administrative and general expenses; the cost of marketing incurred by the Hotel; advertising and business promotion incurred by the Hotel; heat, light, and power; computer line charges; and routine repairs, maintenance and minor alterations treated as Deductions under Section 5.02;

 

3.                     the cost of Inventories and Fixed Asset Supplies consumed in the operation of the Hotel;

 

4.                     a reasonable reserve for uncollectible accounts receivable as determined by Manager;

 

5.                     all costs and fees of independent professionals or other third parties who are retained by Manager to perform services required or permitted hereunder;

 

6.                     all costs and fees of technical consultants and operational experts who are retained or employed by Manager and/or Affiliates of the Manager for specialized services (including, without limitation, quality assurance inspectors) and the cost of attendance by employees of the Hotel at training and manpower development programs sponsored by Manager;

 

7.                     the System Fee;

 

8.                     insurance costs and expenses as provided in Section 6.01 hereof;

 

9.                     taxes, if any, payable by or assessed against Manager related to this Agreement or to Manager’s operation of the Hotel (exclusive of Manager’s income taxes) and all Impositions;

 

74

 

10.                   transfers to the Hotel’s Reserve required pursuant to Section 5.03.C hereof;

 

11.                   transfers required to be made, as they may change from time to time, to the Marketing Fund in order for the Hotel to remain a member of the System (such contributions are presently     percent (   %) of Gross Room Revenues) and shall be consistent with policies established for the System;

 

12.                   all usual and customary sums charged to the Hotel for room reservations obtained for the Hotel through the reservation system used by Manager or through other reservation facilities operated by Manager or its Affiliates which are charged to members of the System (the current system-wide charge is           percent (   %) of Gross Room Revenues, plus $     per reservation made through the reservation system, but is subject to change which will be made in accordance with policies for the System);

 

13.                   the Hotel’s share of the costs and expenses of participating in programs and activities prescribed for members of the System (including those central or regional services set forth in Section 1.03(c)(ii) hereof) to the extent such costs are not paid from the Marketing Fund (and which shall be consistent with policies established for the system);

 

14.                   the costs of commercially reasonable efforts of causing the Hotel to be in compliance with each and every provision of the Lease (regardless of whether or not such compliance is a requirement of this Agreement);

 

15.                   such other costs and expenses incurred by Manager as are specifically provided for elsewhere in this Agreement or are otherwise reasonably necessary for the proper and efficient operation of the Hotel; and

 

16.                   such other costs and expenses paid to Landlord or Tenant pursuant to the Lease or this Agreement, if such costs and expenses would have been a Deduction if paid directly by Manager to a third person in respect of the Hotel.

 

The term “Deductions” shall not include (a) debt service payments pursuant to any Mortgage, and (b) payments pursuant to equipment leases or other forms of financing obtained by Tenant for the FF&E located in or connected with a Hotel, both of which shall be paid or caused to be paid by Tenant from its own funds, the Reserve to the extent permitted hereunder, or from funds provided by Landlord under the Lease.

 

The term “Deductions” shall not include (a) Rent payable under the Lease, (b) any reimbursement to Manager for advances Manager makes with respect to a Hotel as permitted hereunder, and (c) the First Incentive Management Fee and the Second Incentive Management Fee for any Hotel.

 

“Operating Standards” shall have the meaning ascribed to such term in Section 1.02.A hereof.

 

“Other Environmental Costs” shall have the meaning ascribed to such term in Section 11.08.C hereof.

 

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“Other Franchise Agreements” means the Franchise Agreements between Marriott or an Affiliate and Tenant with respect to the Portfolio Properties other than the Hotels.

 

“Other Management Agreements” means the Management Agreements between Manager or an Affiliate and Tenant with respect to the Portfolio Properties other than the Hotels.

 

“Overdue Rate” shall have the meaning ascribed to such term in the Lease.

 

“Owner Agreement” shall mean the Owner Agreement dated of even date herewith by and among Landlord, Tenant, Marriott and Manager with respect to the Hotels and other Portfolio Properties.

 

“Person” shall mean any individual or entity, and the heirs, executors, administrators, legal representatives, successors and assigns of such individual or entity where the context so admits.

 

“Pooling Agreement” means the Pooling Agreement by and among Manager, Marriott, Tenant and others dated as of the date of this Agreement under which the Gross Revenues, Working Capital, and Reserves of the Hotels are pooled with Gross Revenues, Working Capital and Reserves of the other Portfolio Properties, as the same may be supplemented, amended, or modified from time to time.

 

“Portfolio Properties” shall mean, as of any date, the Hotels subject to the Pooling Agreement together with the other properties whose Gross Revenues, Working Capital and Reserves are as of such date pooled with the Gross Revenues, Working Capital and Reserves of the Hotels under the Pooling Agreement.

 

“Prime Rate” shall mean the “prime rate” of interest announced from time to time in the “Money Rates” section of the Wall Street Journal (Eastern Edition).

 

“Proprietary Information” shall mean (a) all computer software and accompanying documentation (including all future upgrades, enhancements, additions, substitutions and modifications thereof), other than computer software which is commercially available, which are used by Tenant or Manager in connection with the property management system, the reservation system and all future electronic systems developed by Tenant or Manager for use in any Hotel, (b) all manuals, brochures and directives used by Tenant or Manager at any Hotel regarding the procedures and techniques to be used in operating any such Hotel, (c) customer lists, and (d) employee records which must remain confidential either under Legal Requirements or under reasonable corporate policies of Tenant or Manager; provided, however, that “Proprietary Information” shall not include any software, manuals, brochures or directives issued by Marriott, as Franchisor to Tenant, as franchisee, under the Franchise Agreement.

 

“Prorated Portions” shall have the meaning ascribed to such term in Section 4.01.A hereof.

 

“Prospectus” shall have the meaning ascribed to such term in Section 11.09.B hereof.

 

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“Purchase and Sale Agreement” shall mean the Purchase and Sale Agreement identified on the Addendum hereto.

 

“Qualified Mortgage” shall have the meaning ascribed to such term in the Owner Agreement.

 

“Reimbursable Advances” shall mean the amounts paid or payable in respect of Item (2) of Section 3.02.B

 

“Renewal Term(s)” shall have the meaning ascribed to such term in Section 2.01 hereof.

 

“Renovations” shall mean the renovation and improvement work to certain Portfolio Properties pursuant to the Renovation-Related Agreements.

 

“Renovation Agreement” shall mean that certain Renovation Agreement dated as of                                among Landlord, Tenant, and Marriott International Design & Construction Services, Inc.

 

“Renovation-Related Agreements” shall mean the Master Funding Agreement and the Renovation Agreement.

 

“Rent” shall mean, for any period, for each Hotel, Minimum Rent and any additional rent allocated to such Hotel and accrued under the Lease for such Hotel for such period, provided the same does not exceed, in each instance, the corresponding amount of Tenant’s Priority with respect to each such Hotel.

 

“Replacement Cost” shall have the meaning ascribed to such term in Section 6.01.C hereof.

 

“Reserve” shall have the meaning ascribed to such term in Section 5.03.B hereof.

 

“Reserve Estimate” shall have the meaning ascribed to such term in Section 5.04.A hereof.

 

“Restricted Trade Area” shall have the meaning ascribed to such term in Section 11.21 hereof.

 

“Rules” shall have the meaning ascribed to such term in Section 11.22.A hereof.

 

“Sale of a Hotel” shall mean any sale, assignment, transfer or other disposition, for value or otherwise, voluntary or involuntary, of the Tenant’s leasehold title to a Hotel and related property.  For purposes of this Agreement, a Sale of a Hotel shall also include a lease (or sublease) of all or substantially all of Tenant’s leasehold interest in a Hotel and any sale, assignment, transfer or other disposition, for value or otherwise, voluntary or involuntary, in a single transaction or a series of transactions, of the Controlling Interest in Tenant, but shall not include any conveyance which results in HPT or an HPT Affiliate holding a Controlling Interest in such Tenant, Landlord or immediate parent of such Tenant.

 

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“SEC” shall mean the United States Securities Exchange Commission.

 

“Second Incentive Management Fee” shall mean, with respect to each Fiscal Year or portion thereof, an amount payable to Manager, the amount equal to thirty-seven and one-half percent (37.5%) of Operating Profit remaining after deducting amounts paid or payable in respect of Sections 3.02.B(1) through (4) hereof.

 

“Section 11.08 Costs” shall have the meaning ascribed to such term in Section 11.08.C hereof.

 

“Security Deposit” shall mean the security deposit held by Landlord as security for Tenant’s obligations under the Lease in respect of a Hotel.

 

“Security Deposit Advances” shall mean advances made pursuant to the terms of the Security Deposit Agreement.

 

“Security Deposit Agreement” shall mean the Security Deposit Agreement of even date herewith among, inter alia, Marriott and Tenant.

 

“Security Deposit Replenishment” shall mean the amounts paid or payable in respect of Section 3.02.B(4) to the replenishment of any Security Deposit Advances with respect to a Hotel to replenish the Security Deposit for such Hotel.

 

“Site” shall have the meaning ascribed to such term in Section A of the Recitals.

 

“Specially Designated National or Blocked Person” shall mean (a) a person designated by the U.S. Department of Treasury’s Office of Foreign Assets Control, or other governmental entity, from time to time as a “specially designated national or blocked person” or similar status, (b) a person described in Section 1 of U.S. Executive Order 13224 issued on September 23, 2001, or (c) a person otherwise identified by government or legal authority as a person with whom Manager or its Affiliates are prohibited from transacting business.  Currently, a listing of such designations and the text of the Executive Order are published under the internet website address www.ustreas.gov/offices/enforcement/ofac.

 

“State” means, with respect to each Hotel, the state in which such Hotel is located.

 

“Sum Due Marriott” shall have the meaning ascribed to such term in Section 3.02.B.2 hereof.

 

“Sum Due Tenant” shall have the meaning ascribed to such term in Section 3.02.B.2 hereof.

 

“System” shall mean all hotels which are operated under the Trade Names listed on the Addenda.

 

“System Fee” shall mean, with respect to each Hotel, during any Fiscal Year, an amount equal to                   (   %) percent of Gross Room Revenues of such Hotel. [each agreement to conform to relevant brand]

 

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“System Services” shall have the meaning ascribed to such term in Section 1.03.

 

“System Standards” shall mean either (or both as the context requires) of the following two categories of standards:  (i) the operational standards (for example, services offered to guests, cleanliness, staffing, employee compensation and benefits, Chain Services, frequent traveler programs and other similar programs, etc.); and (ii) the physical standards (for example, quality of the Improvements, FF&E, and Fixed Asset Supplies, frequency of FF&E replacements, etc.); each of such standards shall be the standard which is generally prevailing or in the process of being implemented at other hotels in the System, on a fair and consistent basis with other hotels in the System including all services and facilities in connection therewith that are customary and usual at comparable hotels in the System; provided, however, that if the market area or the physical peculiarities of the Hotels warrant, in the reasonable judgment of Manager, a deviation from such standards shall be permitted.

 

“Tenant” shall have the meaning ascribed to such term in the Preamble or shall mean any successor or permitted assignee, as applicable.

 

“Tenant Advances” shall have the meaning ascribed to such term in Section 3.02.B.2 hereof.

 

“Tenant Default” shall have the meaning ascribed to such term in Section 9.06.

 

“Tenant Event of Default” shall have the meaning ascribed to such term in Section 9.06.

 

“Tenant Operating Loss Advances” shall have the meaning ascribed to such term in Section 4.01.E hereof.

 

“Tenant’s Priority” shall mean, for each Hotel, for each full Fiscal Year, an amount equal to the amount set forth on the applicable Addenda, or a pro rata portion thereof in any partial Fiscal Year; provided, however, effective on the date of each disbursement by Landlord pursuant to Sections 5.1.3(b), 10.2 or 11.2 of the Lease and Section 1(a) of the Master Funding Agreement for each applicable Hotel, or by Tenant pursuant to Section 5.07 hereof with respect to such Hotel, in each instance at the request of or with the approval of Landlord, Tenant’s Priority payable with respect to each Accounting Period for such Hotel shall be increased by an amount equal to the quotient obtained by dividing (a) nine percent (9%) times the amounts so disbursed, by (b) thirteen (13).  If any disbursement is made during any Accounting Period on a day other than the first day of an Accounting Period, the Tenant’s Priority payable for such Hotel on the first day of the immediately following Accounting Period (after having been so increased) shall be further increased (but only for such instant Accounting Period) by the amount by which Tenant’s Priority for the preceding Accounting Period, as adjusted for disbursement on a per diem basis, exceeded the amount of Tenant’s Priority actually paid to Tenant for such preceding Accounting Period.

 

“Tenant’s Priority Shortfall” shall have the meaning ascribed to such term in Section 3.02.C.

 

“Tenant Reserve Advance” means an advance by Tenant under Section 5.07.F hereof.

 

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“Tenant’s Personal Property” shall mean all motor vehicles, consumable inventories and supplies, furniture, furnishings, movable walls and partitions, equipment and machinery and all other tangible personal property of Tenant, if any, acquired by Tenant on and after the date hereof and located at a Hotel or used in Tenant’s business at a Hotel, and all modifications, replacements, alterations and additions to such personal property.

 

“Tenant’s Termination Threshold” shall mean, with respect to a Hotel, an amount equal to ninety percent (90%) of Tenant’s Priority with respect to such Hotel for any Accounting Period.

 

“Tenant Working Capital Advances” shall mean the aggregate of all funds remitted by Tenant to Manager in order to fund additional Working Capital under Section 4.05 hereof, or pursuant to the Pooling Agreement to the extent allocable to the Hotels.

 

“Term” shall have the meaning ascribed to such term in Section 2.01 hereof.

 

“Termination” shall mean, with respect to each Hotel, the expiration or sooner cessation of the Term with respect to such Hotel.

 

“Trade Names” shall have the meaning ascribed to such term in Section 11.21 hereof.

 

“Uniform System of Accounts” shall mean the Uniform System of Accounts for the Lodging Industry, Tenth Revised Edition, 2006, as published by the American Hotel & Lodging Educational Institute, as revised from time to time to the extent such revision has been or is in the process of being generally implemented within the System.

 

“Unsuitable for Its Permitted Use” shall mean, with respect to a Hotel, a state or condition of such Hotel such that (a) following any damage or destruction involving such Hotel, such Hotel cannot be operated in the good faith judgment of Manager on a commercially practicable basis and it cannot reasonably be expected to be restored to substantially the same condition as existed immediately before such damage or destruction and otherwise as required under Section 6.02.D. hereof, within nine (9) months following such damage or destruction or such shorter period of time as to which business interruption insurance is available to cover Rent and other costs related to the Hotel following such damage or destruction, or (b) as the result of a partial taking by Condemnation, such Hotel cannot be operated, in the good faith judgment of Manager on a commercially practicable basis in light of then existing circumstances.

 

“Vacation Club Products” shall mean timeshare, fractional, interval, vacation club, destination club, vacation membership, private membership club, private residence club, and points club products, programs and services and shall be broadly construed to include other forms of products, programs and services wherein purchasers acquire an ownership interest, use right or other entitlement to use certain determinable holiday villa or apartment units and associated facilities on a periodic basis and pay for such ownership interest, use right or other entitlement in advance.

 

“Work” shall have the meaning ascribed to such term in Section 6.02.D hereof.

 

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“Working Capital” shall mean, with respect to each Hotel, funds that are used in the day-to-day operation of the business of such Hotel, including, without limitation, amounts sufficient for the maintenance of change and petty cash funds, amounts deposited, in operating bank accounts, receivables, amounts deposited in payroll accounts, prepaid expenses and funds required to maintain Inventories, less accounts payable and accrued current liabilities.

 

[SIGNATURES BEGIN ON THE FOLLOWING PAGE]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal as of the day and year first written above.

 

	
 
    	
 
    	
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WITNESS:
    	
 
    	
HPT TRS MRP, INC.,
    
	
 
    	
 
    	
a Maryland corporation
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
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Print Name:
    	
 
    	
 
    	
Print Name:
    	
 
    
	
 
    	
 
    	
Title:
    	
 
    
							

 

S-1

 

	
 
    	
 
    	
MANAGER:
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
WITNESS:
    	
 
    	
NAME:
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
By:
    	
 
    
	
Print Name:
    	
 
    	
 
    	
Print Name:
    	
 
    
	
 
    	
 
    	
Title:
    	
 
    
							

 

S-2Exhibit 10.4

 

[*] = Certain confidential information contained in this document, marked with brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment made pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

 

January 19, 2011

 

Jack Serino

President & CEO

Encision Inc.

6797 Winchester Circle

Boulder, CO 80301

 

Re:          Development, license, and non-commercial supply agreement between Encision Inc., a Colorado corporation having a principal place of business at 6797 Winchester Circle, Boulder, CO 80301 (together with any of its affiliates, parents and subsidiaries, “Encision”), and Boston Scientific Corporation, a Delaware corporation having a principal place of business at One Boston Scientific Place, Natick, MA 01670 (“Boston Scientific” or “BSC”)

 

Dear Mr. Serino:

 

This letter constitutes a development, license, and non-commercial supply agreement (“Agreement”) between Encision and Boston Scientific, effective as of the date both parties have executed the Agreement (“Effective Date”).

 

1.               Definitions:  As used herein, the following terms shall have the following definitions.

 

“AEM Technology” means any technology and associated Intellectual Property Controlled by Encision relating to electrosurgical safety technology and systems for electrosurgical instruments and tools, including active electrode monitoring, which would absent the license herein infringe one or more issued claims of the AEM Patents.

 

“AEM Patents” means the patents and pending patent applications listed on Appendix A hereto including any continuations, continuations in part, divisionals, reissues, reexaminations, renewals and extensions thereof and any and all foreign counterpart applications to the foregoing.

 

“BSC Developed IP” means any Intellectual Property relating to either of the Developed Product or the Equipment that is developed solely by BSC, or jointly with Encision pursuant to this Agreement and to the extent of BSC’s joint interest.  BSC Developed IP expressly includes the Specifications.

 

“BSC IP” means any BSC Developed IP and any other Intellectual Property, including the Specifications, that is Controlled by BSC.

 

“Commercial/Commercialized” means any sale for value, regardless of amount, to a party that is not an affiliate or any sale for which BSC receives revenue.

 

“Control” or “Controlled” means, with respect to any Intellectual Property or other intangible property, the possession (whether by present or future license or ownership) by a party of the ability to grant to the

 

Contains Confidential Information

 

1

 

other party access and/or a license or sublicense as provided herein without violating the terms of any agreement with any third party.

 

“Developed Product” means [*]

 

“Encision Developed IP” means any Intellectual Property relating to either of the Developed Product or the Equipment that is developed solely by Encision, or jointly with BSC pursuant to this Agreement and to the extent of Encision’s joint interest.

 

“Encision IP” means any Encision Developed IP and any other Intellectual Property, other than AEM Technology, that is Controlled by Encision.

 

“Equipment” means capital equipment product(s) Controlled by Encision, as necessary to enable use of Developed Product, including the capital equipment product known as the AEM (Active Electrode Monitoring) product, any off-the-shelf instrument-to-Equipment cables, and any other accessories relating thereto.

 

“FHU Trial Phase” means a trial to be conducted by Boston Scientific with a limited number of non-Commercial units of Developed Product, regardless of the regulatory approval under which the trial is conducted.

 

“Field” means [*].

 

“Intellectual Property” means discoveries, concepts, ideas, developments, specifications, methods, drawings, diagrams, models, inventions, techniques, methodologies, modifications, improvements, works of authorship, know-how, trademarks, trade secrets, Proprietary Information, designs and data (whether or not protectable under patent, copyright, trade secrecy or similar laws), including patents (including patent applications, reissues, divisions, continuations and extensions thereof in any jurisdiction), utility models, and registered and unregistered designs, mask works, copyrights, and any other form of protection afforded by law to inventions, models, designs, works of authorship, databases or technical information and applications therefor.

 

“Proprietary Information” has the meaning set forth in that certain Confidential Disclosure Agreement dated May 5, 2008, entered into by Encision and BSC.

 

“Specifications” means those specifications and requirements provided by Boston Scientific to Encision for the development of the Developed Product, for example, [*] of the Developed Product.  Specifications include those specifications and requirements called out in an SOW, e.g., Attachment-1 and Attachment-2 of Schedule A, as such SOWs may be updated from time to time.

 

2.               Scope of Development Work:  Encision will perform development services for the development of the Developed Product in accordance with the Specifications, through performance of the tasks set forth on the various Statements of Work (each a “SOW”) included on iterative Schedule A’s (e.g., Attachment-1, Attachment-2) attached hereto and incorporated herein and other related tasks (“Services”).  Unless otherwise agreed by the parties in writing, the Services shall include the non-Commercial supply of the Developed Product to BSC for the FHU Trial Phase.  For the avoidance of doubt, services will be performed generally in two phases: 1) a benchwork phase and 2) relating to the FHU Trial Phase.  Each phase will be reflected in a separate SOW and shall be in accordance with the terms, including Specifications, Deliverables (defined below), build quantity, pricing and timing, as detailed in each SOW.  The Services will be conducted in a professional and workmanlike manner and in accordance with industry standards at the general direction of the Liaison (defined below).

 

Contains Confidential Information

 

2

 

Each SOW shall set forth Encision employees (by title and experience) who will render the Services to be provided pursuant to that SOW.  Encision will attempt to honor Boston Scientific’s request with respect to specific individuals, subject to scheduling and staffing considerations.  Individuals performing Services shall be precluded from assignment by Encision to any engagement in the Field for the period of the individual’s assignment hereunder.

 

Encision and Boston Scientific acknowledge and agree that Encision shall not engage any third parties to perform hereunder unless the Liaison shall have approved Encision’s use and the terms and conditions relating to the engagement of such third party in writing, such approval not to be unreasonably withheld, conditioned or delayed.

 

Encision will be reasonably available to Boston Scientific personnel (or its designees) for consultation from time to time throughout the term of this Agreement as requested by Boston Scientific by telephone, fax, e-mail and visits to Encision’s premises.  At Boston Scientific’s request, Encision will also attend occasional off-site working meetings or perform Services at locations and times mutually agreed upon by the parties.  Entering into this Agreement in no way obligates Boston Scientific to retain Encision to perform any additional services or to retain Encision for a minimum amount of Services.

 

3.               Notification:  Encision represents that it has properly notified and received all required permissions from all parties (e.g., regulators) in connection with Services to be performed, obligations assumed and compensation to be paid under this Agreement.  Encision will comply with all applicable laws, ordinances, rules and regulations in the performance of its obligations hereunder.

 

4.               Term:  The initial term of this Agreement will be for the later of a two-year period or the expiration of sixty (60) business days after the termination of the last effective SOW, commencing on the Effective Date.  The parties may mutually agree in writing to extend the term for additional one-year periods prior to the expiration of the then current term.  If there is no two-year initial or additional one-year period in effect and a gap of more than sixty (60) business days between effective SOWs, the Agreement shall reinstate with each successive SOW and extend until sixty (60) business days after termination of the last effective SOW.

 

5.               Termination:

 

a.               Either party may terminate this Agreement upon written notice to the other party if (i) a party materially breaches this Agreement and does not cure the breach within thirty (30) days of the date of written notice of such breach; (ii) a party becomes insolvent or seeks protection under any bankruptcy, receivership, trust deed, creditors arrangement, or comparable proceeding or if any such proceeding is instituted against a party and not dismissed within ninety (90) days; or (iii) a party assigns or attempts to assign this Agreement or any of the rights and obligations under this Agreement in violation of the assignment provision of this Agreement.

 

b.              Termination by Boston Scientific.  Notwithstanding Section 4, Boston Scientific may terminate this Agreement or any or all SOWs immediately in accordance with the second paragraph of Section 17, or upon thirty (30) days written notice for any reason.  In the event of termination by Boston Scientific, Encision shall immediately cease work on all Boston Scientific projects except such work that Boston Scientific provides prior written authorization directing Encision to complete certain tasks, if any, that Boston Scientific would like completed after Encision’s receipt of the termination notice.  Boston Scientific will, as its sole and exclusive obligation and subject to the preceding sentence, pay Encision at the rate specified in Section 6 below for Services provided through the date of termination, prorated on a daily basis in the event of termination prior to the last

 

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day of a calendar quarter.  Notwithstanding the foregoing, Boston Scientific may withhold final payment until it is in receipt of all Boston Scientific Property (defined below).

 

c.               Termination by Encision.  Encision may terminate this Agreement or any or all SOWs upon twelve (12) months prior written notice for any reason.

 

d.              Upon the expiration or termination of this Agreement, Encision shall promptly: (i) return to Boston Scientific all Proprietary Information of Boston Scientific and Boston Scientific Property (including Deliverables and embodiments of Developed Product, whether complete or in progress) in the possession or control of Encision; and (ii) except in the event of termination by Encision pursuant to section 5(a), take all steps reasonably necessary to disclose to Boston Scientific in accordance with the licenses in Section 11 only that particular Encision IP and AEM Technology that is reasonably necessary for Boston Scientific to complete the design and finalize the reduction to practice of the Developed Product, as applicable, and for Boston Scientific to make or have made the Developed Product, including for use with the Equipment.  Except in the event of termination by Encision pursuant to section 5(a), Boston Scientific shall [*].

 

e.               All obligations that are by their nature continuing, including the licenses provided in Section 11 and the provisions of Sections 5, 6, 8-10, 12, 14, 15 and 17-19, will survive expiration or termination of this Agreement.

 

6.               Payment for Services:  Subject to the terms of this Agreement, Boston Scientific will pay Encision for Services actually rendered in accordance with the terms of this Agreement and with the hourly rate amount set forth on the applicable SOW attached hereto and incorporated herein.  Such support, as Services, subject to the hourly rate amount may encompass: general machining and engineering; electrical and/or mechanical testing; and consulting on electrical safety and compliance with electrical standards.  The hourly rate amount, in the absence of an amount set forth on an applicable SOW, for the following positions will apply;

 

	
(i)
    	
Executive   Engineering — [*]
    
	
(ii)
    	
Senior   Engineering - [*]
    
	
(iii)
    	
Engineer,   Project Management - [*]
    
	
(iv)
    	
Prototyping   - [*]
    
	
(v)
    	
Technician/Drafting   - [*]
    

 

In addition, Boston Scientific will reimburse Encision for reasonable and documented travel and associated expenses actually incurred at Boston Scientific’s request in the performance of Services; provided that travel expenses in excess of [*] must be approved by the Liaison in writing in advance, and all air travel will be coach-class, unless approved in writing in advance.  Travel time not spent on actual Services shall not be compensated under this Agreement.

 

Encision will document and record all time spent in the performance of Services to the reasonable satisfaction of the Liaison.  Without limiting the foregoing, on a monthly basis, Encision will submit an invoice, with detailed reporting and supporting documentation and receipts, to Boston Scientific of Services performed during the prior month, including a breakdown of hourly fees showing time for each employee, title of the employee, description of tasks, as well as a breakdown of any pass-through costs for which Encision will seek reimbursement hereunder.  If the fees to be paid on a given SOW are related to achievement of one or more milestone(s), the monthly statement shall describe the milestone(s) achieved and related fees and costs.  Boston Scientific will not be obligated to pay Encision for any Services not listed on the invoice for such month.  Payments for Services will be made by Boston Scientific within 45 days after receipt of Encision’s invoice, unless Boston Scientific in good

 

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faith disputes any amount invoiced. Encision represents and warrants that all amounts invoiced to Boston Scientific based on time-of-staff will be accurate as to the actual amount of time expended with respect to the Service invoiced, and all pass-through costs will be invoiced at Encision’s cost plus [*], net of all discounts provided by any third party suppliers.

 

The parties acknowledge and agree that each SOW that includes payments to be made on a time and materials basis shall include a maximum payment amount that shall be a good faith estimate of the time and materials Encision believes necessary and appropriate to accomplish the Services included on such SOW. In no event will BSC pay more than [*] over the maximum payment noted in that SOW unless Encision has advised Boston Scientific promptly upon its discovery that it is likely to have a cost overrun for such SOW and the Liaison has approved such cost overrun in writing, in advance.

 

Encision represents, warrants and covenants that the consideration set forth in this Section 6 and in accordance with the applicable SOW:  (a) is reasonable and customary for the Services to be rendered by Encision under this Agreement; and (b) except as set forth in Section 5(d) or Section 12, represents the total compensation due to Encision for Services, and no other compensation is or will be due to Encision or any other person or entity relating to the Services.  Encision is solely responsible for, and will report and pay on a timely basis, any and all taxes which may or will be due with respect to Services and the payments described in this Section 6 and 12, including all federal, state and local taxes (including income, Social Security, unemployment, sales, use and excise taxes), or similar taxes, assessments or charges assessed or levied.

 

7.               Liaison:  The performance of Services under this Agreement will be coordinated through a Boston Scientific employee who has been designated as the contract liaison for this Agreement (the “Liaison”).  All reports, documents and communications relating to the provision of Services will be transmitted to Boston Scientific through the Liaison or persons designated by the Liaison.  The initial Liaison for Boston Scientific is [*], who can be reached by calling [*].  The initial liaison for Encision is Warren Taylor, who can be reached by calling (303) 339-6908.   Each party may designate a new liaison by providing written notice to other party.  Separate liaisons for a given SOW may be established in such SOW.

 

8.               Proprietary Information:  Encision and BSC acknowledge that to facilitate the business arrangements created by this Agreement, it may be necessary for the parties to exchange certain Proprietary Information on a confidential basis.  In consideration of the mutual benefits to be derived from the exchange of such Proprietary Information, Encision and BSC have previously entered into that certain Confidential Disclosure Agreement dated May 5, 2008 and the terms of that mutual confidentiality agreement are incorporated into this Agreement by reference.  A copy of the May 5, 2008 mutual confidentiality agreement is attached hereto as Appendix B.

 

The existence and terms of this Agreement shall be held confidential by the parties, except to the extent that the parties shall agree in writing to the wording of a press release to be issued after the Effective Date that discloses the existence but not the terms of this Agreement.

 

9.               Boston Scientific  Property:  All (i) tangible property provided to Encision by BSC in connection with this Agreement whether in hardcopy, electronic or other form, including Proprietary Information, and further including any tooling or capital equipment provided to Encision by BSC or purchased by Encision with funds of BSC in connection with this Agreement; (ii) deliverables provided for herein or in any applicable SOW hereunder, including the bench work phase units and FHU Trial Phase units of Developed Product (collectively, “Deliverables”); and (iii) embodiments of the Developed Product as developed by Encision in connection with the Services, including related tangible

 

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materials, components, prototypes, samples, testing, reports, data, specifications, designs, drawing, analyses, results and the like (collectively, “Boston Scientific Property”), will be and remain the sole and exclusive property of Boston Scientific.  For the avoidance of doubt, Boston Scientific Property shall exclude Encision Developed IP, other Encision IP, and AEM Technology.  Encision will keep and maintain in Encision’s custody and control any Boston Scientific Property that Encision receives or develops during the term of this Agreement and, upon termination or expiration of this Agreement or otherwise upon request by Boston Scientific, promptly return or surrender to Boston Scientific all Boston Scientific Property without retaining any copies thereof in any form.

 

10.         Ownership of IP:  BSC Developed IP and other BSC IP shall at all times be and remain the sole and exclusive property of BSC.  Encision Developed IP, other Encision IP, and AEM Technology shall at all times be and remain the sole and exclusive property of Encision.  The parties shall consult with each other in good faith to determine filing, control of prosecution, maintenance and enforcement decisions with respect to jointly (between BSC and Encision) Developed IP, with the cost of filing, prosecution and maintenance with respect to such joint Developed IP to be shared equally by the parties.

 

11.         Encision Licenses to BSC:  Encision hereby grants to BSC the following licenses:

 

a.               a non-exclusive, worldwide, royalty-free, irrevocable and perpetual right and license in the Field under the Encision IP, to the extent incorporated into or necessary to the manufacture, use or sale of the Developed Product or Equipment, and solely for the purpose to make, have made, use, market, import, sell or have sold the Developed Product and/or to use, market, import, sell, or have sold the Equipment.

 

b.              a non-exclusive, worldwide, royalty-bearing (as set forth in Section 12(b) in the event BSC decides to provide Commercial units), irrevocable and perpetual right and license in the Field under the AEM Technology, to the extent incorporated into or necessary to the manufacture, use or sale of the Developed Product or Equipment, and solely for the purpose to make, have made, use, market, import, sell, or have sold the Developed Product and/or to use, market, import, sell, or have sold the Equipment.

 

12.         Consideration:  As consideration for the licenses granted in Section 11 and the supply of the bench work phase and FHU Trial Phase units of Developed Product, BSC shall pay to Encision:

 

a.               A one-time license fee of [*], payable in two equal payments of [*], with the first [*] payment due within five (5) business days of the Effective Date and the second [*] payment due on the six (6) month anniversary of the Effective Date; and

 

b.              If, in BSC’s sole discretion, BSC decides to provide Commercial units of Developed Product and/or the Equipment:

i.                  A one-time Commercialization license fee of [*], and

ii.               To the extent Encision is unable or unwilling to supply the Developed Product and/or Equipment under Section 14(a), or BSC elects to manufacture for itself the Developed Product and/or Equipment or to have the Developed Product and/or Equipment manufactured by a third party for supply to BSC under Section 14(b), a royalty for the term of the AEM Patents to the extent the manufacture, use or sale of the Commercial units of Developed Product and/or Equipment constitutes AEM Technology, at a rate to be negotiated in good faith between the parties that will not exceed [*] of net sales of the Developed Product and/or Equipment.

 

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The royalty rate and the due date of the license fee set forth in Section 12(b) shall be negotiated in good faith by the parties, in connection with a separate agreement (as set forth in Section 14 below) that shall be entered into by the parties at such time as BSC, in its sole discretion, decides to provide Commercial units of the Developed Product and/or the Equipment.

 

13.         BSC License to Encision:  BSC hereby grants to Encision for the term of this Agreement a non-exclusive, worldwide, royalty-free right and license under the BSC IP relating to the Specifications or Developed Product solely to develop the Developed Product for BSC, and solely to manufacture and supply the Developed Product and Equipment to BSC.

 

14.         Commercial Supply:  At any time following completion of the Services as detailed in the SOWs of Schedule A regarding the bench work phase and FHU Trial Phase, BSC shall have the option, in its sole discretion, to provide Commercial units of the Developed Product and/or the Equipment:

 

a.               Commercial Supply by Encision.  If BSC decides to commercialize the Developed Product and/or the Equipment with Encision, the parties shall negotiate in good faith for the purpose of entering into a supply agreement, pursuant to which Encision will manufacture and supply Developed Product and/or Equipment for BSC.  Such supply agreement will include terms that are customary in the industry, the consideration set forth in Section 12(b)(i), and additional terms, such as Specifications, Deliverables, quantity, pricing, payment, branding, delivery, taxes, acceptance, inspection, quality, regulatory, patent marking, and timing.

 

In the event Encision is or becomes unable or unwilling to manufacture and supply the Developed Product and/or the Equipment for BSC, the parties shall negotiate in good faith and agree in writing on the royalty percentage figure for the consideration in paragraph 12(b)(ii), and Encision shall promptly, upon written request from BSC, take all steps reasonably necessary to disclose to BSC in accordance with the licenses in Section 11 only that particular Encision IP and AEM Technology that is reasonably necessary for BSC to make or have made the Developed Product and/or the Equipment.  In addition, Encision shall provide BSC all assistance reasonably necessary to train personnel to manufacture the Developed Product and/or the Equipment, and technical consultation, advice, and know-how relating to the manufacture of the Developed Product and/or the Equipment, such as documentation, drawings, specifications, protocols, process information, and the like.  For the avoidance of doubt, the Developed Product and/or the Equipment made, used or sold based on BSC having under this paragraph to manufacture for itself the Developed Product and/or the Equipment, or to have the Developed Product and/or the Equipment manufactured by a third party for supply to BSC, is subject to the royalty rate provisions described above in paragraph 12(b)(ii).  In the event that Encision and BSC had entered into a supply agreement and Encision, after becoming unable or unwilling to manufacture and supply the Developed Product and/or the Equipment for BSC, is able or willing (and both parties subsequently agree to allow Encision) to resume such manufacture and supply, the supply agreement shall be deemed reinstated and thereafter in full force and effect without any further action required by either Boston Scientific or Encision.  Upon any such reinstatement, Boston Scientific shall return and/or destroy all copies of Encision IP and AEM Technology relating to the Equipment transferred under the terms of this paragraph that are not Boston Scientific Property.

 

b.              Commercial Supply by BSC or Third Party.  Notwithstanding the foregoing, if BSC prefers, in its sole discretion, to manufacture for itself the Developed Product and/or the Equipment, or to have the Developed Product and/or the Equipment manufactured by a third party for supply to BSC, the parties shall negotiate in good faith and agree in writing on the timing and royalty percentage figure for the consideration in Section 12(b), and Encision shall promptly, upon 

 

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written request from BSC, take all steps reasonably necessary to disclose to BSC in accordance with the licenses in Section 11 only that particular Encision IP and AEM Technology that is reasonably necessary for BSC to make or have made the Developed Product, including for use with the Equipment.  In addition, Encision shall provide BSC all assistance reasonably necessary to train personnel to manufacture the Developed Product, and technical consultation, advice, and know-how relating to the manufacture of the Developed Product, including for use with the Equipment, such as documentation, drawings, specifications, protocols, process information, and the like.  For the avoidance of doubt, the Developed Product and/or the Equipment made, used or sold based on BSC’s decision under this paragraph to manufacture for itself the Developed Product and/or the Equipment, or to have the Developed Product and/or the Equipment manufactured by a third party for supply to BSC, is subject to the royalty rate provisions described above in paragraph 12(b)(ii).

 

15.         Information Not for Sale; No Implied Licenses:  The parties acknowledge that the disclosure of Proprietary Information (including that which is a process, machine, manufacture, or composition of matter) is not intended to be an offer for sale or public use.  Each party shall not:  (a) appropriate or use Proprietary Information of the other party for itself, for any third party or for any other purpose other than in accordance with this Agreement; or (b) by virtue of either this Agreement or the other party’s performance of Services obtain any title to, interest in or license in any Proprietary Information of the other party, except as expressly provided herein.

 

16.         [This section intentionally left blank]

 

17.         Additional Warranties:  Encision represents, warrants and covenants that as of the Effective Date and throughout the term of this Agreement:  (a) Encision has and shall have the unrestricted right to disclose any information Encision submits to Boston Scientific hereunder free of all claims of third parties; (b) Encision’s execution and delivery of, and performance under, this Agreement does not, and will not, conflict with or violate any other agreement to which Encision is a party or any obligation or restriction of any kind, including any confidentiality obligation to third parties; (c) Encision will comply with all applicable laws, ordinances, rules and regulations in the performance of its obligations under this Agreement; (d) all Services to be performed hereunder shall be performed by individual employees of Encision (and not subcontractors unless explicitly approved by the Liaison as described in Section 2 above, such approval not to be unreasonably withheld, conditioned or delayed), each of whom shall possess the requisite knowledge, training and experience to perform such Services in accordance herewith; (e) Encision shall advise each of its employees of Encision’s obligations under Sections 7 through 16 of this Agreement and that each of such employees and any approved subcontractors shall be similarly bound as if he or she were the contracting party hereto, and in any event Encision shall be liable for the breach of this Agreement by any of its employees and subcontractors; and (f) Encision has and shall have in place legal, valid and binding agreements, including appropriate written confidentiality, invention assignment and copyright assignment agreements, with each of its employees and any approved subcontractors with respect to the matters covered by Sections 7 through 16 of this Agreement, in each case sufficient to carry out the purposes of such provisions, including enabling Boston Scientific to enjoy the benefits and rights conferred thereunder without regard to whether it had contracted with Encision or directly with Encision’s employee(s) or approved subcontractor(s) hereunder.

 

In addition, as of the Effective Date, Encision represents and warrants that it is not excluded, debarred, suspended or otherwise ineligible to participate in U.S. government health care programs (e.g., Medicare, Medicaid, CHAMPUS) or U.S. government procurement and non-procurement programs.  If, during the term of this Agreement, Encision becomes excluded, debarred, suspended or otherwise ineligible to participate in any of the programs described in the immediately preceding

 

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sentence, Encision will disclose immediately by written notice to Boston Scientific details of such exclusion, debarment, suspension or other ineligibility, and this Agreement will terminate immediately.

 

Encision further represents, warrants and covenants that throughout the term of this Agreement, all work in connection with Services performed and Deliverables delivered under the Agreement and any SOW shall: (i) be consistent with best industry practices; (ii) be free of any defects in design, material or workmanship; (iii) meet all specifications provided by Boston Scientific; (iv) comply with all applicable laws; (v) be free and clear of all liens and encumbrances or other defects in title; and (vi) be original and free of infringement of any third party intellectual property rights, except to the extent that such infringement is a direct result of adherence to Specifications provided by Boston Scientific.

 

Encision represents and warrants that during the 180 days following the delivery of a Deliverable, that the Deliverable will conform to the Specifications for such Deliverable set forth in the applicable SOW and that any nonconformities will be remedied promptly, or if that is not possible, the Deliverable will be replaced promptly with a conforming Deliverable.  If Encision fails to remedy a breach of this subparagraph within a reasonable period of time, then Boston Scientific may terminate the applicable SOW pursuant to and in accordance with Section 5, and in addition to all of its other remedies at law and in equity, may seek a refund from Encision of all amounts then paid under the applicable SOW so terminated.

 

Encision represents and warrants that any Encision IP or AEM technology, Deliverables, Encision tools, software or hardware, or the like, that is licensed to Encision by a third party does not require a license or payment of any consideration by BSC to any third party for purposes of delivering the Deliverables under an SOW, and no such third party license(s) to the extent any may be or become applicable to the manufacture, use or sale of Developed Product will be implemented without the prior approval of BSC.

 

18.         Indemnification:

 

a.               Encision agrees to indemnify, defend and hold Boston Scientific and its affiliates and their personnel, officers and directors harmless from and against any loss, costs, expenses (including reasonable attorneys fees) or damages incurred by them to the extent arising from (a) a material breach of this Agreement by Encision, including the representations and warranties in Section 17; or (b) Encision’s negligence.

 

b.              Boston Scientific agrees to indemnify, defend and hold Encision and its affiliates and their personnel, officers and directors harmless from and against any loss, costs, expenses (including reasonable attorneys fees) or damages incurred by them to the extent arising from (a) a material breach of this Agreement by Boston Scientific; or (b) Boston Scientific’s negligence.

 

c.               The indemnifying party’s obligations under this Section 18 are conditioned upon the indemnified party: (i) providing notice to the indemnifying party of any claims promptly, but not later than 30 days after notice of such claim; (ii) permitting the indemnifying party to assume full responsibility for the defense of such claim; (iii) assisting the indemnifying party in defense of such claim; and (iv) not compromising or settling any such claim without the indemnifying party’s prior consent, which shall not be unreasonably withheld, conditioned or delayed.  The indemnifying party shall not compromise or settle any such claim without the indemnified party’s prior consent, which shall not be unreasonably withheld, conditioned or

 

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delayed, unless such compromise or settlement includes a full release of the indemnified party without any admission of liability or future obligation, monetary or otherwise.

 

19.         Miscellaneous:  Each party may not use the other party’s name in any advertising or other form of publicity without the prior written permission of the other party.  Encision acknowledges and agrees that it is free from the supervisory direction and control of Boston Scientific, is an independent contractor with no authority to sign the name or bind in any manner Boston Scientific, and is not entitled to any benefits for which Boston Scientific employees are eligible.  This Agreement, together with each SOW attached hereto, is the entire understanding between the parties with regard to the subject matter hereof, and any prior or contemporaneous agreements between the parties relating to the subject matter hereof, either oral or written, are hereby superseded.  No amendment to this Agreement, including changes to any SOW attached hereto, will be effective unless made in writing and signed by Encision and an authorized representative of Boston Scientific.  This Agreement is governed by the laws of The Commonwealth of Massachusetts, without regard to its internal conflicts of law rules.  The parties hereby consent and submit to the personal jurisdiction and venue of the state and federal courts located in Boston, MA for all disputes, suits, actions and claims related to or arising out of this Agreement.  If any provision of this Agreement shall prove to be unenforceable, invalid or prohibited by any applicable law, such provision will be interpreted to be enforceable to the maximum extent permitted under applicable law; provided that any modification thereto does not frustrate an essential purpose of the Agreement, in which case the parties shall seek in good faith alternative provisions to achieve the same purpose.  This Agreement is not assignable by Encision, nor may Encision delegate or sub-contract any duties hereunder.  This Agreement will inure to the benefit of Boston Scientific and its successors and assigns.  The headings in this Agreement are intended solely for convenience of reference and will be given no effect in the construction or interpretation of this Agreement.  Whenever the words “include”, “includes” or “including” are used in this Agreement, they will be deemed to be followed by the words “without limitation.”  Failure or delay of either party to enforce any right under this Agreement will not be deemed a waiver thereof.  In the event of a conflict between the terms of this Agreement and a SOW, the terms of this Agreement shall control, unless a SOW includes reference to the particular section or subsection(s) of this Agreement that will be controlled by the SOW, with the parties acknowledging and agreeing that such change in controlling terms shall be applicable only for that SOW and not for any other SOW.

 

20.         Notice:  Any notice required to be given by either party will be deemed sufficiently given if mailed by certified mail, return receipt requested, or by a nationally recognized courier that guarantees overnight delivery and addressed as follows:  (a) if to Encision, to Encision’s address set forth on the first page of this Agreement; and (b) if to Boston Scientific, to Boston Scientific Corporation, 100 Boston Scientific Way, Marlborough, MA 01752, Attn: [*]; and, with respect to legal matters, with a copy to:  Boston Scientific Corporation, One Boston Scientific Place, Natick, Massachusetts 01760-1537, Attn: General Counsel.

 

21.         Review of Agreement:  Encision acknowledges that it has had an adequate amount of time to read this Agreement and review its provisions with its counsel and advisors if it so chooses.

 

[Remainder of page left intentionally blank]

 

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If the foregoing accurately represents our agreement, please sign where indicated below and return one copy of this Agreement to me.  Please note that Boston Scientific cannot have you commence Services until after it has received the fully-signed Agreement from you, as required by Boston Scientific policies.

 

Sincerely,

 

BOSTON SCIENTIFIC CORPORATION

 

Date: January 21, 2011

 

	
By: 
    	
/s/ Kurt Geitz
    	
 
    
	
Name: 
    	
Kurt Geitz
    	
 
    
	
Title: 
    	
Vice President of R&D
    	
 
    
	
 
    	
 
    
	
 
    	
 
    
	
AGREED AND ACKNOWLEDGED:
    	
 
    
	
 
    	
 
    
	
ENCISION INC.
    	
 
    
	
 
    	
 
    
	
Date: January 20, 2011
    	
 
    
	
 
    	
 
    	
 
    
	
By:   
    	
/s/   Jack Serino
    	
 
    
	
Name:   
    	
Jack   Serino
    	
 
    
	
Title:   
    	
President &   CEO
    	
 
    

 

Contains Confidential Information

 

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SCHEDULE A

ATTACHMENT — 1 (BENCH WORK PHASE UNITS STATEMENT OF WORK)

 

Contains Confidential Information

 

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SCHEDULE A

ATTACHMENT — 2 (FHU TRIAL PHASE UNITS STATEMENT OF WORK)

 

[Editorial Note: Intentionally omitted because the parties have combined what was anticipated to be in Attachment 2 with Attachment 1.]

 

Contains Confidential Information

 

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APPENDIX A

(AEM Patents)

 

[*]

 

Contains Confidential Information

 

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APPENDIX B

(May 5, 2008 Confidential Disclosure Agreement)

 

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CONFIDENTIAL DISCLOSURE AGREEMENT

 

This Agreement is entered into May 5, 2008, between Boston Scientific Corporation (including its subsidiaries, collectively identified herein as “BSC”), a corporation with a place of business at One Boston Scientific Place, Natick, MA  01760-1537 and Encision Inc., 6797 Winchester Circle, Boulder, Colorado  80301, attn: John R. Serino, President and Chief Executive Officer.

 

WHEREAS, each party has developed or owns technical, operational, and business Information which it deems proprietary; and

 

WHEREAS, the Parties agree that to facilitate possible future business arrangements concerning Boston Scientific’s [*] (the “Project”), it may be necessary to exchange certain Information on a confidential basis;

 

NOW, THEREFORE, in consideration of the mutual benefits to be derived from the exchange of Information, the Parties agree as follows:

 

“Information” is defined as communication or data, in any form, including but not limited to oral, written, graphic or electromagnetic forms and physical observation.

 

“Proprietary Information” is defined as that Information which a Party desires to protect against unrestricted disclosure or competitive use, and which is designated as such in the manner provided by this Agreement.

 

All Information which is disclosed by one Party to the other Party and which is to be protected hereunder as Proprietary Information of the disclosing Party:

 

(a)                                  If in writing or other tangible form, shall be conspicuously labeled as proprietary at the time of delivery; and

(b)                                 If oral, or is disclosed by observation or viewing, shall be identified as proprietary prior to disclosure; and after disclosure shall be reduced to writing or other tangible form, within thirty (30) business days thereafter, and delivered to the receiving party.

 

Proprietary Information of a disclosing Party shall be treated and safeguarded hereunder by the receiving Party for a period of five (5) years from the date of disclosure and with the same degree of care with which it treats its own Proprietary Information of like character.  The receiving Party warrants that it applies reasonable safeguards against the unauthorized disclosure and use of Proprietary Information.

 

The receiving Party agrees that (i) any Proprietary Information disclosed hereunder shall be used by the receiving Party solely for the purpose of evaluating the mutual interests of the Parties in the Project and (ii) it will not distribute, disclose, or disseminate Proprietary Information to anyone except its employees and consultants who are involved in the consideration or evaluation of the Project and who are bound to maintain its confidentiality, unless and until such time as:

 

 

(a)                                  Such Information is or becomes generally available to the public, through no fault of the receiving Party, its employees or consultants, and without breach of this Agreement; or

 

(b)                                 Such Information is already in the possession of the receiving Party, its employees or consultants without restriction and prior to any disclosure hereunder, as evidenced by appropriate documentation; or

 

(c)                                  Such Information is or has been lawfully disclosed to the receiving Party, its employees or consultants by a third party without an obligation of confidentiality upon the receiving Party; or

 

(d)                                 Such Information can be shown to have been developed independently by employees or consultants of the receiving Party without use of the Information disclosed hereunder, as evidenced by appropriate documentation.

 

If disclosure is required by order of a competent court, each Party will give the other Party prior written notice sufficient for it to seek appropriate protective orders.

 

Except as expressly provided herein, no license or right is granted by either Party to the other Party under any patent, patent application, trademark, copyright or trade secret.

 

All Information furnished by one Party to the other Party shall remain the property of the disclosing Party.  At the written request and instruction of the disclosing Party, all Information in the possession of the receiving Party which is Proprietary Information shall be returned to the disclosing Party, except for one archival copy.

 

This Agreement is governed by the laws of The Commonwealth of Massachusetts, USA, without regard for the conflicts of law provisions.

 

This Agreement sets forth the entire agreement and understanding between the Parties as to the subject matter hereof and merges all prior discussions between them.

 

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by duly authorized representatives as of the date first written above.

 

Very truly yours,

	
Boston   Scientific Corporation
    	
ACKNOWLEDGED,   ACCEPTED
    
	
 
    	
AND   AGREED TO:
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
By:   
    	
/s/   William J. Shaw
    	
 
    	
By:   
    	
/s/   John R. Serino
    
	
Name:   
    	
William   J. Shaw
    	
Name:   
    	
John   R. Serino
    
	
Title:   
    	
Patent   Counsel
    	
Title:   
    	
President   and CEO
    
	
 
    	
Date:   
    	
May 7,   2008
    

 

 

Confidential

January 27, 2011

 

Attachment-1

 

1.               This Attachment-1 is issued as a Statement of Work (SOW) to that certain Development License and Supply Agreement between Boston Scientific Corporation and Encision, Inc., dated 21-January-2011 (the “Agreement”), and is incorporated by reference as part of such Agreement as of the date this Attachment-1 is signed by the parties.

 

2.               Services:  Service Provider shall perform the services requested by Boston Scientific in connection with its [*], for which services are detailed in:  (a) the statements and table(s) set forth below, as described therein and in accordance with the payments and within the deadlines set forth therein; (b) further statements of work signed by the parties, if any, as described therein and in accordance with the payments and within the deadlines set forth therein; and/or (c) purchase order(s) issued by Boston Scientific in accordance therewith. In the event of any conflict between the Agreement and any purchase order or statement of work, the Agreement shall control.

 

The technical liaison for Services is [*], who may be reached at [*] (unless Boston Scientific hereafter notifies Encision of a new liaison for services).

 

As part of the Services, Service Provider shall generate and maintain all relevant and appropriate design history files and/or design master record documents. Services shall be performed with respect to BSC’s specifications. Document numbers will be assigned by Boston Scientific.

 

Service Provider will provide design and manufacturing development services in accordance with the table(s) included in this Attachment-1.

 

3.               Payment:  Boston Scientific shall pay Service provider at the following hourly rates:

 

Executive Engineering: [*]

Senior Engineering: [*]

Engineering, Project Management: [*]

Prototyping: [*]

Technician/Drafting: [*]

 

 for the Services that are set forth in this SOW, or in purchase order(s) corresponding to this SOW, as compensation for such Services satisfactorily performed by Service Provider, based upon invoices to be provided by Service Provider and in accordance with the Agreement.

 

	
BOSTON   SCIENTIFIC CORPORATION
    	
ENCISION,   INC.
    
	
 
    	
 
    	
 
    	
 
    	
 
    
	
By:   
    	
/s/   Barry Weitzner
    	
 
    	
By:   
    	
/s/   Warren Taylor
    
	
Name:   
    	
Barry   Wetizner
    	
Name:   
    	
Warren   Taylor
    
	
Title:   
    	
Director,   R&D
    	
Title:   
    	
V.P.   Engineering
    

 

[Remainder of page left intentionally blank]

 

 Boston Scientific

Encision Statement of Work #1 – Benchwork Phase

Rev AA

 

 

Table I:  Services to be provided pursuant to Attachment-1 SOW.*

 

	
 
    	
 
    	
Item
    	
 
    	
Description
    	
 
    	
Milestone
   Timeline
    	
 
    	
Milestone Deliverable(s)
    	
 
    	
Maximum
   Estimated Fees
   and Costs
    
	
[*]
    	
 
    	
[*]
    	
 
    	
[*]
    	
 
    	
[*]
    	
 
    	
[*]
    	
 
    	
[*]
    

 

* The work proposed in Table I is based upon the following assumptions:

1.               ENCISION, Inc. will not maintain a design history file for this SOW.

2.               All documentation supplied by Boston Scientific is current and up-to-date and in a condition that it may be readily released into ENCISION, Inc. document control system and used for manufacture.

3.               An initial purchase order will be issued to ENCISION, Inc. within thirty (30) days of the date of this SOW.

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