• Trouble in paradise for Marriott

The post-summer return to work has come with a bigger bump that usual for legal teams in the hotel  sector, as last week saw problems between Marriott International and the owners of the Waikiki Edition escalate.

The situation moved quickly, from Marriott being locked out, then briefly taking back control until the owners filed for bankruptcy. The operator asserted that it would pursue "tens of millions of dollars" of damages to its Edition brand and company as it settled in for a long legal battle.

Marriott's problems began in June with reports that the owner of the Waikiki Edition  – one of only two hotels open under the brand – was suing both Marriott and Ian Schrager, claiming that the two had done nothing to grow the Edition name or brand and were ultimately responsible for making their hotel "a virtual ghost town".

The owner said that Marriott was responsible for construction overruns, as well as cost overruns after the hotel began operating, with the hotel having lost $6m between opening last October and June and recording occupancy of around 30% in the fourth quarter of 2010, below the 62% occupancy Marriott predicted in August 2009.

Marriott said that it was "surprised and perplexed" and would defend the action "vigorously". Since the most recent events, the group has said that occupancy rates reached 67% in July and were over 80% in August.

The company has now been somewhat stymied in its defence by the decision by the owners M Waikiki to declare bankruptcy, a move which came days after they changed the locks on the hotel and rebranded it as The Modern Honolulu, being run by Aqua Hotels & Resorts. During bankruptcy proceedings Marriott is prevented from filing any countersuits, which it said it would respect.

However, it will not be rolling over. Marriott said that the filing, which prevented it from retaking management of the hotel was a "self-defeating step that ultimately involves the destruction of significant value of the owner's asset". The company said its court filings would counter the "continuous stream of false and misleading statements" regarding its management of the hotel by the owner and its legal counsel.

Marriott said it would pursue damages "over time" giving an indication that, despite the rapid pace of events last week, bringing the hotel back into the fold, if at all, would be a slow process. For the operator, the hotel, although the first to open under the brand, could not, given its location, be described as a flagship and would not be a strategic loss to the portfolio.

However, with so few sites open under the flag, any negative attention will give developers pause. In June COO Arne Sorenson flagged-up three new contracts for the brand, and said that the group was in "advanced discussions" on another three, adding that the brand "could easily have 100 hotels".

In an interview with Amy McPherson, Marriott International's president & managing director, Europe, in the next print edition of Hotel Analyst, she emphasised the strategic importance of the brand for Marriott's growth. The company put its own cash into the purchase of the Berners Hotel in London for conversion to the flag, a hotel which will make for a much more suitable flagship than the Waikiki property.

Marriott is not opposed to continuing to bankroll the brand, as it tries to make up ground lost to rivals in the boutique space, such as Starwood Hotels & Resorts. The company is even facing a challenge from the once-beleagured Morgans Hotel Group, which expanding as a management company and is to open a Mondrian in Sea Containers House in London.

The company has suffered in the small pool that is the boutique world, having lost two of its executives at Edition to Morgans, but had since replaced Dan Flannery with Tim Miller, who includes Morgans on his CV. However, it does at least have one up on Hilton Worldwide, which is currently unable to launch a brand in the sector, as a condition of its settlement with Starwood post-Denizen.

Owners who feel that they are not seeing enough of a return on their management fees will be watching the case with interest. Marriott had a 30-year contract with M Waikiki to run the hotel, which the owner said had been a failure "due to gross mismanagement and Marriott's inability to successfully launch the Edition brand".

Launching a new brand during a downturn was always going to be tough, despite Marriott's size and Hawaii has also suffered after losing custom from Japan following the tsunami. What the exact state of trading was at the hotel and who is to take the credit or blame will be decided by the court. Marriott is deploying its own cash to jump-start Edition and it must now hope that the publicity around the Waikiki Edition and how it is perceived to handle it does not spill over to give developers reason to doubt the potential of its other brands for their properties.

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