Oyo suspends fixed income guarantees to hotel partners as covid-19 wipes out revenues4 min read . Updated: 29 Jun 2020, 06:49 PM IST
- The Softbank-backed startup has terminated minimum business guarantee agreements, a fixed amount payable to property owners on a monthly basis
- Oyo has instead offered new contracts on a revenue share basis, nullifying fixed pay-outs that were earlier agreed
BENGALURU : Hospitality unicorn Oyo has suspended contracts with more than 250 hotel owners across India, as it looks to renegotiate fixed payment agreements after revenues took a hit due to a nationwide lockdown, said multiple people aware of the development.
The Softbank-backed startup has terminated minimum business guarantee (MGB) agreements, a fixed amount payable to property owners on a monthly basis, according to emails sent by Oyo to hoteliers.
In its communication, Oyo has instead offered new contracts on a revenue share basis, nullifying fixed pay-outs that were earlier agreed on, said at least half a dozen Oyo Townhouse property owners.
The 250 hotel owners co-own Townhouse hotels with Oyo. Launched in 2017, the Townhouse was positioned as a “mid-market boutique hotel brand" that operated on a franchise format in 19 cities.
“These premium properties (Townhouse) fetch almost 15% of monthly revenue for Oyo and these hotels boast high occupancy rates. Most of these owners have now stopped receiving MGB pay-outs from Oyo since March leaving owners stranded," said a person aware of the development, requesting anonymity.
As per the earlier agreement between Oyo and Townhouse property owners, the startup had agreed to source regular bookings and consequently take care of online promotions for the property. But with Oyo choosing to suspend fixed payments to owners, the latter is forced to choose between taking legal recourse or agreeing to the new terms.
Townhouse co-owners told Mint said that they had chosen to partner with Oyo since the fixed MBG payments seemed more attractive than other alternatives in the market.
Typically, Townhouse property owners enter into a 5-7 year contract where Oyo takes over the property and renovates it. Contracts have a 2-3 year lock-in period.
An Oyo spokesperson confirmed that it has invoked the force majeure clause and served notices for a certain number of asset partners “where revised terms could not be aligned."
“In today’s time, where covid-19 has made an impact across all industries and led companies across the board to revisit the terms of their contract, we have also invoked relevant sections of our existing contracts to move to a more sustainable model of operations. Therefore, the minimum guarantee-based contracts represent an increasingly reduced share of our overall business/ contracts," Oyo said.
Akash Nangia, a Goa-based entrepreneur entered into an MBG agreement under the Townhouse portfolio in 2018 when his resort was still under construction. Oyo took over the remaining construction and billed Nangia for equipment and renovation charges.
“I invested ₹8 crore in the resort and Oyo had promised us an MBG of ₹14 lakh per month, and the first payment was due in December 2018. But we never received the promised MBG amount and we only get around ₹4 to 5 lakh monthly for the next few months," added Nangia.
After Nangia was informed by Oyo’s Goa team that it has invoked the force majeure clause—an unforeseeable event forcing a business to fulfil terms of the contract, he has approached a civil court in Goa after both parties failed to reach a settlement via the arbitration route.
However, many Townhouse owners who cannot afford to move court have chosen to either sell off the property or approach other online hotel aggregators and managed rental platforms.
An entrepreneur from Kolkata who had partnered with Oyo’s Townhouse portfolio decided to sell both his properties off in order to recover his investment with Oyo. Two other owners based in Gurugram have approached a Delhi civil court after they failed to come to a settlement via the arbitration route.
“I had paid ₹30 lakh for renovation apart from another ₹75 lakhs to purchase a fresh property after Oyo came to us promising fixed pay-outs...Basically, if we took care of the renovation payments then our (monthly) fixed payments were higher, and if we leave it up to Oyo to pay the renovation charges, then the pay-out was much lesser per month, hence I invested my own money in renovation," said a third Gurgaon-based hotel owner requesting anonymity.
The hotel owner mentioned above has now decided to work with a rival online hotel aggregator and cancelled his contract with Oyo.
Soumya Rathore, a Delhi-based lawyer representing a group of stranded Townhouse property owners said that a business slowdown arising from a pandemic does not meet conditions of a force majeure event.
“On the pretext of a pandemic, Oyo is trying to unilaterally re-negotiate a contract by simply sending out emails to a majority of its owners. This is an illegal practice under contractual law since the consent that one (business) party gives to another party (for the contract) is protected under undue influence, pressure, and fraudulent practices...In Oyo’s instance, it cannot pressurize the other party to agree to a new contract just ton Oyo’s terms," Rathore said.