CANCELLATIONS – WHO GETS PAID?
In a post Covid world there appears to be far more inconsistency in the industry when it comes to short-term operators charging cancellation fees when bookings are cancelled. After a couple of years of significant pressure to not charge any cancellation fees and entice guests to book risk-free, the tide has been turning. Whether you charge a cancellation fee or not, what hasn’t changed over the years is the number of Letting Appointments we see that don’t adequately address who gets to keep the cancellation fee paid by the guests.
A cancellation fee paid by guests is typically intended to offset a lost opportunity for the lot owner and/or recover the costs incurred by the manager in managing the booking prior to cancellation. Generally, the later a booking is cancelled the greater the lost opportunity and therefore impact on the lot owner.
If your Letting Appointment does not include any mention of a cancellation fee, the presumption is that any cancellation fee you charge guests belongs to the lot owner. As agent for the lot owner all income you collect relating solely to a booking belongs to the owner unless the owner has authorised you to deduct an agreed fee or expense. It is not recommended that you assume you can charge your normal commission rate on any cancellation fee you collect. If your Letting Appointment is worded in a way that only allows you to charge a commission when a stay has occurred, a cancelled booking never results in a stay and therefore you can’t charge your commission.
Ideally your Letting Appointment should expressly state that you can charge a cancellation fee to guests and that when a cancelation fee is paid you are entitled to a share of it. There should be no doubt or confusion about why you are keeping this money or how much you are allowed to keep.
What should you charge?
A common amount charged by managers is a base fee, e.g. $50, with any extra collected above that passed onto the owners. In this case the manager is reimbursed a fixed amount for their admin time with the rest going to the owner.
Another common model is sharing equally any cancellation fee collected. This accommodates the fact that both the owner and the manager are losing an income opportunity when a cancellation occurs.
A combination of both the above is also good fit for many managers, ensuring that your admin costs are covered first, while also gaining a chance to share in lost profit potential with the owner.
Whatever amount you charge owners it is important that it is stated clearly in your Letting Appointment. Remember that the cancellation fee you have charged guests is not your money and is only money you hold on trust for the lot owners. The only cancellation fee you get to keep is the amount you charge owners for the service you have provided for the owner, as set out in your Letting Appointment. Also, managers should be aware that unauthorised cancellation fees are not considered a sustainable income stream and won’t contribute to the value of their business.
If you have any doubts about whether you can or can’t keep a cancellation fee, I strongly recommend you speak to your lawyer and have your Letting Appointments reviewed. For managers thinking of charging a cancellation fee in the future, being up-front and speaking to owners about how much you should charge is a far less an awkward conversation than trying to argue why you don’t have to refund any unauthorised fees you have charged in the past.
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Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.