Event Contracts for Nonprofits – When to Push Back

Many nonprofit organizations host signature events that are fundamentally important for the organization’s mission. For some nonprofits, an annual fundraising gala provides the bulk of the nonprofits’ funding for the coming year.  For others, conferences may provide essential opportunities to further their mission. Regardless, many nonprofits by necessity enter into major event contracts with venues.  A working familiarity with an event contract’s core elements, and when to push for fairer terms, can help ensure your event is a success and your organization is protected.

In this post, we will take a bird’s-eye view of the contracting process, from identifying those items that are of essential importance to your organization to getting into the details of deposits, cut-off dates, and cancellation clauses.  Please be advised that this summary is not comprehensive, so I encourage you to seek an experienced advisor (event planner, attorney, development officer).

An Agreement

The first step is to identify the goals of the event.  Is it in celebration of a particular achievement? How many attendees are expected? Is it going to be formal or casual? Will there be activities, an auction, or dancing? What other criteria will help narrow down the search for a venue?

Once you identify a venue, you need to concur on the major points of the agreement.  If there are any “must-have” features or services for the event, be sure to identify and confirm that the venue provides them before delving into contracting. There’s no point in getting into negotiations only to realize the venue can’t accommodate the video presentation that is essential for the awards ceremony, for example.

Once there is agreement on the big-ticket items, in all likelihood the venue will send you a draft contract, based on a standard template. To lock down the booking, the venue may limit the time period to review and sign the contract. The venue wants a quick response because: a) it is holding that event space, hotel rooms, or other facilities for your organization, and b) the venue wants you to feel pressured to make a decision quickly and limit the negotiable items.

You should always make sure at the outset of negotiations that the venue provides sufficient time to talk to all of your organization’s decision-makers and have the contract reviewed by your advisor(s). For a major event, you might need to run the agreement by a board committee, the organization’s leadership, legal counsel, and an event planner.

Analyzing the Agreement

The Big Picture

Once you receive the contract, check that the big ticket items are correct – how much is the venue charging? If hotel rooms are being reserved, did the venue list the correct nights, number, and level of rooms? Were the correct conference rooms/event spaces listed? If you negotiated a discount for food/lighting/valet parking, did the venue include those items?

Never rely on a venue’s assurances that certain items or services will be provided if those items aren’t listed in the contract. Even if the venue has every intention to provide those items or services when you sign the agreement, there may be turnover in the venue’s event staff before your big event. All of a sudden you will get a whopping bill for the extra spot lighting that you thought was included, or your guests are asked to pony up for valet parking when you thought it would be comped. Make sure those items are explicit in the agreement to avoid misunderstandings down the road.

The Details

The big picture items are business decisions that anyone in a decision-making position should be able to review. Approval of those items will be driven by your sense of whether the terms are fair. The smaller details are equally important but require a closer review by someone with experience with events contracts.

Here are a few items that we frequently discuss with venues on behalf of our clients. While you may not always get the changes you ask for, it never hurts to ask, and often you can get the venue to budge from their initial offer.

Deposit

A venue almost always requires a deposit upon signing the contract. The further into the future your event, the less you should pay up-front. We recommend negotiating an initial deposit that does not exceed 10% of the overall cost. The venue may require additional deposits as the event date approaches.

A venue will typically frame the deposit as “non-refundable.” We try to remove such a reference, for a few reasons. If the venue has to cancel the agreement, it should refund your deposit. Similarly, if there is a “force majeure” event, something that makes the performance of the contract impossible, the venue should refund your deposit.

Headcount & Cut-Off Date

When the venue’s charges correlate to the number of people attending, the venue will want an estimate of the number of attendees before you sign the contract. They will typically take your minimum headcount, figure out how much revenue that number of attendees will generate, and require that your organization guarantee that revenue (a “Guaranteed Minimum”). A Guaranteed Minimum provides down-side protection for the venue – if your attendance numbers disappoint, the venue can still plan on receiving a minimum amount of revenue.

A Guaranteed Minimum is great for a venue, but bad for your organization. If attendance changes for the worse, you are stuck with a bill for services you didn’t need. Therefore, we recommend including a subsequent “Cut-Off Date” in the contract, which is a date by which your organization may provide an updated headcount to the venue. Any updates to your headcount prior to the Cut-Off Date won’t incur liability for your organization – the venue will link the Guaranteed Minimum to the revised count.

Depending on the type of event, the Cut-Off Date may still be several months before the event date. You should try to negotiate for as much time as possible before you provide a firm number that the venue will link to your Minimum Guarantee.

The venue will likely tell you that any increase will be subject to availability (especially with hotel contracts), and that’s fine. You should be more interested in the ability to lower your attendance numbers, rather than increase them. The venue will (almost) always try to accommodate an increase in attendance, because it will be able to charge you more. But venues try to lock you into a minimum attendance number, and charge you a penalty if you fall below that number (see Attrition, below).

Bottom line –ask for as much time as possible before you have to provide a firm headcount to the venue.

Attrition

The venue has to plan ahead – it may need to contract with vendors, enter into additional service contracts, and make other expenditures to prepare for a large event. That’s why the venue wants a Guaranteed Minimum (see above). But what happens if your event falls one person, or one percent, short of the Guaranteed Minimum?

Some contracts include “Attrition” clauses, which allow your event to fall within a certain number or percent below your Guaranteed Minimum before you suffer a penalty. We routinely see Attrition clauses ranging from no Attrition allowance to a twenty percent (20%) Attrition allowance. Depending on how confident you are in your attendance numbers compared to the Guaranteed Minimum, you may want to include the Attrition number as a top item for negotiation.

Bottom line – negotiate the largest Attrition allowance you can.

Cancellation

A “force majeure” clause allows either party to cancel if something outside of your control makes it impossible to hold the event. Typical examples are natural disasters, power outages, etc. If the contract doesn’t have a force majeure clause, request one. Make sure that the venue doesn’t include anything within the force majeure clause that is actually within its control – for instance, some force majeure clauses include a “labor stoppage” provision. Make sure that the clause is written so that if the venue causes its own labor stoppage (i.e. it violates a CBA with its unionized workers), the venue is not off the hook from your contract.

Cancellation by your organization

Venues like to protect themselves against possible losses. Once your contract is signed, the venue will hold space for your event, potentially turning away other business that would have come its way. In exchange for missing out on those opportunities, the venue will ask that your organization pay a fee if you have to cancel your event (a “Cancellation Fee”).

Typically, the Cancellation Fee is computed on a sliding scale, increasing as you get closer to the event. Some contracts compute the Cancellation Fee as a percentage of the Guaranteed Minimum.

Regardless of the amount of the Cancellation Fee or how it is computed, we always require venues to include language in the contract that would diminish or eliminate an organization’s penalty if the venue is able to find a replacement event. It’s only fair that if you cancel three months out from the event, and the venue finds another organization to host an event on the same night for as much or more money, you shouldn’t have to pay anything. The venue didn’t suffer any loss, so it has nothing to recoup.

The contract should include language that if you cancel, the venue will use commercially reasonable efforts to market the event space to other potential customers. If the venue finds a replacement client, it should then credit any replacement revenues against what you owe in Cancellation Fees.

Finally, make sure that any amounts due as a result of a cancellation are due after the event date. Otherwise you may find yourself in the sticky situation of paying a cancellation fee, then asking the venue for a refund if they found a replacement event.

Bottom line – minimize your exposure by limiting cancellation penalties and requiring the venue to seek a replacement event.

Cancellation by the venue

While you want to limit your exposure if your organization has to cancel the event, you also need to protect against a cancellation by the venue. Some venues like to retain the ability to cancel for any reason – others just want the ability to cancel for cause. Regardless, a cancellation by the venue can throw a huge wrench into your plans.

If the contract lets the venue cancel without cause, make sure the venue will cover your organization’s costs to secure a replacement venue in addition to returning any amounts you’ve already paid. To be fair, the contract can state that you will use your best efforts to limit any replacement venue to one that is similar in quality.

Bottom line – if the venue cancels you should recover your deposits at a bare minimum, but push to get the venue to cover any additional costs your organization or attendees will have to bear if you have to book a replacement space.

Tax-Exempt Status, Taxes & Cancellation by Your Organization

Make sure the venue acknowledges your group’s tax-exempt status in the contract. Depending on the state or locality, you may not have to pay certain taxes. If you are booking an event outside the state where your group normally operates, there may be certain registrations required before you’re able to take advantage of any exemptions. The venue may be able to walk you through what is needed – otherwise you should check with counsel to see what your options are.

We also suggest including a clause in the contract that allows clients to cancel if the venue’s actions would in any way jeopardize the organization’s exempt status or reputation. The chance that the venue’s actions would ever trigger such a cancellation is small, but it’s real. In addition, if your group is a values-based nonprofit, you may want to include language that allows an out if the venue violates such values. You may also wish to include a rider requiring the venue to acknowledge your group’s values and a covenant that the venue will not take any action which would materially violate, or cause your group to violate, your values.

Indemnities and Insurance

Venues always require that your group indemnify them against any damages caused by your group or attendees. This is standard is not worth fighting over, however, make sure the venue doesn’t overreach. The indemnity should not include anything which may have actually been caused by the venue’s actions or negligence. Exclude any indemnity for damages that are ordinary wear and tear.

You should also ask for a similar indemnity. You (and your attendees) should be protected from damages caused by the venue’s actions. Ideally, your indemnity should mirror that of the venue.

The venue will ask for your group to provide proof of insurance, or at least represent that you have adequate insurance. Be sure to ask the venue to provide similar proof or a similar representation. We recommend that you secure event insurance, which will help provide some relief if something happens to the event that isn’t foreseeable or fully covered by the representations and warranties in the contract.

Compliance

As with any contract, it’s a good idea to request a generic representation from the venue that it is in compliance with applicable laws and regulations. You may want to give some examples (building code, fire code, food handling, and ADA compliance are some common representations to ask for).

Nonprofits must always be aware of state fundraising regulations and whether the activities surrounding the event will trigger any registration obligations with a state charity official. Whether the nonprofit or its event planner are required to register will depend on the nature of the event, what the activities are in support of the event, and what the event planner does on behalf of the nonprofit.

For the event planner, it’s important to ascertain if they will be selling tickets or soliciting sponsors for the event and/or contributions on behalf of the nonprofit, or if they are just taking care of the logistics and providing tools to the nonprofit’s staff.  Are they providing fundraising advice? Depending on where the event is held and where solicitations are being made, the event planner and the nonprofit may need to register with one or more states. Their contract may need to have certain required provisions and may need to be filed with the state. It’s advisable to review this with legal counsel to ensure the nonprofit and the event professional are fully compliant with applicable law.

Finally, there are numerous IRS rules regarding how to treat the deductibility of ticket purchases for events or items won at auction. For instance, charities must notify purchasers what amount of the portion is considered a contribution versus a payment for goods and services.  There are rules regarding the deductibility of items donated for an auction. Finally, nonprofits must always be aware of their obligations for receipting donors.

Conclusion

Events are complex. A good contract helps provide a framework for the logistics of the event, and protects you if something goes wrong. Make sure you take the time to carefully review the contract, and ask for expert advice whenever you are uncertain.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.