Summary courtesy of scflier on flyertalk:
With Nights & Flights, you have to book a 5-night hotel stay at a Cat3 or Cat4 property. If you later decide not to use that stay, you can reschedule it (if availability exists and you abide by any change/cancellation deadlines) or you can cancel it altogether. If you cancel the hotel portion, the points for the hotel portion (20K - 30K) of the N&F award are redeposited into your account.