19 Jul 2010

THE IMPACT OF THE JOINTLY OWNED PROPERTY DIRECTIONS ON HOTELS AND BRANDED OPERATORS

Authored by: Brent Baldwin

THE IMPACT OF THE JOINTLY OWNED PROPERTY DIRECTIONS ON HOTELS AND BRANDED OPERATORS

Law No.27 of 2007 concerning Ownership of Jointly Owned Properties in the Emirate of Dubai (JOP Law) was issued on 10 December 2007.  The recent issuance of a number of Directions (JOP Directions) by the Dubai Real Estate Regulatory Authority (RERA) has provided greater clarity for owners of property in jointly owned property developments. There remains, however, a number of unanswered questions over how the JOP Directions will affect hotels and branded operators. Brent Baldwin looks at potential issues.

In brief: 

  • Mixed use developments such as retail, hotel and residential complexes are likely to be significantly affected by the JOP Directions.
  • The JOP Law and JOP Directions are flexible. Developers will, however, need to consider the boundaries of what is acceptable to RERA when their projects are registered under the JOP Law.
  • A key part of the implementation of the JOP Directions was to give different owners a fair and equal degree of control over the management and administration of common facilities. Anything that unfairly favours one particular owner or group of owners may be rejected by RERA.
  • It is important that issues regarding maintenance and management are properly considered by a developer and are reflected in the JOP documentation with a view to reducing unfavourable changes to the documentation being sought by owners at a later stage.

Mixed use developments 
One group of developments that are likely to be significantly affected by the JOP Directions are mixed use developments where there are a number of different uses e.g. retail, hotel and residential. The reason for this is that developers have until now enjoyed a reasonable amount of control over the way such developments are managed and maintained. This has for example, meant in some cases, higher than average service charges have been levied to ensure those developments retain their attraction as a destination. In addition (subject to contractual restrictions) a developer has been able to reasonably easily control the level of access to common facilities owners may have been granted. This may not continue to be the case.

Regulating competing interests
It is generally recognised that there are a number of competing interests in mixed use developments. Owners of residential units may not have the same desire to see common areas maintained to the high standards required by a hotel for example. Yet for hotels, the overall presentation of the development is an important aspect in attracting and retaining patrons. In addition (and again, depending upon any contractual restrictions), hotels may wish to regulate permanent residents’ use of common areas in a number of ways, such as by charging for the use of swimming pools and gyms, or putting rules and procedures in place for the use of foyers, valet and concierge facilities.

The JOP Directions have sufficient flexibility to regulate these matters, but developers will need to consider the boundaries of what is acceptable to RERA when they are registered under the JOP Law. Developers will need to bear in mind that everyone is assumed to have the same rights under the JOP Law, and it is unlikely to be acceptable that one particular owner in a development has a greater degree of control of common areas than others.

Developers who have an interest in promoting an ongoing hotel or serviced apartment brand will need to carefully consider how this is reflected in the JOP Declaration and (if any) the Building Management Statement. There are a number of issues to consider here. A key part of the implementation of the JOP Directions was to give different owners a fair and equal degree of control over the management and administration of common facilities. Anything that is perceived as unfairly favouring one particular owner or group of owners may be rejected by RERA.  Developers need to be careful in the way such issues are addressed to ensure that the principles of equity and fairness between owners contained in the JOP Law and the JOP Directions are protected.

Clarity in documentation 
At the same time, if a hotel or other brand is not maintained to the historical standard, it is possible the brand may suffer or the brand owner may terminate rights of use. Some owners have paid significant premiums to buy into branded developments and loss of the brand may have a negative impact on the value of the owner’s property. In implementation of the JOP Law and Directions, both Developers and RERA need to be mindful of what was and was not promised in the sales documentation and what the buyer bought into. Owners that bought in with the expectation of the development being maintained to a very high standard as part of a distinct brand may not object to those standards being reflected in a JOP Declaration or Building Management Statement. Buyers might be concerned if the high standards they are expecting are not appropriately reflected and protected in the documentation. There may however be developments where residential owners do not share these concerns and who may object to such high standards being enforced and consequently reflected in their service charges. Once a developer completes this assessment the manner of enforcing the particular standard will need to be carefully considered and appropriately reflected in the documentation.

Control of common areas 
Developers will also need to give thought to the basis on which they have contracted with a hotel or other branded operator. If control of common areas is handed over to an Owners’ Association with no interest in meeting the contractually agreed standards, the owner of the branded component may be required to pay additional charges on top of any service charges levied by the Owners’ Association in order to maintain standards which could have a substantial effect on the bottom line. In addition, developers need to consider what services were contractually agreed to be provided for owners and whether hotels or other branded operators can charge owners for the use of those facilities.

Conclusion 
It is important that these issues are properly considered by a developer and reflected in the JOP documentation. Owners are able to amend the JOP Declaration by a two third vote so proper consideration of these issues now on the basis of achieving fairness and equity between the different interests in a mixed use development may reduce the chances of unfavourable changes being sought by owners later.