Dubai’s new strata law will have significant implications for owners and managers of mixed-use developments with hotel components, of which owners and operators throughout the Middle East need to be aware. This article is the third in a series of three that examine the law and its impact. Last week, we dealt with important considerations for hotel owners and operators in regard to the strata law, and steps that can be taken to protect a hotel’s brand. This week, we consider additional ways in which a hotel’s brand can be protected and the importance of balancing competing interests in a mixed-use development.
Another way to ensure common areas shared by a hotel component with an adjacent owners association are maintained to the appropriate standard is for the owner/developer and operator to agree the owner/developer will procure the owners association for the JOP component enters into a facilities management agreement with the hotel operator or an affiliate of the hotel operator.
A facilities management agreement will enable the facilities manager (namely, the hotel operator or its affiliate) to take such steps as it considers necessary to maintain the common areas to a particular standard (that is, to a standard commensurate with the standard of upkeep of the hotel’s common areas). The agreement will require the owners association to pay a management fee to the facilities manager for the provision of its services.
Securing the right to provide facilities management services is also an important consideration for an operator—third-party service providers are excluded from the hotel development, and the provision of facilities management services can be profitable, supplementing hotel revenues.
However, under the JOP law, the term of a facilities management agreement is limited to three years. In some cases, the term of these agreements can be extended to 20 years, which is more in line with the term of a hotel management agreement. For the time being, the circumstances in which such an extension will be granted aren’t known (nor is the procedure for seeking such an extension). There has been discussion a mixed-used scheme that includes a hotel might warrant such an extension.
A jointly owned property declaration is a document which, among other things, regulates the interaction between owners and occupiers of units in the JOP. It’ll typically include the by-laws for the day-to-day management of the JOP. The owners of units within residential schemes will be bound by the JOP declaration for their development. The JOP declaration may deal with a number of matters, including:
- restrictions on how units can be used (for example, a general prohibition on the operation of serviced apartments or other businesses that may compete with the business of the hotel);
- architectural guidelines for the development to maintain an appropriate standard in the JOP;
- restrictions on the use of some of the common areas in the JOP; and
- special management arrangements to which the owners association will be bound (this may include the appointment of the hotel operator as the facilities manager of the JOP).
Accordingly, the community declaration may include a number of restrictions on the use of common areas, as well as ensuring common areas are maintained to a particular standard. Additionally, it also might require the owners association to enter into special management arrangements with the hotel in relation to particular services or activities the hotel might be able to provide.
However, a community declaration can be amended with a two-thirds majority vote of the owners association. If an owners association was motivated sufficiently, it could amend the community declaration to remove any rights granted by it in favor of the hotel operator.
Balancing competing interests
It’s important for owners and operators to keep in mind any successful mixed-use development will carefully balance the rights of, and obligations attaching to, its component parts, including those of the hotel and other owners and occupants within the development. This balance will become increasingly important in the Emirate of Dubai under the JOP Law (and in other Middle East jurisdictions that adopt a similar form of strata titling) as consumers begin to expect (and demand) a greater degree of autonomy in the operation of their buildings and start to resent what’s perceived by them to be undue interference from hotel owners and operators.
A failure on the part of the parties to strike the right balance could have serious consequences from a public relations perspective and may drive down the value of properties elsewhere within the development. The hotel owner and operator will want to avoid any negative implications for the hotel and brand associated with it.
Read “New title laws will impact projects in the Middle East (Part 1).”
Read “Impact of strata law on hotels in the Middle East (Part 2 of 3).”
David Sanson, ISHC (david.sanson@dlapiper.com), a member of the International Society of Hospitality Consultants (www.ishc.com), is a partner in the Real Estate Group of DLA Piper Middle East LLP (www.dlapiper.com) in Dubai.
