Legal considerations of Branded Residential Developments

Whilst Hotel Management Agreements (HMAs) throughout EMEA and further afield can (generally – there are exceptions) be governed by English law and follow a similar approach, there is no ‘cookie-cutter’ approach in Branded Residential Developments (BRDs). A BRD is inherently more complex, involving the Brand (either (i) a hospitality company such as Accor or Marriott, operating a BRD, or (ii) a non-hospitality brand, licensing its trademark to a Developer, to brand a BRD), the Developer and multiple (in some cases, hundreds) of individual Unit Purchasers.

There are a multitude of legal documents required to efficiently structure a BRD, dependent on the (i) location of the BRD (e.g. complying with local real property, strata law, condominium law and their equivalents, which vary drastically by jurisdiction), and (ii) structure of the BRD.

It is critical to focus on how the BRD will operate once complete and consequently, legal advice must be sought at the outset. In this article, our hospitality sector partner Nadia Milligan sets out some of the key legal documents and considerations.

Key legal documents applicable to most BRDs

1. Residential Marketing Agreement between (i) the Brand, and (ii) the Developer.

• Purpose: the Brand licenses its trademark in connection with the marketing and sale of the units. The agreement contains a robust indemnity in favour of the Brand, reserving the right to withdraw the licence for multiple reasons (e.g. the Developer falls behind agreed sales targets).
• Fees: percentage of the (i) sale price, or (ii) gross development value. Upfront fees are typical (as the Brand is used in marketing collateral).

2. Development/Technical Services Agreement between (i) the Brand, and (ii) the Developer.

• Purpose: technical services rendered by the Brand to ensure the BRD is constructed and furnished to Brand Standards. The Brand reserves the right to sign off on construction and fitting-out.
• Fees: either (i) a fixed amount, or (ii) an amount per unit, or (iii) a combination of both.

3. Sale and Purchase Agreement (‘SPA’) between (i) the Developer, and (ii) each Unit Purchaser.

• Purpose: the Developer agrees to build and furnish the BRD to Brand Standards. Contains a ‘Purchaser Acknowledgement’ (the Brand can be withdrawn at any time).
• Fees: the unit sale price. Brands are increasingly charging a licence fee on resale of a unit.

4. Rules and Regulations between (i) the Operator, and (ii) the Home Owners Association (HoA).

• Purpose: the rules and regulations governing the use of the BRD, including use of common areas.
• Fees: the Brand will require that the Operator implements the Rules & Regulations to ensure adherence to Brand Standards.

5. Rental Programme Agreement (mandatory or voluntary) between (i) the (White Label) Operator, and (ii) Each Participating Unit Owner.
   • Purpose: Unit Owners must purchase the Brand’s standard FF&E pack. If the BRD is associated to a hotel, the unit becomes part of the hotel inventory and must be made available for specified periods. If a unit is not part of the program, there are restrictions on short-term letting.
   • Fees: Participating Unit Owners receive a percentage of rental income. Rental programme income may be pooled or be specific to units.

Consider whether securities law applies in the local jurisdiction (potential civil and criminal liability if breached).

6. Residences Management Agreement between (i) the (White Label) Operator, and (ii) the Brand, and (iii) the HoA.

• Purpose: operation of the BRD on behalf of the Developer and/or the HoA to Brand Standards and budgeting and financial responsibilities. The Operator produces a draft annual capex and FF&E budget, akin to the process in a HMA.
• Fees: management fee paid to the Operator is passed through to Unit Owners through service charges, apportioned on size/type of unit.

Legal documents applicable to a BRD associated to a hotel

1. HMA between (i) the Operator, and (ii) the Developer.
   • Purpose: operation of the hotel by the Operator, on behalf of the Developer. If the HMA for the hotel falls away, the Brand for the BRD will fall away.
   • Fees: such as base management fee, incentive fee, hotel specific services fees, and group services fees. 

2. Shared Facilities Agreement between (i) the Operator, and (ii) the HoA.
   • Purpose: use of hotel amenities by Unit Residents and charging mechanisms.
   • Fees: pay per use or are costs included in base charges? Residents may receive discounts on the hotel’s amenities (e.g. a spa).

Legal document applicable to a standalone BRD

Joint Venture Agreement between (i) the Brand (ii) the Developer (and the White Label Operator)

• Purpose: outlines terms on collaboration to a develop BRD to Brand Standards; funding contributions; allocation of liability and risk.
• Fees: outlines sharing of profit and costs.

Legal and commercial issues to consider

Governance

A HoA should govern all common areas and critical components (physical plant, all exterior and interior common areas) of a BRD. The HoA’s governing documents should give the Operator the right to control the HoA to ensure adherence to Brand Standards, as far as local law will permit, enhancing the value of the units on initial sale and preserving the value of the units going forward.

Some jurisdictions are inherently more complicated to structure from a local law perspective, e.g. Dubai, where complex mixed-use schemes sit below a Master Association in a ‘Master Development’ (such as The Palm Jumeriah) comprised of representatives from each of the uses within the scheme, e.g. office, retail, unbranded residences, BRD and hotel(s).

Maintenance to Brand Standards

Several reserves will require constant ‘topping-up’ by the Unit Owners to ensure maintenance of common areas and critical components to Brand Standards, e.g. a shared facilities reserve, a sinking fund reserve and a reserve to replenish FF&E and OS&E.

As units participating in a rental programme will require furnishing and maintenance by the Operator to ensure adherence to Brand Standards, a separate FF&E and OS&E unit reserve is required.

Local law requirements

Developers must consider local law requirements when considering a scheme as many jurisdictions have specific legislative requirements; for example, Dubai’s Escrow Law requires Developers to pay instalments from the sale of off-plan property into an escrow account where cash is released upon reaching specific milestones. Disclosure of all material facts about off-plan property must be made in some jurisdictions, such as Abu Dhabi where the Registrar of the Abu Dhabi Global Market must approve the disclosure statement prior to any off-plan sales.

Potential Brand liability

The primary source of liability for Brands comes from unhappy Unit Owners. With the proliferation of social media, a dissatisfied Unit Owner can pose a significant PR risk to Brands, for example:

Example 1: ‘De-flagging’

Unit Purchasers agree in their SPA that they agree to purchase ‘a unit associated with [the Brand] which can change at any time’.

A Brand must retain rights to pull its flag to mitigate risk to de-valuing its brand, for example, the development is not built to Brand Standards.

Complaints from Unit Owners along the lines of “I bought my unit because it was an [X] branded property” may result in adverse publicity, which needs to be meticulously managed.

Example 2: Non-payment of charges

If a Unit Owner fails to pay charges, should access to amenities be withdrawn? Consider the impact of pursuing outstanding fees vs being fair and reasonable to the other Unit Owners vs the potential impact on Brand reputation if fees are pursued (or not, as other Unit Owners may complain).

If you have questions or concerns about BRDs, please contact Nadia Milligan.