- Introduction
Egypt’s real estate market has been witnessing a great development during the last few years. New types of investment are increasingly evolving; among them is the branded residence associated with rental pool arrangements. In this type of investment, a luxury brand name of a hotel is licensed for use on a residential development. The hotel operator collaborates with the developer to provide full range of hospitality services and activities.
A residential development will consist of branded fully furnished units (“Units”). Units sold to private investors (“Owner”) will be managed by the brand operator (“Operator”) as serviced units to the extent and as long as these are kept in the rental pool. Another part of the Units can remain owned by the developer of the project (the “Developer”) to form a guaranteed number of Units for the management of Operator regardless of the rental pool.
The concept of ‘branded residence’ will raise several legal questions; among them the legal nature of the branded residence and whether it will be considered a hospitality or hotel facility.
The Operator will usually have two main concerns: first, how to ensure control over the operation and maintain the ‘branded residence’ up to the brand standards; and second, how to avoid direct legal relations with the multiple Units. The Operator will therefore be keen to retain the Developer as owner of various shared facilities and common areas of the branded residence component as well as to have the Developer as a contracting party with the Owners or any Owners’ union.
The concept of ‘branded residence’ will raise several legal questions; among them the legal nature of the branded residence and whether it will be considered a hospitality or hotel facility.
Another question to consider is the common property (strata) title and management rules under Egyptian law and the role of the owners’ union in this respect. Also, how the contractual arrangements and legal documentations can be structured to accommodate the interests of the different stakeholders. This Article will try to answer these questions briefly.
Branded residence takes several forms. It may have a hotel component (hotel + branded residence) or standalone. In this article we will be focusing on the stand alone projects.
2. Does Branded Residence Fall into the Hospitality Class?
The concept of a branded residence is relatively new in Egypt and it is therefore not subject to specific regulations. A legal framework for the concept however can be created under the general rules of contract, the real estate and hospitality laws and regulations.
Hospitality and hotel facility ownership and operation is a highly regulated area in Egypt. According to the Hotel and Touristic Facilities Law No. 1 for 1973, a hotel facility may not be established, constructed, used, marketed or managed without obtaining a license from the Ministry of Tourism (“MOT”) as the competent regulator.
A hotel facility is defined in the law to include hotels, pension, and villages, floating hotels, cruise ships as well as houses and furnished apartments which are permanently allocated for the residence of tourists. The law however does not define the term ‘tourist’ nor does it clarify the criteria for a ‘permanent allocation’ or its minimum duration.
There is a possibility therefore that a ‘branded residence’ be considered as comprising furnished apartments that are allocated for tourists and therefore constitutes a hotel facility. In this case, the residences will not be established without a license from the MOT, and their management must be through a licensed company.
The current interpretation of the regulatory authorities is that a license from the MOT will be required only if the branded residences consist of a hotel component and branded units (Hotel + branded residence). The license in this case will be limited to the establishment and management of the hotel rather than the associated branded units which will be established and managed as non-hotel units and will not fall under the authority of the MOT.
3. Common property (strata) title under Egyptian Law
The terminology ‘strata’ is referring to individual ownership of part of a property (generally an apartment or a house), combined with shared ownership in the remainder common areas (e.g. foyers, driveways, stairs and gardens).
The Egyptian Civil Code (the “Civil Code”) contains detailed rules governing common/shared ownership as well as the management thereof. The rules under the Civil Code are applicable on all kinds properties whatever its purpose, i.e., residential and non-residential.
Management of the common property is bestowed on all co-owners collectively. Decisions related to the management of a common property shall be taken by the majority vote of the co-owners, and a decision of the majority will be obligatory to all owners in this case.
Majority co-owners shall have the right to appoint a manager for the common property and to set rules for the management and efficient use of the common property. The maintenance and management costs as well as the taxes on the common property will be borne by all co-owners pro-rata with their ownership percentage.
Occupant Union
In addition to the general rules for management of common ownership under the Civil Code, the Building Law No. 119 for 2008 (“Building Law”) contains detailed provision governing owners associations. The Building Law applies on residential as well as commercial and administrative properties. It however does not apply to tourists or hotel facilities.
According to the Building Law, a building, a development or a gated compound (the “Development”) which consist of 5 units or more are mandatorily required to establish a union for the occupants (the “Union”).
The Union is responsible for the management, maintenance, safety and use of the Development including the shared parts and facilities. It is also responsible for ensuring the restoration of the Development, keeping its architectural design and providing the required services thereto.
For integrated residential compounds, the Union is required to take the form of a company. The owners of the Units in the compound will coordinate with the Developer to establish the company. Each owner will pay a share in the company’s capital equal to the percentage of the area of unit to the total area of the compound.
The Union will have a general assembly consisting of all owners/tenants of the Units. The general assembly will appoint a board of directors for the daily management of the Development.
Each unit will have a vote in the general assembly calculated on the basis of the percentage of the area of the unit to the total area of the Development. The area of the unit which is allocated for commercial and administrated use shall have double the vote of the residential unit.
4. Branded Residence Legal Documentation
How to preserve the Operator’s right to operate and manage the Units
The unit sale agreement between the Developer and the buyer of the Unit may include a management statement committing the buyer to engage the Operator to manage the residences and the common areas and impose rules and regulations governing the use of the Units and the behavior by the Owners.
The Operator’s right to operate and manage the Units can also is ensured through a residence management agreement with the Developer and/or the Union whereby the Operator is engaged to manage the common areas and shared facilities.
In a rental program agreement with the Owners who opt for the rental scheme, the Owners can delegate the Developer to act as a tenant on their behalf. An acknowledgement by the Owner that the operator will be the branded operator of its Unit should be clearly stated in such rental agreement.
How to maintain control over shared facilities
The Unit Sale Agreement can provide clearly that title on the common areas will be with the Developer. In this way, shared facilities (like spa, gym, pool etc.) will remain under the control of the Developer.
The diagram below provides an illustrative example of the main contractual relations and contractual documents that one can see in a branded residence project, although this can vary depending on each deployed scheme.
How to deal with multiple participants in the rental pool structure
The Developer can act as intermediary between the Owners, the Union and the Operator through the following contractual structure:
- Developer will be a tenant of the Unit kept in the rental pool, and will be voting on behalf of the Owner at the general assembly of the Union.
- The Developer (or its representative) will be appointed as the Union’s Chairman to manage the day-to-day aspects of the Development and the common areas and facilities.
- The Union, which should be controlled by the Developer, will contract the Operator as the manager of the Development.
The Operator may also agree with the Developer to keep the ownership of a particular number of Units in the Development as a guaranteed source for the Operator’s business in future, regardless of the rental pool.
How to preserve the branded unit in the rental pool
In order to protect the Operator right, a rental agreement shall be entered into with the Owner. A requirement that the Owner remain in the ‘rental pool’ for a period of time is generally legal and enforceable as long as it is for a fixed term and not eternal. There is no maximum duration that is mandated by the law. Withdrawal from the rental arrangement by the Owner during the agreed term can constitute a breach of contract. The rental pooling agreement can include a termination fee (liquidated damages) that will be payable by the Owner in case of withdrawal from the rental pool
Generally speaking, it is essential to agree on a transparent and equitable allocation of the cost and expenses attributable to the Units as well as the profit distribution in order to incentivize the Owner to continue in the rental pooling scheme.
Protection of the brand
Protection of the Operator’s brand can be ensured through contractual arrangements between the parties. A Marketing and Licensing Agreement will be entered into between the Developer and the Operator whereby the Operator agrees to license the use of its brand and marks to the Developer in connection with the marketing and sales of the Units against a license fee. This agreement will provide that the use of the brand is solely limited to the marketing and sales of the Units.
The unit sale agreement between the Developer and the buyer can provide, among others that the Owner or the Union is restricted from appointing an operator for management of the Unit which is the Operator’s competitor to create competition to the Operator by renting out the Unit for short periods.
Loss of brand and the right of termination and exit
In case of the loss of the brand for reasons not attributable to the actions of the Owner, claims may arise by the Owner who was marketed and purchased the Unit as a branded luxury residence at a considerable premium. The Owner can argue that it has reasonable expectations that the brand and the brand service standards will remain with the Unit and be available for future resale.
To mitigate this risk, agreements should include acknowledgement by the Owner of any potential loss that may result from losing the brand as well as a waiver of claim for loss or damages against the Operator in this case. Owners can also acknowledge that the Operator may terminate the association with the Development at any time and without the consent of the Owners.
A cross-default clauses in the Marketing and Licensing Agreement, the Unit Sale Agreement and the Common Facilities Management Agreement that a loss of the brand’s association with the Development will automatically results in termination of any rights to use the brand with the Units.
If you have any questions regarding this paper, feel free to contact
Dr. Fatma Salah
Partner
Tel: +202 37488521
Email: f.salah@riad-riad.com
.
Mohamed Abdelaty
Associate
Tel: Tel: +202 37488521
Email: m.abdelaty@riad-riad.com