Investment into branded residences with rental pool arrangements is becoming an increasingly popular investment vehicle in Dubai.
This investment option has a number of advantages when compared to a traditional lease, in particular the fact that the investment is fully managed. However, a rental pool arrangement is not a simple contractual arrangement. Indeed the concept of a managed and serviced apartment, or branded residence, incorporates different, and sometimes even conflicting, interests of its stakeholders being: the branded Operator, the Developer, and the Residence Owner.
While negotiating a rental pool arrangement, the Developer and the Operator usually require a fixed term and on occasions may state that remaining in the “rental pool” is mandatory for the Residence Owner. A mandatory rental pool gives rise to issues for both the Owner and the Operator, as under the law any Owner may, where circumstances justify the same, be entitled to withdraw its unit from the rental pool and actually reside in the unit. Conversely, if an Owner cannot rent out its unit to a third party, it may be held captive within the rental pool and obliged to accept the terms the Operator offers.
In view of such risks, the Operator may want to restrict the Developer from selling all the units in the development, and indeed may require the Developer to remain the owner of a particular number of units as a guaranteed source for the Operator’s business in future, regardless of the rental pool. In certain cases the branded residences sit alongside a Hotel component owned by the Developer, which is also a guaranteed source for the Operator’s business.
In this article we consider in more detail how the interests of all stakeholders can best be aligned. We do this in the context of the following, common rental pool schemes:
- the development consists of a hotel component and branded fully furnished units for sale with a “mandatory” rental pool. The branded residences will be managed by the Operator as serviced apartments (“Hotel + Serviced Apartments”); or
- the development consists of branded fully furnished units, part of which will be sold to private investors with a “mandatory” rental pool, another part will form a guaranteed number of units for the Operator’s management regardless of the rental pool. Sold branded residences will be managed by the Operator as serviced apartments to the extent and as long as these are kept in the rental pool (“Serviced Apartments”).
Alignment of interests
In order to create a suitable contractual structure it is important to first analyze in detail the interests of each stakeholder in the rental pool, and then to align them on an equitable and transparent basis.
In the table below we set out the relevant interests and steps that can be taken to align the stakeholder’s interest.
Click here to view table
As one may see from the above, the rental pool arrangement is a complex structure involving different stakeholders with different and sometimes conflicting interests. In order to ensure the success of the project and protection for all participants, it is highly important to establish and disclose an effective rental pool structure with very detailed allocation of rights, obligations and remedies