Everyone and their branded product it seems is hopping on the bandwagon to develop hospitality-adjacent branded residences.
This includes many brands — such as fashion, automotive, jewelry, media and sports — outside the traditional hospitality and accommodation sphere, all trying to leverage their brand value to a new and wider target consumer audience.
Nowhere is this branded residential craze more prevalent than in my “hood,” Dubai. It's undoubtedly the branded residential capital of the world today, surpassing Miami and other major gateway cities. And there are indeed some very impressive and very financially successful projects which have been or are being brought to market.
But whenever things start to get too hot — remember the pre-2008 financial crisis and the declaration of the “end of the business cycle” — it is wise to wish for some rain on the parade.
The question no one wants to talk about or even contemplate when pitching those branded residential projects is after the residence buyer has paid his 15% to 60%+ premium for a branded product, what if the brand goes away? And through no fault of the buyer?
I have chaired numerous branded residence panels at various conferences where this question is discouraged or even outright rejected by several experienced brand players in the sector as “it cannot” or “it never happens.” But it does happen.
I have been involved recently in two projects with major brands where the brand pulled out after the commencement of sales to residence buyers. Now granted the developer in each case was not entirely in compliance with their contractual obligations with the brand. But the projects were not stalled, were proceeding to completion and the breaches for which the termination was triggered were not so egregious and well outside the bounds by which, in my experience, most international operators would seek to pull the plug on a deal that was likely to otherwise materialize. Operators will patiently tolerate quite a few contractual indiscretions by developers if they see the finish line in sight. These high front-end cost projects are, after all, hard to complete.
And this was with some of the more experienced operators in the branded residential sector. In my experience, there are really only a handful of experienced branded residential brands — primarily already in hospitality — with the know-how, due-diligence procedures and detailed contractual documentation to seriously establish a sound branded residential framework. The rest, well with so many new and inexperienced brand entrants leaping in to the sector — frankly many cowboys at their first branded residential rodeo and with very inadequate contract documentation — the specter of disappointed buyers only grows.
Certainly one would think that a branded residence buyer has some reasonable expectation that the brand for which they have paid a considerable premium for on their unit will remain with the project development for the foreseeable future. But actually, what protections does the branded residence buyer have? Well it depends partially on the sales jurisdiction and the sophistication of the legal system, but in many locations where branded residences are popular, there are practically very few protections for buyers.
This is because by the time the product comes for sale — typically off plan — to the branded residence buyer, the cake has already been baked by the developer and the brand. They have negotiated their contractual agreements between themselves, such as the brand marketing and license fee, the residential management fees, technical services provision, etc. upfront and prior to the sales. And they have included various protections of their position should the project not come to market or the brand prematurely go away.
For example, the sales purchase agreement on a typically $2-million-and-up unit will not formally state that the buyer is buying a “Ritz-Carlton-branded residence.” Instead, the fine print typically will say the buyer is purchasing “a unit that will be associated with an international luxury hospitality brand” and which brand “may be changed at any time in the sole discretion of the developer.”
That is to protect both the developer and the brand in the event their deal falls through. But imagine, going to a Ferrari dealer, signing the contract to buy a car and when you go to pick it up, instead you get a red Lada. You protest and the seller says; “Well it’s a car; a mode of transport. Four wheels and the like.” Technically true, but not at all what you paid the premium for. But surprisingly, many buyers of branded residences often do not even seek legal counsel or are comfortable with this lack of product clarity in branded residences.
Additionally, the brand — and often developer — will require that the residence buyer execute as a part of the SPA a “buyer's acknowledgement” in which the buyer acknowledges, amongst other things, that the brand is not an “investor/developer” in the project and is merely providing its brand for the marketing and sale of the unit. Fair enough, it being the case. But has not the brand’s association with the project — and the premium it thus commands — been in some ways a “seal of approval” endorsement of the projects viability?
The buyer's acknowledgment will also include an acknowledgment by the buyer that there is no guaranty that the brand will remain associated with the project for any length of time and that the brand “may be removed by the brand or the developer at any time and for any reason” without either being liable to the residence buyer.
In the end, the only real buyer protections are often not legally based, but grounded on both the brand’s — and developer’s — own reputational concerns of being associated with an unsuccessful project. Some comfort, but not much legal recourse.
So while there are indeed a lot of potential “upsides” for all of the parties — the developer, the brand and the buyer — in branded residential projects, in my experience too many branded residence buyers are guided more by enthusiasm than sense and do not thoroughly factor what they are getting into and the potential risks involved, especially with those with little experience in the sector.
Scott Antel is an international hospitality lawyer based in Dubai with many years experience working for developers and brands in the hotels and branded residential sectors, mainly in emerging markets.
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