<p>Consider the shared systems and services in an integrated building  such as this, including, fire systems, lifts, and the exterior. Consider  also the levels of service and corresponding costs that a residential  apartment building may find desirable compared to that required by a  hotel.&nbsp;</p>
<p>Thankfully, many potential compromises will exist in order to balance  these tensions for any development, the exact nature of which forms  much of the focus of a lawyer&rsquo;s craft. Of course individuals may  disagree as to whether a fair compromise has been reached and for this  reason it is important to emphasise (once again) the importance of  developers clearly disclosing to all investors the compromise and  structures chosen for their developments.</p>
<p>Such developments are regulated pursuant to Law No 27 of 2007 on  Ownership of Jointly Owned Properties in the Emirate of Dubai (&ldquo;JOP  Law&rdquo;) and the Directions to Law No 27 of 2007 which are implemented by  RERA (&ldquo;Directions&rdquo;).&nbsp;<br /><br />Such &ldquo;simple&rdquo; schemes of joint ownership  however have come close to being the exception in Dubai and many other  cities in the Gulf where mixed use developments are common. A mixed use  development will usually possess more than one &ldquo;uses&rdquo; for example;  residential apartment, office, hotel and retail uses. The volumetric  area comprising each such &ldquo;use&rdquo; is generally termed a &ldquo;Component&rdquo;.&nbsp;<br /><br />All  mixed use developments present certain challenges in terms of  management. Consider for example the case of a residential and retail  building. Perhaps the residential Component has a swimming pool and gym  as part of its facilities. Should the retail Owner(s) be responsible for  the costs of these facilities? Conversely would the residential Owners  want the retail Owner(s) and potentially their clients using the  swimming pool and gym?<br /><br />Generally speaking retail Owners would  have no interest in such facilities and would not want to pay for the  same. Such issues would therefore need to be resolved through the  constitutional documents (for example the &ldquo;Jointly Owned Property  Declaration&rdquo; as it is termed in Dubai) for the development.&nbsp;<br /><br />The  above however represents a fairly simple situation, where the interests  of the parties are clear. There are however numerous occasions where  more complex issues arise both by virtue of the areas and services in  question and the nature of the building. There is no better example of  this than in the case of mixed use developments incorporating a hotel,  residential and other Components.<br /><br />To illuminate the issues, let  us consider Diagram 1 (below) where area &ldquo;A&rdquo; is a singly owned Hotel  Component and area &ldquo;B&rdquo; is a jointly owned Residential Component. Area  &ldquo;C&rdquo; represents an area shared between the two Components.&nbsp;<br /><br /></p>
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<p>Let us say that area &ldquo;A&rdquo; (the &ldquo;Hotel Component&rdquo;) and Area &ldquo;B&rdquo; (the  &ldquo;Residential Component&rdquo;) are relatively self contained with each  retaining its own entrance lobby and mechanical, electrical and plumbing  infrastructure. Area &ldquo;C&rdquo; in this example comprises a shared leisure  area comprising a swimming pool, gym area and spa area (&ldquo;Facilities&rdquo;).<br /><br />Both Components may have a legitimate interest in the use of the Facilities however the following issues arise:</p>
<ol>
<li>Who should control the management of the Facilities?</li>
<li>To what standard should the Facilities be maintained and operated  to? The standard required of the Residential Component or the standard  required by the Hotel Component?<span>&nbsp;</span></li>
</ol>
<p>The answer from the Owner of the Hotel Component has to be that these  areas must remain in their control as the Hotel Component Owner will  need to be able to promise to its Operator, control over such areas in  order that the Operator can maintain its &ldquo;brand standards&rdquo; and customer  service levels.&nbsp;<br />&nbsp;<br />Let us therefore consider the following management possibilities for Area &ldquo;C&rdquo;:</p>
<ol>
<li>The area becomes a Common Area and an Owners Association be formed having jurisdiction over Area &ldquo;C&rdquo;; on</li>
<li>Ownership over Area &ldquo;C&rdquo; passes to the Owner of Component &ldquo;A&rdquo; (the Hotel Component&rdquo;)</li>
</ol>
<p>Let us consider in more detail each management possibility:<br />&nbsp;<br /><strong>Option 1 &ndash; Area &ldquo;C&rdquo; is Common Area and an Owners Association is formed.</strong><br />&nbsp;<br />Under this option the following needs to be considered:</p>
<ol>
<li>Decisions of an Owners Association are made either by the General Assembly or by the Board.</li>
<li>Decisions of the General Assembly usually relate to constitutional  issues such as rule formation and the appointment of the Board.</li>
<li>Decisions on constitutional matters may depend on the number of votes of the voting &ldquo;entitlement&rdquo; the relative Components have.</li>
<li>Decisions as to who the Board may comprise may depend on the number  of Owners in each Component and also the number of votes or voting  &ldquo;entitlement&rdquo; held.&nbsp;</li>
</ol>
<p>It will be apparent from the above that to leave decisions as to who  manages such areas strictly to the JOP Law and Directions can be  arbitrary and risks an ongoing political struggle for control of such  Facilities.&nbsp;<br />&nbsp;<br /><strong>Option 2 &ndash; Ownership of Area &ldquo;C&rdquo; passes to the Owner of the Hotel Component.</strong><br />&nbsp;<br />Under this option the following needs to be considered:</p>
<ol>
<li>Ownership would entitle the Owner of Component &ldquo;A&rdquo; to exclude all  Owners in the Residential Component &ldquo;B&rdquo; (the Residential Component).</li>
<li>The Owners of Component &ldquo;B&rdquo; would be required to pay for the costs  of the maintenance and repairs and all other services in connection with  the Facilities.</li>
<li>The above factors would mean that transparency as to the costs of  the Facilities may be unlikely, and could lead to a situation where the  Owner of Component &ldquo;A&rdquo; simply names its price for the use of the  Facilities.&nbsp;</li>
</ol>
<p>Option 2 would appear the optimal solution for the Hotel Component  Owner, however in many cases the developments may have been designed  such that such Facilities were intended for the use of both Components.  In other cases the developments may have been sold on the basis of  shared use (to have sold on a &ldquo;user pays&rdquo; basis may have reduced the  sale price of the Residential Units).&nbsp;<br />&nbsp;<br />The astute reader may  well have gathered that either Option 1 or Option 2 may work provided  appropriate mechanisms are put in place to protect the respective  Owners&rsquo; interests. The other important point (though not the focus of  this article) is that any mechanisms need to be disclosed to investors  prior to the sale of Component A or Units in Component B.&nbsp;<br />&nbsp;<br />Let us consider some potential mechanisms for resolving this Hotel/Residential mixed use scenario:<br />&nbsp;<br /><strong>Option 1 &ndash; Area &ldquo;C&rdquo; is Common Area and an Owners Association is formed.</strong><br />&nbsp;<br />Within  the constitutional documentation for the Owners Association the  following needs to be clarified so as to bind the Owners Association, as  well as the Owner of the Hotel Component and Owners in the Residential  Component:</p>
<ol>
<li>The standards of maintenance and repair and provision of the  Facilities needs to be that required by the Owner of the Hotel  Component.</li>
<li>Owners within the Residential Component would need to accept  heightened charges for the Facilities due to the higher standards  required, or at least a cost split agreed up front.</li>
<li>If the Owners in the Residential Component dominated at the General  Assembly or could control the Board then there would need to be a means  of curtailing such rights to ensure 1 and 2 above were achieved.&nbsp;</li>
</ol>
<p><strong>Option 2 &ndash; Ownership of Area &ldquo;C&rdquo; passes to the Owner of the Hotel Component.</strong><br />&nbsp;<br />For  this option to add value to the Owners in the Residential Component  there would need to be an agreement (commonly called a &ldquo;Building  Management Statement&rdquo;) setting out the rights and obligations of the  Owners of the Components in relation to Area &ldquo;C&rdquo;.&nbsp;<br /><br />Typically a Building Management Statement would:</p>
<ol>
<li>Specify that Area &ldquo;C&rdquo; would fall within the Hotel Component;</li>
<li>By a separate plan designate that rights would be granted over Area &ldquo;C&rdquo; to the Owners in the Residential Component;</li>
<li>By the Building Management Statement and usually a schedule  (commonly called a &ldquo;Building Management Schedule&rdquo;) designate the rights  and obligations of the Owners in the Residential Component in relation  to Area &ldquo;C&rdquo; including:<br />&nbsp;<br />a.&nbsp;that the Owner of the Hotel Component would have the right to appoint the contractors;<br />&nbsp;<br />b.&nbsp;by  the Building Management Schedule, setting out the level of costs that  the Owners respectively would have to share in relation to Area &ldquo;C&rdquo;.</li>
</ol>
<p>Neither Option 1 nor Option 2 represents a perfect solution for both  parties.&nbsp; Each requires consideration in order to reach a balance that  is attractive to both parties.&nbsp;<br /><br />Option 1 would require the Owner  of the Hotel Component to become subject to the jurisdiction of an  Owners Association with its associated procedures and mechanisms which  may be considered onerous and more capable of dispute in a situation  where Operators may want clarity, simplicity and control.&nbsp;<br /><br />Option  2 however would lack transparency from the point of view of an Owner in  the Residential Component. In particular, how could the Owners in the  Residential Component be confident that the contracts and costs incurred  by or on behalf of the Owner of the Hotel Component were procured in a  fair and transparent fashion?&nbsp;<br /><br />At this juncture, readers may also  like to consider Diagram 2 where Area &ldquo;A&rdquo; once again is the Hotel  Component, Area &ldquo;B&rdquo; is the Residential Component and Area &ldquo;C&rdquo; represents  the shared car-parking, lobby and foyer areas and pool gym and  recreational areas.&nbsp;</p>
<p><span><br /></span></p>