An increasing number of purchasers are showing interest in the so-called branded residences, which combine the advantages of acquiring a private home with the sophisticated design, luxury services and professional management provided by a hotel operator. A key aspect of this investment is understanding the relationship between the hotel operator and the homeowners’ association.
This is, of course, reflected in the valuation of the homes. What is being offered is a high-end product, with the highest quality standards, but, above all, access to personalised services, including first-class common areas, security and a management experience comparable to that of a top-tier hotel.
But how is this legally structured? Through an agreement entered into by the homeowners’ association with the operator.
The developer and seller of the homes is the party that negotiates this agreement with the operator, together with the other agreements forming part of the contractual package for the project — such as the trademark licence agreement, the technical advisory services agreement, etc. However, whereas all the other agreements are entered into between the hotel operator and the developer, this agreement is entered into between the homeowners and the operator, with the seller not being a party to it.
In any case, an adequate regulation of this agreement is essential for the three parties involved in branded residence projects:
- From the purchaser’s perspective, it is essential to analyse this agreement carefully when making the investment, since it is the owner who will be directly bound to the hotel operator under the terms set out therein.
- For the operator, this agreement is also essential, as it will regulate its future relationship with the project and its corresponding recurring remuneration, in circumstances where the developer with whom it initially negotiated will no longer continue to act as its counterpart.
- Finally, even for the developer-seller, which is not even a party to the agreement, it is relevant for two fundamental reasons: (i) because the seller assumes liability vis-à-vis the consumers acquiring the homes; and (ii) because its commercial prestige and reputation, and therefore the feasibility of carrying out further projects, depend on it. The developer is therefore the first party interested in ensuring that the agreement works properly.
What are the most relevant aspects to be taken into account in relation to these agreements?
The starting point must be an initial premise: there is a common interest between the two parties to the agreement — the operator and the homeowners’ association — in achieving a satisfactory long-term relationship. However, the success or failure of that relationship will depend, to a large extent, on whether the regulation of the agreement is appropriate.
The following are some of the key aspects to be considered:
- The term of the agreement and the regulation of the different events of breach that may give rise to its termination. Homeowners pay a high price for a luxury product associated with a specific brand and with the services and advantages offered by it, and therefore wish to preserve that privilege for a long period of time. For its part, the operator bases its business model not only on the income it receives from the developer at the initial stage of the sale of the homes, but also -and as a very relevant part- on the recurring income it will receive from the homeowners’ association over an extended period of time. Accordingly, an appropriate regulation that satisfies the common interest in the sustainable maintenance of the agreement over the long term, while respecting the applicable law and the respective rights of the parties, is one of the key elements of the agreement.
- The regulation of the fees to be paid by the homeowners’ association to the operator for the provision of its services. It is in the interest of both parties that it is clear which services are remunerated, what is or is not included and what may or may not give rise to the right to payment of additional fees in the future. The purchaser of a branded residence is aware that the homeowners’ association expenses will be higher than those of a traditional residential development and is willing to pay them, both in order to enjoy all the advantages associated with the brand while owning the property and to preserve the value of the home, particularly if the purchaser decides to sell it in the future. For the operator, as indicated above, this is essential, since obtaining the expected income depends on it. Among other matters, the operator’s remuneration for management and administration services, as well as the price of any additional services offered to homeowners, must be properly defined and regulated.
- The determination of which company will enter into the agreement on behalf of the operator, and its ability to subcontract or assign the agreement.
The identity of the party that will provide the service and invoice the homeowners’ association has practical implications, but also legal implications, which must be analysed -including tax impact, costs arising from the structure, and other related matters-.
- Employment-related matters. It is necessary to determine who will hire the employees who will provide services to the development, as well as the responsibilities and obligations in employment and Social Security matters, both during the term of the agreement and upon its termination.
- Compliance with applicable regulations on consumer and user protection and personal data protection.
- The regulation of horizontal property matters. It should not be forgotten that, pursuant to this agreement, the operator is entrusted with the functions of the administrator of the homeowners’ association and, therefore, the legal fit between the regulation freely agreed by the parties and the Spanish Horizontal Property Law is key. In this regard, it is essential that the by-laws of the homeowners’ association and other governing rules be consistent with the regulation of the agreement and with the applicable law.
More and more branded residence projects are being developed in Spain, and operators and developers are becoming increasingly sophisticated. It is therefore essential that both they and the investors receive appropriate advice on all these aspects, which may determine the success or failure of the project.
