Luxury, Legacy, and Resolution: ADR in the World of Branded Residences
By Michael J. Brinn
As of mid-2023, there were 690 completed branded residence schemes across the world, with over 600 schemes in the pipeline expected to be delivered by 2030.[1] Branded residences have become increasingly popular in the luxury real estate market, offering a unique blend of high-end living and hotel-like amenities.[2] These developments, often associated with renowned hotels, present an attractive proposition for buyers seeking both a personal retreat and an investment opportunity.[3] The rental programs offered by developers and branding partners in these luxury projects is one of the main attractive aspects for buyers.[4] It offers the owner the best of both worlds; the luxury of enjoying the elegant lifestyle while at the same time offsetting the premium cost, such as service charges and other fixed costs when not in-residence.[5] Typically overseen by the brand operator, these programs handle all aspects of rentals, from marketing and bookings to guest services and maintenance.[6] The differing goals of buyers can create tension and conflicts within the community, especially when it comes to revenue distributions and amenity usage.[7] As conflicts arise, Alternative Dispute Resolution offers a more efficient and harmonious approach to resolving disputes in the unique context of branded residences' rental programs.
Revenue distribution is one of the most contentious issues when it comes to rental pools.[8] The operator typically markets the residence through its distribution channels and takes a management fee for this service, with any remaining balance, after the deduction of various allocated operating expenses and charges, going to the owner.[9] Owners may disagree with the management company over the calculation of profits, the deduction of expenses, or the fairness of the revenue sharing model.[10] A key challenge in these arrangements is balancing the operator's desire for consistent remuneration, as specified in their management agreement, with residence owners' expectations for transparent budgeting and equitable profit distribution.[11] To address this, we recommend implementing a tiered ADR approach.[12] Initially, a standing committee comprising representatives from residence owners, the hotel operator, and an independent financial expert could be established to review revenue calculations and expense allocations quarterly. Any disputes arising from these reviews would first go through a mediation process, where a neutral mediator with expertise in hospitality finance facilitates discussions to reach a mutually agreeable solution. If mediation fails to resolve the issue within a specified timeframe (e.g., 30 days), the dispute will then proceed to binding arbitration. This tiered approach allows for collaborative problem-solving while ensuring that protracted disputes can be resolved efficiently and fairly, maintaining transparency and trust between owners and operators.
Furthermore, conflicts often arise over the use of shared amenities. Full-time residents may feel that transient hotel guests or rental tenants overuse or improperly use these amenities, infringing on their rights.[13] Disputes can emerge over access to facilities like spas, pool areas, or golf courses.[14] Industry experts suggest that “parties should also consider when and under what terms access to hotel amenities should be provided to owners of branded residences, their guests, and lessees or short-term renters under a rental program.”[15] To address these complex issues, we recommend implementing a structured ADR process with an “Amenity Usage Committee.” This committee, comprised of representatives from full-time residents, part-time owners, hotel management, and an independent mediator, would meet quarterly to review usage data, discuss concerns, and collaboratively develop or adjust amenity access policies and fee structures. The mediator would facilitate discussions to find innovative solutions,[16] such as time-based access restrictions, dedicated resident-only areas, or a points system for high-demand amenities, ensuring a fair balance between resident expectations and guest experiences. If specific disputes arise that cannot be resolved by the committee, a formal mediation process could be initiated, with arbitration as a final recourse for more complex issues. This approach provides a flexible and efficient mechanism for resolving conflicts related to amenity access and associated costs.
The complex nature of branded residences with rental pool arrangements inevitably leads to conflicts. ADR emerges as a vital tool in navigating these challenges, offering a flexible, cost-effective, and relationship-preserving approach to conflict resolution. By implementing robust ADR mechanisms, branded residences can enhance owner satisfaction, protect brand reputation, and ensure smooth operation of rental pool arrangements. As the sector continues to grow, ADR will play an increasingly crucial role in shaping the success and sustainability of these properties. Forward-thinking stakeholders who embrace ADR strategies will be better positioned to offer not just luxurious living spaces, but also the promise of a harmonious, well-managed community that represents the pinnacle of modern luxury living.
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[1] Branded Residences, Savills, https://pdf.savills.com/documents/Branded-Residences
2023.pdf?mod=sponsored_main [https://perma.cc/9GFZ-K57U].
[2] Branded Residences, KnowledgeRidge (Aug. 28, 2023), https://www.knowledgeridge.com/expert-views/brandedresidences#:~:text=Branded%20residences%2C%20luxury%20properties%20usually%20associated%20with%20renowned,which%20makes%20this%20sector%20very%20exciting%20and%20competitive. [https://perma.cc/RX36-2RWF].
[3] Emma Al-Mousawi, What are Branded Residences? Elitetraveler (Dec. 20, 2023), https://elitetraveler.com/property/what-are-branded-residences#:~:text=In%20the%20most%20straightforward%20terms,#:~:text=In%20the%20most%20straightforward%20terms, [https://perma.cc/C5Y3-K75W].
[4] Rental Programmes, Savills (Oct. 12, 2023), https://www.savills.com/research_articles/255800/352858-0 [https://perma.cc/3JQS-F8S9].
[5] Branded Residences, supra note 1.
[6] Hotelier Middle East Staff, How rental pool investment works, Hotelier, (Oct. 28, 2014, 12:39 PM), https://www.hoteliermiddleeast.com/hme/21999-how-rental-pool-investment-works [https://perma.cc/N3DM-5R9N].
[7] Unlocking the synergies of branded residences, Withersworldwide, (Aug. 21, 2020), https://www.withersworldwide.com/en-gb/insight/read/unlocking-the-synergies-of-branded-residences [https://perma.cc/A6WJ-H6XC].
[8] Chris Graham, Branded Residences: An Overview 42–45, (Graham Associates, 4th ed. 2021).
[9] Scott Antel, Branded Residences: Tips for Navigating a Successful Project, JDSUPRA (Nov. 13, 2019), https://www.jdsupra.com/post/fileServer.aspx?fName=52cf1784-e115-40e5-8731-e8bbc17f47ca.pdf [https://perma.cc/RHW7-PQZ7].
[10] Lada Shelkovnikova, Branded Residences and Rental Pool Arrangements in Dubai, Al Tamimi & Co. (Dec. 2014), https://www.tamimi.com/law-update-articles/branded-residences-and-rental-pool-arrangements-in-dubai/ [https://perma.cc/525N-MY3N].
[11] Id. at 5.
[12] Bernardo M. Credmades, Multi-Tiered Dispute Resolution Clauses (Sep. 15, 2014), https://fidic.org/sites/default/files/36%20cremades_2004.pdf [https://perma.cc/2DK2-8LFC].
[13] Antel, supra note 9, at 6.
[14] Id.
[15] The Continued Rise of Branded Residences: Opportunities and Structuring Considerations For Developers, Hotel Owners, and Brands, JDSUPRA (May 1, 2024), https://www.jdsupra.com/legalnews/the-continued-rise-of-branded-2998848/ [https://perma.cc/SU4S-JPBN].
[16] Mediation Techniques: Tools for Effective Conflict Resolution, RapidRuling (Aug. 26, 2024), https://rapidruling.com/blog/alternative-dispute-resolution-blog/mediation-alternative-dispute-resolution-blog/mediation-techniques-tools-for-effective-conflict-resolution/ [https://perma.cc/9E2W-5F7R].
