Management and structuring issues are more complex for multiple-use developments
Developments in the UAE often comprise a number of mixed-use schemes as developers seek to maximise the marketability of and return on projects. A common example of a mixed-use development is a residential apartment building with ground-floor retail units. However, more complex developments may include additional uses such as hotels, serviced apartments and commercial offices.
As different “uses” may have different requirements or expectations in relation to the control, management or use of the common areas within a building, the management and structuring of mixed-use developments is more intricate than with single-use developments and requires striking an appropriate balance between the relevant use interests.
To provide a brief overview, mixed-use would usually involve dividing the development into units, for which a title deed is issued to each owner, and shared or common areas, which are owned in common by the unit owners and managed via a licensed owners’ association manager. In Dubai, this structure is known as jointly owned property and is regulated principally by Law No. 27 of 2007.
Common areas would usually include the structure of the building, MEP, equipment such as air-conditioning systems, fire-suppression systems and elevators, internal areas such as lobbies, stairways and internal passageways, facilities such as pools and gyms, and external areas such as driveways and gardens.
Where a development is for single use, such as an apartment building comprising solely residential units, the management and structuring of the development is relatively straightforward and would generally require only a single-layer subdivision, regulated by a jointly owned property declaration. Unit owners will generally share the use of and cost of administering and maintaining the common areas.
Where a development involves multiple uses, the management and structuring issues are more involved and it may be necessary for a developer to implement a more complex subdivision structure to address those issues. That subdivision could take the form of a layered scheme of subdivision, a volumetric subdivision or a combination of the two.
In a layered scheme, the development would be subdivided into principal common areas and components. Generally, each distinct “use” would comprise a separate component and the component owners share in the principal common areas. Each component may then comprise of single ownership, which is common in hotels, or be further subdivided into units and component common areas, which is common in residential and retail units.
In contrast, a volumetric subdivision involves subdividing a development into volumes. Volumes are similar to components under the layered subdivision approach. The distinction is that with volumetric subdivision there are no areas of common ownership.
Instead, all areas are included within one or more volumes and are owned by the owner of that volume and, to the extent that another volume owner may require or enjoy use over such areas, that use right is documented as an easement in what is often called a “building management statement”, together with any cost-sharing mechanisms. Readers will appreciate that this approach requires a detailed and technical assessment of what areas, plant and equipment would be subject to such easements.
Consider the example of a mixed-use development comprising a residential apartment tower and a hotel tower on a shared podium, with retail units within the podium. This type of development raises a number of structuring considerations, including whether the shared podium and other common areas should comprise “principal common areas” under a layered scheme of subdivision, i.e. shared between the hotel, residential and retail components, or should critical common areas be included within say the hotel component/volume, making a volumetric subdivision more appropriate?
There is no one-size-fits-all approach and developers should consider issues such as building design, control requirements, cost sharing and management.
Other considerations are asset queries such as:
* What if any other areas are necessary for the proper use and enjoyment of the hotel, the residential units and/or the retail units?
* If it is essential that one “use” controls a particular common area, should that area instead form part of the relevant component or unit? If included in the relevant component or unit, this would increase the area of the component or unit and generally also increase its liability to contribute to other common area service charges. Alternatively, may these areas be retained as common property with rights of exclusive use granted in favour of the retail unit owner?
* Is it appropriate that the hotel, residential units and retail units share in the cost of managing and maintaining all common areas? For example, if the retail unit owners do not use or benefit from the elevators within the building, those owners would likely not want to contribute to the costs of maintaining them. Alternatively, a hotel owner/operator would generally require that certain common areas such as lobbies, entrance areas and landscaping be maintained to a standard consistent with the hotel operator’s brand standards, which is likely to be a higher standard than a residential unit owner would require.
* Is it appropriate that the hotel, residential units and retail units share in the use of all common facilities? For example, retail unit owners and occupiers would generally be excluded from the use of any common pool or gym facilities, which is of course linked to the preceding query.
* Are any facilities included within the development intended to be available only on a pay-per-use or commercial basis?
* Is it appropriate to develop rules specific to a particular use? For example, particular requirements relating to the undertaking of works or alterations to the fit-out of retail units.
A comprehensive consideration of the relevant management and structuring issues is critical to ensure that an appropriate structure is implemented. From a practical point of view, as units in jointly owned property developments are generally marketed off-plan, the structure should be settled in advance and disclosed to purchasers to comply with a developer’s obligations. It is, therefore, critical that developers give due consideration to or seek appropriate advice on these management and structuring issues at the outset.
A clear framework and appropriate balance around these types of issues give investors a clear understanding of the nature of the development into which they are investing, their prospective rights or limitations on those rights in respect of common areas or common facilities and their obligation to contribute to the cost of maintaining and administering those areas.
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