UAE

The UAE is a constitutional federation formed on 2 December 1971. It consists of the seven emirates of Abu Dhabi, Dubai, Sharjah, Ajman, Fujairah, Umm al-Quwain and Ras Al Khaimah.

As a federation, the UAE is governed by a Constitution that regulates the distribution of legislative powers between the federation and the individual emirates, among other things.

Under the UAE Constitution, federal laws have supremacy over the laws of individual emirates. However, individual emirates are permitted to enact their own legislation in areas other than those exclusively reserved to the federation.

Individual emirates can also legislate on matters where the federation has not yet exercised its legislative powers. Federal laws (with the exception of property law) generally govern civil and commercial transactions.

Both share deals and asset deals are common hotel sale and purchase structures in the UAE.

Hotel transactions and their terms (in particular, the parties and the sale and purchase price) are not public in the UAE.

Dubai

Non-UAE/GCC investors are permitted to own real property in “designated areas” such as Palm Jumeirah or Dubailand.

Abu Dhabi

Non-UAE investors can own real property in “investment zones” such as Yas Island and Saadiyat Island.

UAE

Privately owned/independent hotels

Unlike branded hotels, privately owned/independent hotels are less common.

Hotel management agreements

Hotel management agreements (HMAs) are very prevalent especially among international and regional hotel chains.

Hotel lease agreements

Hotel lease agreements are not common.

Franchise agreements

Franchise agreements are less common. However, they are increasingly being discussed.

Privately owned structures

These are owned and operated by individuals or small companies and are not affiliated to major hotel chains. The owner has full control over operations, branding and management decisions.

HMAs

Under a HMA, the owner contracts a management company to operate the hotel on their behalf. The management company handles the day-to-day operations, staffing and marketing. Meanwhile, the owner retains ownership of the underlying asset and financial responsibility.

The owner will benefit from the experience and brand recognition of the management company but has less control over daily operations.

Hotel lease agreements

Under a hotel lease agreement, the owner of the hotel leases the property to an operator. The operator is responsible for all operational aspects and pays rent to the owner. The owner receives a steady rental income with minimal involvement in operations, while the operator assumes all operational risks and rewards.

Franchising agreements

Under a franchising agreement, the hotel owner operates the hotel under the brand and guidelines of a franchisor. The franchisee manages the hotel but must adhere to the franchisor’s standards and practices. The franchisor provides brand recognition, marketing support and operational guidelines. The franchisee benefits from the franchisor’s brand and support but pays franchise fees and complies with strict operational standards.

UAE

HMAs are key documents that govern the definition of a hotel’s relevant ownership and operational roles. Their typical structure includes the following.

Term of appointment

The term of appointment species the duration of the agreement and conditions for renewal.

The standard contract period of HMAs is between 15 and 25 years for the initial term. Renewal terms are commercially negotiated between the parties.

Operator’s fees

The typical operator’s fee structure includes a base fee (which is a percentage of overall revenue) and an incentive fee (which is a percentage of gross operating profit).

Operator’s obligation and rights

The operator is required to operate a hotel to a specified standard. The operator is granted all rights reasonably necessary to achieve that obligation including rights to employ staff (on behalf of the owner) and determine maintenance obligations.

The operator is responsible for setting an operational and capital expenditure budget and generally has exclusive control over an operating hotel and accounts for the payment of various expenses, fees and returns.

The operator may have rights to provide marketing services to the hotel.

Operators will generally have the right to require upgrades to the hotel to reflect brand standards (as determined by the operator) although these may be time or scope limited.

HMAs often include a right of first refusal for the operator to purchase the hotel if it were to be sold.

A non-compete/area of protection clause is often negotiated as part of the deal. Non-disclosure agreements are also often negotiated as part of the deal.

Key money

This is less common in the UAE compared to Europe, the Middle East, and Africa or the Asia-Pacific.

Owner’s obligations

The owner is required to fund the hotel’s operation and upkeep, including payments such as insurance. They are also typically required to set aside funds for fixtures and fittings.

The owner is required to provide necessary funds for the hotel’s operation, including working capital and capital expenditure.

The owner must maintain adequate insurance coverage for the hotel.

The owner must ensure the hotel complies with all applicable laws, regulations and standards.

The owner will only generally have approval rights over significant decisions, such as major renovations. Rights in respect of operational expenditure and approval of budgets vary but operators are generally afforded broad rights to determine the correct management of the business.

The owner will commonly endeavour to procure a non-disturbance agreement before financing and ratio restricted financing obligations in HMAs.

In addition to the applicable laws, owners must ensure compliance with anti-money laundering and sanctions obligations.

The owner’s obligations will also often include a clause preventing them from exerting undue influence on the hotel operator.

Accounts

An account is established in the owner’s name, which is generally under the control of the operator. The owner typically provides initial working capital.

Revenue generated from hotel operations is deposited into designated accounts. Operating expenses, including payroll, utilities and supplies are paid from these accounts.

Profits are usually distributed according to the terms of the HMA with an agreed priority of payments out of those accounts.

Termination and default events

There are standard contractual provisions for termination due to insolvency or judgments levied against a party or for material breach.

Cross-termination provisions where other relevant agreements are terminated are common.

Owners can often exercise their right to termination for failure to satisfy the performance test or sell the hotel to a third party. This is often done after a specified period of time and/or payment of a break fee.

Performance test

There is often a standard of performance imposed on an operator. Failing to satisfy this standard may entitle the owner to terminate.

This commonly has two limbs: a revenue per available room (RevPAR) of the hotel compared to a consecutive set of hotels and a comparison of actual total revenue compared to budgeted total revenue.

Cure rights are normally afforded to an operator. However, the terms of the cure rights varies from transaction to transaction.

Dispute resolution procedures

HMAs will typically have terms addressing the best method of dispute resolution depending on the type of dispute. This will either be dispute fee-related or early termination.

If the dispute is fees or accounts-related, it may be referred to an expert. For other disputes it is common to provide for an escalation process, of good faith negotiations, mediation and then arbitration (often within the ADGM or the DIFC).

Hotel lease agreements are not prevalent in the region (see 3.1 Common Hotel Ownership and Management Structures).

Dubai

Short-term leases (ie, with a term of less than ten years) must be registered with the Real Estate Regulatory Agency on the Ejari system. Long-term leases (ie, those with a term of between ten years and 99 years) must be registered on the Real Estate Register of the Dubai Land Department.

Abu Dhabi

A short-term lease (ie, with a term of less than four years) must be registered on the Tawtheeq system. Any leasehold interests located within the ADGM must be registered with the ADGM Land Registrar.

The important clauses and provisions in commercial lease agreements are rent, duration, renewal right, and dispute resolution mechanisms.

UAE

Franchising agreements involve a licensing of the brand’s name and operating systems to the franchisee, who is responsible for independently operating and managing the hotel.

Franchise agreements commonly require brand operators to pay royalties based on a percentage of sales or total revenue. They also usually provide the licensee with a right to inspect the hotel from time to time.

In the UAE, hotel franchising agreements are regulated by several different licensing and regulation requirements depending on the emirate.

In the UAE, the acquisition of real estate is usually financed by equity (ie, the buyers own funds) and/or bank financing.

Financiers are only permitted to lend in the UAE if they are incorporated locally and regulated by the UAE Central Bank.

Sale and Purchase of a Hotel

The sale and purchase of a hotel in the UAE can be subject to corporate tax (which is calculated at 9% on the gain realised in the financial statements) and VAT (which is calculated at 5%). The corporate tax rate can be increased to 15% if the entity is subject to the domestic minimum top-up tax regime.

The corporate tax position could be reduced to 0% in specific circumstances (including where the property is commercial and located in a free zone and sold by a UAE free zone person).

The VAT position can be treated as a transfer of a going concern (and be outside the scope of VAT) subject to it satisfying the conditions of the UAE VAT framework.

The transfer of the underlying real estate asset is subject to a transfer fee of 4% in Dubai and 5% in the DIFC. The transfer fee is between 1% and 4% in Abu Dhabi and 2% in the ADGM.

Hotels must apply a range of extra fees such as the tourism dirham fee and municipality fees.

Entering Into a HMA

Income received by a UAE entity under a HMA will be subject to corporate tax (which is calculated at 9% (potentially increasing to 15% if the entity is subject to the domestic minimum top-up tax regime)).

VAT at a rate of 5% should be applied on the invoices raised under the HMA.

Tax Incentives

There are no corporate tax or VAT incentives available for hotel projects.

However, the Dubai government has set out an aim to waive the 10% municipality tax imposed on hotels to incentivise growth in the hospitality sector in the emirate.

Hotels in the UAE must obtain the necessary licences and permits from local authorities and comply with building codes and standards to ensure compliance with the zoning requirements.

The requirements related to hotel construction or refurbishment frequently change. However, the general guidance in some key emirates is as follows.

Dubai

Hotels in Dubai must comply with the Dubai Building Code (“the Code”) and Development Authority regulations. The key building and development regulations for hotels in Dubai are as follows.

• Height ‒ there is no maximum building height in the Code and it varies depending on location.
• Density ‒ there are no specific regulations.
• Floor area ratio ‒ there are no specific regulations.
• Parking requirements ‒ the Code sets out specific parking requirements for hotels:
1. there must be one bay for every five standard rooms and every two suite rooms; and
2. there must be one bay per 50 square metres of hospitality space and 20 square metres of function space.
• Fire protection ‒ all fire protection products and systems must comply with the UAE Fire and Life Safety Code of Practice.
• Disability and accessibility ‒ the Code sets out a wide range of accessibility requirements including exits, pathways, access control barriers and protruding objects.

Abu Dhabi

The building and development regulations for hotels in Abu Dhabi are as follows.

• Height ‒ there is no maximum building height.
• Density ‒ there are no specific regulations.
• Floor area ratio ‒ development regulations will be established during the information provision process for these types of regulations and these will be based on the facility type, plot scale and the surrounding urban environment.
• Parking requirements ‒ these are regulated by the Abu Dhabi Parking Standards.
• Fire protection ‒ buildings must follow the UAE Fire and Life Safety Code of Practice.
• Disability and accessibility ‒ the Code sets out a wide range of accessibility requirements including exits, pathways, access control barriers and protruding objects.

Ras Al Khaimah

The building and development regulations for hotels in Ras Al Khaimah are as follows.

• Height ‒ the ground floor level of buildings must not be more than 1.20 metres above the approved design level. The height of the roof parapet in buildings should be between 1 metre and 1.80 metres after the final finishing. Architectural facades are exempt from these requirements.
• Density ‒ there are no specific regulations.
• Floor area ratio ‒ this is regulated by the competent department of the municipality.
• Parking requirements ‒ these are regulated by the competent department of the municipality.
• Fire protection ‒ all fire protection products and systems must comply with the UAE Fire and Life Safety Code of Practice.
• Disability and accessibility ‒ as a minimum, hotels must provide one hotel room on the first floor if there are less than 100 rooms and two rooms if there are more than 100 rooms. These rooms must be fully equipped in line with the international standards approved for disabled people or those with accessibility needs.

The requirements for building permits for hotel refurbishment or new construction in the UAE frequently change. However, an application will need to be lodged with the Department of Tourism and Commerce Marketing, which is responsible for providing written approval for the construction of a new hotel or the conversion of an existing one.

The average duration of the procedure varies depending on the complexity of the project and the specific emirate.

There is no formal process for objecting to a building permit in the UAE.

Converting a hotel to another use in the UAE requires a change in zoning classification and this requires a formal application to be made. Any conversion must comply with local building standards and must be approved by the relevant authorities.

The UAE’s National Policy for Preserving the Modern Architectural Heritage of the UAE includes significant hotel landmarks. It also ensures that heritage sites are maintained and preserved for future generations. It is not permitted to demolish, remove or modify buildings and architectural elements of historical value which are considered as heritage.

Dubai

To operate a hotel in the emirate, a company must be registered with the Department of Economy and Tourism. The Department of Tourism and Commerce Marketing’s clearance is required once registration has been completed.

The Department of Tourism and Commerce Marketing grants a hotel licence once it has completed inspections.

Licences are provided in the DIFC once the hotel has been registered and has had a site inspection.

Abu Dhabi

Hotel licences are awarded by the Abu Dhabi Tourism Authority.

The ADGM Registration Authority has the right to issue commercial licences to hotels operating in the ADGM.

Ras Al Khaimah

Hotel licences are given once hotels are registered with the hotel classification system and all services offered have been officially classified.

UAE

The Department of Tourism and Commerce Marketing requires sustainability standards pertaining to energy and water efficiency to be upheld. This specifically requires implementing energy-saving measures and water conservation measures. They also require measures to reduce carbon emissions to be implemented.

Dubai

The Dubai Department of Economy and Tourism has announced the launch of the Dubai Sustainable Tourism Stamp. This is a new sustainability initiative which seeks to recognise hotels who adhere to the highest sustainability requirements. These requirements cover a wide range of areas, including energy efficiency, water conservation, waste management and staff engagement.

The DIFC has made commitments to sustainability initiatives which are considered when approving development plans.

Abu Dhabi

Abu Dhabi has issued a series of Sustainability Guidelines which focus on water management, energy, waste and transportation.

The ADGM has made commitments to sustainability initiatives which are considered when approving development plans.

Ras Al Khaimah

The Ras Al Khaimah Tourism Development Authority (RAKTDA) has issued guidelines and protocols under a “Green Hotel Rating” initiative to regulate sustainability standards and work.

In the UAE, there are specific employment law requirements which relate to hotel transactions. The applicable law will depend on where the hotel is based. Federal Decree-Law No 33 of 2021 Regarding the Regulation of Employment Relationships and its Amendments (the “UAE Labour Law”) is applicable onshore in the UAE and in most of its free zones. It is also applicable to the employment aspects of hotel transactions. However, where the hotel is based in the DIFC or the ADGM different employment laws will apply.

• Transfer of employment – where employees are required to transfer from one entity to another in the context of a hotel transaction, their transfer will be effected by way of termination and rehire. New employment contracts will have to be entered into with the new employer and new visas and work permits obtained. The termination of the employee’s employment with their current employment will, strictly speaking, trigger the payment of termination payments, including end of service gratuities. In practice, however, it is typically possible to roll over and defer these payments.
• Harmonisation of benefits – the provisions of the UAE Labour Law will have to be considered when implementing any harmonisation of benefits. Any employment contract changes will require the express consent of the employee.
• Share sale – in a share sale, the existing contracts remain in place and are considered continuous. The new employer will be responsible for previous liabilities together with ensuring compliance with the UAE Labour Law and contractual obligations going forward.
• Owner/operator model – in the UAE it is common for employees to be directly employed by the hotel owner and to be managed by the hotel operator. Parties to a transaction should be aware of this and employment-related documentation structured accordingly.

The commentary and information are accurate and correct as at the date of publishing and are subject to change.