5 tips for hotel operators entering the UAE market

(Leonardo Patrizi)

In the last 12 months, we have seen an influx of new operators and hotel/serviced apartment brands entering the UAE market. Strong consumer demand and the UAE's success in building it reputation and quality offering on a worldwide scale, including the successful bid to host Expo 2020, continue to attract operators from all parts of the globe. 

While the environment is ripe for success, with a record-breaking number of tourists visiting the UAE each year, it remains of utmost importance that new entrants to the market ensure that they understand the local legal framework before committing to a long-term management agreement (often 20 years or more). Local laws and regulations can be difficult to assess without specific knowledge of the region and local legal advice. 

For example, certain concepts in management agreements that are fairly standard and workable in other jurisdictions may be unenforceable or impractical in the UAE. In this context, five key considerations for operators entering the market are:

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1. Licensing

In the UAE, all licenses required for the operation of a hotel are generally obtained by and are in the name of the hotel owner, including any alcohol license or entertainment licenses (for DJs, special events, musicians on the hotel premises). As a general rule, all bank accounts and any contracts entered into in relation to the hotel are in the name of and for the account of the hotel owner. The key for the operator is to establish its authority to act on behalf of the owner in respect of these matters, as many of the operator's rights under the hotel management agreement are contingent upon having such powers. 

2. Authority

In order for the hotel operator to have requisite authority to fulfill its obligations, such as managing the operating and FF&E accounts, hiring and termination of hotel employees, applying for renewal or application of any requisite licenses, the hotel owner will need to execute (and usually have notarized) a power of attorney granting these powers to the hotel operator. Under local law, a power of attorney may be revoked, regardless of whether the terms of the hotel management agreement provide for it to be irrevocable. Before the local authorities, the hotel operator acts as an "agent" on behalf of the hotel owner pursuant to the power of attorney. It is critical that the power of attorney contains the requisite powers agreed to in the hotel management agreement and conforms to local requirements.

3. Employment

In the UAE, the hotel owner is typically the sponsor for all of the hotel employees, including key personnel, such as the general manager and the financial controller. For Ministry of Labour purposes, it is the hotel owner who has the right to hire and fire any hotel personnel. It is important that the terms of the hotel management agreement clearly delineate the rights of the owner and the operator with respect to hotel staff and that the power of attorney granted by the hotel owner addresses the hotel operator's rights and input in respect of hiring and termination of hotel staff.

4. Governing Law & Dispute Resolution

While there is no legal requirement for hotel agreements to be governed by local law, it is likely to be both a preference and a requirement of a local hotel owner. Operators should also understand the differences and implications between having disputes settled by the UAE Courts, the Courts of the Dubai International Financial Centre or arbitration. There are differences as to predictability, cost and efficiency with each of these options.  

5. Taxes

With the announcement of value-added tax to be introduced in the Gulf Cooperation Council countries by 2018, it is crucial that the hotel management agreement reflects the obligations of each party to pay and account for such taxes. 

The above list is not exhaustive, but demonstrates the types of issues that often arise in the local market. With an increased number of international operators looking to enter the market, it is critical that the hotel agreements are reviewed by a legal expert in the UAE to ensure compliance with the local customs and practices, as well as UAE regulation. 

Sarah Khalifa is a senior associate within the real estate and hospitality team at Clyde & Co LLP.

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