Summary

Branded residence buyers, having paid a substantial premium for their association with the luxury brand, are at greater risk than they may think of the brand going away through no fault of their own.

Purchasers of branded residence properties (typically situated adjacent to a luxury hotel operating under a similar “Brand”) often cite the buyer assurances that a branded property brings:

• quality design, fit out and overall development delivered as advertised;
• high levels of security, common area maintenance and well enforced rules and regulations;
• convenient access to the adjoining hotel facilities and amenities, including concierge and other services; and
• not to mention the prestige and exclusivity of the lifestyle Brand, which should also bring a resale premium on any subsequent sale.

What many buyers don't realise, however, is that perhaps the weakest of these assurances is that the Brand will remain associated with residence development over the long term. This can be through no fault of the buyer and despite their having paid a premium (typically from 15-50%) for the privilege of buying into a branded community. 

In virtually all branded residence projects, buyers are required to execute a "Purchaser Acknowledgement" in favour of both the Brand and the developer acknowledging that:

• the Brand is not an investor, developer or sponsor of the residences and has no liability to the buyer with respect to the development, construction or sale of the residences;
• the Brand is granting a limited and revocable right to associate the Brand with the residences, but without any grant of intellectual property rights (e.g., the “Brand Residences, Park Lane”);
• the right to associate the Brand with the residences will automatically terminate should the Brand cease to be associated with the adjoining hotel for whatever reason;
• the Brand may terminate the association with the residences at any time and without the consent of the residence owners; and
• the buyer has factored in the risk of loss of the Brand when making its decision to purchase a residence at the Brand sales premium, and will have no claim for loss or damages against the Brand operator should the Brand be removed from the residences.

Loss of the Brand may be wholly, partially, or completely not, attributable to the actions of the residence buyer.

The most common reason for removal of the Brand is due to the developer or residence owners' association's failure to adequately fund the management and maintenance of the common areas/facilities of the residences resulting in Brand termination for failure to maintain the “Brand Standards”.  For this, one cannot blame the Brand operator.

In many jurisdictions, legislation governing jointly owned properties is poorly developed and often residence owners cannot be forced to join or remain in a common owners' association.  This can expose the Brand operator and compliant residence owners to actions of one or more “rogue” owners who, through failure to fund or other reasons, disrupt the management of the residences.

In other cases, the residence owners may, over time, feel that the costs of “branding” and maintaining Brand Standards is too expensive for their needs, and elect to have the residence owners' association manage and maintain the  residences privately for less. In such a case, an individual residence buyer willing to pay extra for the Brand and Brand Standards can be at the mercy of the majority of less willing owners.

In other cases, the loss of the Brand may be completely outside the residence owners’ control.  Removal of the Brand from the adjoining hotel due to a default of the hotel owner (or the Brand operator) will almost certainly result in a cross default loss of the residence Brand.  Whilst one can understand a Brand operator’s hesitance to have its Brand associated with residences located next to a competing brand hotel, the residence owners did not precipitate this Brand loss, but suffered economically nonetheless.

More perturbing is where the Brand and the developer mutually decide to terminate the residences Brand relationship. This is not unusual, and one can understand the motivations of the developer and Brand operator at this stage of the project life cycle: the developer has made its Brand premium on the residence sales and has far less economic interest in remaining in the project; likewise, the Brand has earned its 3%-6% Brand license premium on the residence sales and has far less upside on managing the residences for a cost plus fee of 10% of the residence service charges.  And it has to deal with not just the developer “devil it knows”, but potentially multiple “devils it doesn’t know” in the individual residence owners.   A lot of work for little upside.  

But that is not what the prospective residence buyer contemplated when they read the glossy brochures and listened to the branding sales pitch.  Despite the buyer’s acknowledgement of, and waivers of claim for, potential loss of the Brand, when paying that level of Brand premium for a residence, certainly there is some reasonable buyer expectation that they will receive the benefit of what they bargained for - particularly where the loss of Brand is not their fault.

Whilst to date there is little precedent for residence buyers, having paid the Brand premium, bringing claims for subsequent loss of the Brand (perhaps due to buyers failing collectively to agree to fund such dispute), one can expect to see these disputes in future as the popularity of branded residence developments grows internationally.