The Dubai Hotel Market

There can be little doubt that the hotel industry in Dubai is one of the most vibrant and dynamic in the world. Having initially worked hard to market itself as a luxury destination, the hotel market is now moving towards a broader offering indicative of a more mature market.

Where once the landscape was dominated by 5 star hotels, a broader offering is springing up comprised of midmarket and family hotels to cater for the influx of visitors anticipated as a result of the new large scale theme parks, and the upcoming Expo 2020.

In addition to this anticipated growth, and already with an estimated 679 establishments and over 105,000 available rooms, Dubai already has a significant and growing hotel industry. However, with that level of growth and opportunity, the margins between success and failure being so slim, and the rewards for obtaining prestige status turning on such small issues, the potential for disputes to arise between owners and operators is on the increase.

The Dubai Hotel Market in the News

Nowhere is this potential for dispute more apparent than in the fierce battle currently being fought for control of the ‘Viceroy’ Palm Jumeirah Hotel, the US$ 1.2 billion hotel and residences which opened in March 2017.

The owner of the property is Dubai-based real estate development and hospitality group FIVE Holdings. Until June 2017, the property was operated by Viceroy Hotels and Resorts pursuant, it seems, to a long term hotel management agreement to brand and manage the Palm Jumeirah-based hotel agreed between the parties in 2013.

However, in June 2017, it is alleged that Viceroy’s regional president and other staff were forcibly removed from their offices, and at the same time a statement was issued by FIVE Holdings confirming that it would be launching FIVE Hotels & Resorts to manage the hotel and residences on the Palm Jumeirah previously operated by Viceroy.

Since then, a bitter legal battle has ensued, with Viceroy at one point obtaining an injunction from the Dubai International Financial Centre (DIFC) Courts prohibiting the owner from taking any steps to prevent Viceroy from exercising its exclusive authority to manage the hotel.

In response, it has been reported that FIVE subsequently filed a case with the Dubai Joint Judicial Committee (the recently established body tasked with adjudicating conflicts of jurisdiction between the DIFC and onshore Dubai Courts) that the DIFC Court has no supervisory or supportive jurisdiction to make an injunction and order. Referrals to the Committee are not publically available, but the eventual judgment will be.

In a statement issued at the time of its take over of the Palm Jumeirah premises, the CEO of FIVE Hospitality LLC said:

“We believe now is the right time to disrupt the hospitality industry. The people who actually provide a hospitality experience never receive the real benefits while most of the commercial benefits are taken in most cases by operators. This needs to change.”

Given the rhetoric that is coming from both sides in this dispute, and the fact that the legal wranglings are taking place before both the onshore and the offshore Court jurisdictions, the case is being watched carefully by lawyers, operators and owners.

The outcome of this case is likely to impact how such disputes are progressed in the future (although we note that the proceedings in relation to the validity of the management agreement are likely to take place in private arbitration proceedings).

Further, with talk of ‘disrupting’ the industry, and a call to change the ‘commercial benefits’ derived by operators, owners and operators alike will be watching carefully to see whether this is the beginning of a sea-change, or simply the public airing of an owner / operator dispute that would otherwise have been kept to the confines of confidential arbitration proceedings.

Our Experience

Whilst the current battle for the ‘Viceroy’ Palm Jumeirah is an ongoing and high profile dispute in the region between an owner and operator, it is far from the first dispute of its kind and, in light of the above, unlikely to be the last.

We have our own recent experience acting for an owner to assist it with the termination of a management agreement with a underperforming operator.

This threw up a number of issues, including:

• The interpretation of the original management agreement, entered into before construction of the hotel had even commenced
• Whether the dispute resolution procedure had been properly followed
• Amicable settlement options and attempts
• What, in reality, the owner could do to effect the removal of the operator from the hotel

In that case, we assisted the owner in successfully agreeing with the operator the terms of its exit from the hotel, and the terms of a handover to the incoming operator.

From our experience on that matter, and several others on which the team has assisted in the region, we consider that there are several key aspects which can assist parties in avoiding a dispute between an operator and owner in Dubai (and the wider GCC region) from becoming the next ‘Viceroy’ dispute.

Successful Partnering

Whether between an owner and operator, joint venture partners, or a supply agreement relating to hotel operations, we consider that there are key steps that can be taken to avoid a dispute arising, or, where a dispute cannot be avoided, to mange a dispute through to an amicable settlement:

• First, and most importantly, get the set-up right. Ensure that you have a clear and detailed agreement, properly agreed by authorised signatories, which includes reporting obligations, defined communication channels, unambiguous targets and clearly documented steps that must be undertaken in the event that a dispute does arise.
• Ensure that you agree an appropriate and effective dispute resolution clause. Where issues are likely to turn on sensitive commercial data, confidential arbitration proceedings are likely to be more appropriate, but consider how, if required any arbitration award can be rendered on an emergency basis, or supported by the Courts, and if so, which ones.
• Have a clear exit/handover strategy agreed. That way if the dispute cannot be resolved, there is a clear and detailed process that you, and your owner/operator partner are obliged to follow and which, if necessary, the arbitration panel or Court can enforce.
• Ideally, a dispute between an operator and owner will always be settled amicably. How can this be achieved? What are the commercial realities of the situation, particularly in a challenging jurisdiction such as Dubai? Unfortunately, there is no ‘one size fits all’ solution to owner / operator disputes, we always recommend seeking early legal advice in order to help you explore all angles to ensure that any dispute is resolved in a way which allows you to obtain the most commercially and legally satisfactory outcome to your dispute.

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