Common Area Maintenance Obligations

By: Robert (Bob) H. Voelker
Hospitality & Mixed-Use Leader
June 2008

A key issue in any mixed-use project is structuring the maintenance obligations for the common areas. In a typical condominiumized project, common area maintenance is handled by the owner's association and the cost is a common area expense allocated among all of the unit owners. By their nature, mixed-use projects involve stronger players with potentially divergent interests. Adding a hotel to the mix raises the ante as the hotel operator will typically require a higher level of maintenance and service than a typical business tenant. Branded residential condominiums further complicates the situation as the visible common elements of the residential branded condos must be maintained at the same level as the hotel. As a result, many hotel operators are unwilling to rely upon their remedies under the condo documents; they want to control condominium common area maintenance themselves. The most common ways of giving the hotel operator the right to maintain the common areas are addressed below:

1. The owners association engages the hotel operator under a management contract which puts responsibility on the hotel operator to maintain the common areas. This option allows the hotel operator a direct and immediate right to maintain the hotel and condominiums at a consistent level and can also result in cost savings to the hotel and the overall mixed-use project. The cost of maintaining the condo common areas is easily passed back through to the various owners through the owners association. Unfortunately, this option has a major drawback which can be a deal killer from the hotel operators perspective. Section 3-105 of the Uniform Condominium Act (which is the model which has been adopted in most states) provides that any contract entered into before the condo owners control the condominium association (i.e., while the developer controls the association) is terminable. As a result, the hotel management company cannot be assured that it will be able to maintain those common elements for the entire term of the hotel management contract.
2. One means of avoiding the issue raised by the Uniform Condominium Act is granting the hotel owner a perpetual maintenance easement right over the exterior skin and other visible common elements of the condominium building, and then having the hotel owner subcontract out the maintenance responsibilities to the hotel operator. Section 3-105 covers contracts and leases, and does not appear to invalidate other legitimate property
   interests. Particularly where the hotel and condominium are vertically integrated (stacked), the granting of this perpetual maintenance easement has a legitimate business purpose — to preserve the integrity of the building skin and common areas shared between the hotel and other uses.
3. Another approach to the maintenance issue is creating a separate condominium unit under the master condominium declaration comprised of all the common areas in the project. That separate unit is oftentimes called a shared facilities unit or SFU. The SFU is owned by the owner of the hotel and the maintenance of that unit is handled by the hotel operator pursuant to the hotel management agreement. From a cost allocation perspective, the condominium declaration should allow the owner of the SFU to allocate costs it incurs in maintaining the common areas to the owners of the units (both the commercial units - hotel, retail, etc. - and the residential condominium association) that are benefited by those common areas. For example, if the elevators service the hotel and the residential condominiums located on top of the hotel, but not a separate retail unit that is located on the ground floor, the cost to maintain the elevators should be borne by the hotel unit and the residential condominium unit. The disadvantage of this structure is that it requires the creation of another unit under the condominium declaration, significantly complicates the condominium map (to create the SFU, you will need to identify all the common areas that the hotel operator will maintain), and requires detailed accounting of the costs incurred for allocation purposes.

As indicated above, there are several ways of approaching the common area maintenance obligations in a mixed use project. Each scenario requires careful analysis of the allocation of costs and the identification of common areas, and making sure that the hotel owner and hotel operator, as well as the other commercial and residential condominium unit owners, have a clear understanding of how these issues are resolved.