New Villa Lease Arrangements

It was more than ten years ago that we were first asked to advise and assist a client in the organization of contractual arrangements to introduce the concept and mechanics of villa leases in the Maldives. The assignment related to the grant of leases in respect of a villa on a resort.The Ministry of Tourism was helpful to the extent that they included some limited provisions in their regulations called the Maldives Tourism (Grant of Rights) Regulations [Regulations No: 2010/R-14] which were introduced on 9 December 2010.Exactly a decade later, the Maldives Tourism Act has specifically recognized and provided for the creation of villa leases. This development came with the enactment of the Tenth Amendment to the Maldives Tourism Act [Law Number 35/2020] on 27 December 2020.Why a villa lease?It is interesting to note that the tourism law also uses the same concept we introduced in 2010. The legislation calls it a villa “lease” but defines it as a “sale” of “right to use” the villa.There is a reason for that. As we all know, the islands (on which resorts) are built in the Maldives are all State land held by the government. The islands are (not sold) but granted on long leases to the resort “owners” (lessees) vesting them with no property ownership. Even if (for all practical purposes) the lessee is regarded as the owner of the resort island, the resort owner technically holds only the ownership of a leasehold granted by virtue of an Island Lease Agreement signed with the Ministry of Tourism.That is why the owner in the context of villas is not capable of granting an ownership right that is stronger and superior to the one that they hold in the form of leasehold under the Island Lease Agreement.Therefore, in Maldives legal parlance, the villa owner sells the practical right to use enjoy and sleep in the villa as opposed to any physical villa, the land or immovable property.The LawThere are a total of ten provisions in the tourism law that focus on villa leases. They are all found in section 16 of the law. To be exact they are arranged from section 16 – 6 to section 16-15.Helpful DefinitionsSection 16-6 of the law now allows a villa lease to be created in respect of individual villas on a tourist resort. In simplest of terms, the operator of a resort may now sell the right to use a villa on their resort under a long term contract for valuable consideration.The lease is defined to mean a long term lease of a villa whereby the right to use that villa is sold to a villa buyer.A villa is defined to mean an independent unit that contains more than one room; is placed within a specific boundary; is found on the site plan of the resort; and is connected to and forming part of the general facilities and utilities of the resort such as water electricity and the like. The sale comes with the right of entry to the resort, and of course, access to the villa.Section 16-7 says that a lease of a villa can be granted for long term according to processes outlined in the law and regulations made under it.Prior registrationSection 16-8 puts an obligation on the operator (the seller) to identify the villa that is to be offered to a buyer, and get that unit registered with the Ministry of Tourism for a fee ahead of making an offer on it. This may mean that a villa may only be offered to a buyer after it is registered with the Ministry of Tourism.Who can sell?Section 16-9 requires an agreement to be signed between the seller and buyer for the villa lease. That agreement ought to contain details required to be found in it under the law or regulations.It is interesting to note that the seller (under a villa lease agreement) can be the lessee (who has taken the lease of the resort from the government) or the sub-lessee (who has subleased the resort from an existing lessee).Depending on who is operating the resort, the operator (whether the lessee or sub-lessee) is given the freedom to offer villa leases – but of course, according to law and regulations.Who can own? Only two types of persons can own a villa: an individual or a company registered or re-registered in the Maldives.While the law is clear that only a local set up (in the form of a company created or re-registered in the Maldives) can hold a villa lease, it is unclear from the law if a villa lease can be held directly by a foreign national (who has no local presence). The law is silent on the nationality element as regards individuals.Lease agreement prevailsThe villa lease cannot be given for a period longer than the period remaining of the Island Lease Agreement. The latter governs the fundamental relationship between the government and the lessee of the resort.The villa lease is also prevented from containing a provision that conflicts with the Island Lease Agreement. If there is any provision that is inconsistent with the Island Lease Agreement, the affected provision will be of no effect to the extent of such inconsistency.Villa buyer rightsThe rights and interests accruing to a villa buyer under the villa lease agreement are specifically recognized in the tourism law and are deemed to be validly and legally belonging to the villa buyer. That is clear from s16-10 (e).Those rights and interests may be mortgaged in a manner not inconsistent with the villa lease agreement, the tourism law or regulations made under it. Also, any mortgage will have to be registered with the Ministry of Tourism.A villa buyer in possession of those villa lease rights can subsequently sell or transfer their rights to another, or even exchange with another. However, a villa buyer is prevented from creating any further leases in respect of the same villa.Once a villa lease is concluded and the villa buyer is in possession of their rights, the villa buyer is asked to proceed to the Ministry of Tourism to get their rights registered with the ministry.Transaction agreements The law mentions two specific agreements: the villa lease agreement and the management agreement. These are required to be concluded between the seller (operator) and villa buyer.A villa lease agreement is to contain the following details: period of lease; period of use within a year; if period of use is to be staggered within the year, the formula by which the days would be scattered; consideration payable; the details of the island / resort on which the villa is located together with its size and facilities; how management rights may be organized; positive and negative covenants in the use and management of the villa; how rights can be sold, transferred or exchanged; how lease may be terminated including requisite notice and adjustment of payments at premature termination; how to provide for redevelopment of the resort during the existence of a villa lease.A management agreement is to provide for the management of the villa as part of the resort establishment. The contents to be found in the management agreement are to be provided in the regulations to be made under the law.Even if the law speaks of these two agreements, a typical transaction may contain four agreements: a reservation agreement (to book a villa); a villa lease agreement (the main agreement); a management agreement (to deal with management matters); and a rental agreement (to earn and split revenue from the villa).Government taxesAccording to s16-14 of the law, the villa lease agreement will attract GST under the Goods and Services Tax Act on the consideration / contract value. Current rate is 6%.If the villa is used commercially to earn income from tourists, that would trigger US$6 Green Tax due under the Tourism Act; US$12 TGST due under the Goods and Services Tax Act.The Regulations As mentioned at the start, until the Tenth Amendment came into being at the tail end of 2020, the provisions on villa leases were found only in the Grant of Rights Rules of 2010.However, now that the Tourism Act has upgraded the level of villa leases to be provided for in the law itself, the legislation requires additional rules to be created under the law.Therefore, the detailed picture on the full regulatory framework on villa leases would become clearer once the Ministry of Tourism has updated its set of villa lease related regulations in line with the Tenth Amendment. By MNPhoto: Courtesy A Sattar