Minister of Tourism recently issued a three-year ultimatum for resorts idling in the “under development” category of properties.
He made the statement in parliament taking a stand on tourism leases where islands remain idle without any form of development despite having consumed several years of the lease period.
The rule change
His reference is to the rule change of 28 December 2020 to the construction period extension regulations conceived in the second amendment to those regulations.
Under the current regulations in effect, a construction period extension is granted for a maximum of three years. There will not be a further extension. If the resort is not completed during the three-year extension, the lease agreement over the island is to terminate automatically without the need to take any further action on either part.
Every tourism lease agreement provides a construction period without rent to complete development. That period is generally for three years. If the resort is not completed within the initial construction period found in the lease agreement, the lessee can apply for an extension of the construction period. The lessee chooses the number of months it may require in extension. However, there is a cap of 36 months.
The Ministry of Tourism charges a payment for each month of extension and grants the extension via an addendum to the lease agreement over the island.
The standard clause
The current regulations require this addendum to have a standard clause which says that the lease agreement would terminate automatically if the property could not achieve completion and commencement of operations within that extended construction period.
The effect of the clause is to guillotine the lease agreement at the end of the extended construction period for want of completion of development and commencement of operations.
The proponents view
According to those who support the view, a resort is awarded to a serious investor. It is not about signing a lease agreement to keep the island idle – sometimes for a decade or even more. Keeping an island locked in a lease prevents other able and willing investors to make good use of that island.
Additionally, such an island is a loss to the government in terms of job creation, economic stimulation, and tax revenue.
A lessee who holds a lease of an island ought to have a responsibility to bring the island into operation, and contribute (directly and indirectly) to economic growth and social development.
This rule change is aimed at pushing hibernating resorts towards completion of development or have their leases returned to the government.
The opponents view
Those against this policy shift feel that that the such a move could create the opposite effect.
The reason for delayed development is largely about trouble arranging finance. While the rule may not impact those who have finance in place, it is definitely going to be an added challenge for those still trying for financing opportunities. The banks and other lending agencies may want to be extra cautious in their credit risk evaluation in respect of a property which has no security of tenure and whose lease may be guillotined during their financing period – with no opportunity to cure.
Some of the resorts may be partly constructed during the three-year period. They may need an extra few months to complete the development and bring the property into operation. An absolute provision on automatic termination would fail to recognize the work already done and money already expended. This will create further issues over the absence of appropriate compensation mechanisms to deal with take-over of partly completed resorts.
Additionally, it is still a legal question if a set of regulations dealing with detailed processes for seeking a construction period extension could ride over the provisions of the tourism law in place, and if such a set of regulations contain clauses that can directly torpedo an existing lease granted under the law.
Even if the lessee is “agreeing” to automatic termination during its efforts to secure a lease period extension, its agreement is to a standard clause dictated via a standard agreement without which an extension of the construction period is not available.
It would be interesting to see how far this clause pushes hibernating resort islands towards development and operation. It would be noteworthy to see if any resorts are actually guillotined and returned to the government for being bitten by this new rule. It would be exciting to see if this new rule survives without a legal challenge to its constitutionality in a court of law.
Photo: Courtesy Mihaaru