Condohotels and aparthotels in Poland – investment principles, contracts and key legal risks

Aparthotels and condo-hotels – legal and business differences

Aparthotels and condo-hotels are two popular types of accommodation in Poland that combine residential and commercial features. Although their characteristics appear broadly similar, there are slight differences between them.

An aparthotel is a hotel facility offering accommodation in fully equipped apartments, usually with a kitchen or kitchenette. It operates on a model similar to that of a ‘traditional’ hotel, as it is owned by a single entity and managed centrally. Guests, however, are provided with standard hotel services, such as a reception, housekeeping, catering and leisure facilities.

A condohotel, on the other hand, is based on a slightly different ownership model. Individual units are developed by the developer and then sold to individual investors, whilst the entire property remains under the unified management of a professional hotel operator. Buyers therefore become owners of specific, separate apartments and, depending on the model adopted, may use them for their own purposes or entrust them to the operator for commercial letting, sharing in the revenue generated by the property.

However, in market practice, the distinction between a ‘condohotel’ and an ‘aparthotel’ is often merely a matter of convention and marketing. The choice of terminology depends largely on the business strategy adopted by the developer and how the development is positioned. Currently, there are no legal definitions of these terms in the Polish legal system, which encourages their flexible, and sometimes even arbitrary, use. It can, however, be assumed that, given the dynamic growth of this market segment, the legislator will attempt to standardise the terminology.

Of course, from the perspective of an investor in a condo-hotel or aparthotel, it is not the (marketing) name of the project itself that is of key importance, but above all the content of the legal documentation and the mutual obligations of the parties, and in particular the investment agreement, which is often linked to the property sale agreement and the management or lease agreement. It is precisely in this document or these documents that the actual terms of the investment, discussed later in this publication, are set out, along with the mechanisms for allocating legal and economic risks.

The investment agreement in a condo-hotel – what does it involve?

The investment model for an aparthotel or condohotel typically works as follows: the developer builds the property and then sells rooms or apartments (self-contained units with kitchenettes) within it to individual investors. Land registers are established for each individual unit. At the same time (and this is crucial), the purchaser enters into a management agreement for the purchased unit, transferring responsibility for its administration and marketing activities to the entity that carried out the project or to another specialist entity dealing with short-term rentals. In return for making the unit available for commercial use, the owner shares in the revenue generated by its letting.

The legal relationship between the investor and the developer or operator is therefore, as a rule, based on a document entitled an ‘investment agreement’, or a package of interrelated documents concerning the construction, separation and sale of the property, the management of the property, the letting of the property, and sometimes also additional obligations of the parties.

What, then, should an investor pay attention to in practice when entering into such an agreement?

The condohotel and aparthotel investment model

Generally speaking, there are two legal options available on the market: the construction and purchase of a property, and the acquisition of shares in a special-purpose vehicle carrying out the apartment development. However, it would appear that the more advantageous and secure option for an investor is to purchase a separate property with its own land and mortgage register. This ensures ownership of the property, and thus of a specific asset, which is protected under property law, and also allows for its relatively unrestricted disposal, encumbrance or the pursuit of claims.

In contrast, an investment through the acquisition of shares in a special purpose vehicle is of an indirect nature. In practice, the investor does not become the owner of a specific unit in a condo-hotel, but merely participates in the corporate structure of the company, whose financial situation, management style and level of debt have a direct impact on the security of the invested funds. This model therefore generates additional risks, typical of corporate relationships, which do not arise in the case of a traditional purchase of a property unit.

Profit from a condo-hotel – settlement models and rates of return

The primary aim of investing in a condo-hotel model is to generate a regular return on the property for the investor. This return is paid out according to a set return-on-investment model. In Poland, the most common models offer a fixed rate of return, typically ranging from 7% to 10% per annum.

For the investor, however, the key factor will be precisely determining the basis on which (i.e. the exact amount) the profit will be paid. For example, the profit may be paid:

• on the total price paid for the finished property, including fittings and fixtures, or
• on the price specified in the development contract, excluding the costs of finishing and furnishing, which will obviously be less profitable for the investor and yield lower returns.

There are also business models under which rental income is shared between the owner and the operator of the property, for example in the proportions: 70% for the owner and 30% for the operator, or on a 50/50 basis.

Investors should also bear in mind that, in developers’ advertising materials, investments in condo-hotels and aparthotels are frequently presented as generating a ‘guaranteed’ and secure return, which may suggest that there is no risk on the investor’s part. However, as evidenced by the decision-making practice of the Polish President of the Office of Competition and Consumer Protection (for example: Decision of the President of the Office of Competition and Consumer Protection No. RLU 4/2023 of 8 November 2023), such statements may be misleading if they do not take into account the actual volatility of the market and the conditions for the implementation of the investment. Consequently, the declared rates of return should be treated as marketing assumptions rather than binding financial promises.

It is also important to specify the frequency of profit payments in the investment agreement. Typically, agreements provide for one of the following options:

• monthly payment,
• quarterly payment,
• annual payment,
• the option to pay out income solely at the investor’s request, subject to agreed terms and procedures.

Owner stays in a condo-hotel – rules and restrictions

In addition to generating rental income, aparthotels and condohotels offer owners the opportunity to use the property freely during specific periods, known as ‘owner stays’. This undoubtedly adds value to this type of investment for the buyer. Such owner stays involve the investor being able to use the apartment for their own purposes, or for those of a person they designate, for a number of days per year specified in the contract. This is usually 7–14 days per year (up to a maximum of 28), although certain periods or seasons may be contractually excluded (this applies in particular to public holidays and holiday periods, when the highest returns on the investment are generated).

It is essential that the investment agreement clearly and precisely sets out the rules regarding owner stays. This should primarily include specifying:

• how many days a year the owner is entitled to use the property,
  
  
• how these days are allocated (e.g. whether they are fixed periods or rotating periods),
  
  
• the procedure for booking stays, i.e. how the owner should notify their intention to use the property, taking into account the booking lead time and the rules for prioritising the allocation of dates,
  
  
• rules governing the use of the property during the owner’s stays, such as maintenance standards, additional costs (e.g. cleaning fees), and rules regarding short-term lettings when the property is not being used by the owner,
  
  
• the possibility of transferring the right to owner-occupancy to third parties, such as family or friends, and any associated conditions and restrictions,
  
  
• how owner-occupancy stays affect overall rental income, and whether the costs of maintaining the property during these stays are covered by the owner or included in the overall accounts.

Condohotel investment agreement in Poland – key provisions

The investment agreement should precisely regulate the rights and obligations of both parties to the agreement, i.e. the investor and the developer or property management entity. It is within the agreement that all key provisions serving to protect the interests of each party should be included. Below, we present a detailed description of the key elements that should be specified in this type of agreement.

Payments and fees

For the investor, financial matters remain one of the key aspects of the relationship with the developer and the property management company. It is essential to clearly define the payment schedule, the rules for calculating any contractual penalties for delays, and all additional charges related to the operation of the property, in particular the costs of maintaining common areas, including maintenance, security, cleaning and day-to-day management.

At the same time, it is necessary to clearly distinguish which costs are borne by the owners of individual premises and which remain the responsibility of the manager or operator. The lack of precise regulations in this regard often leads in practice to disputes over interpretation and significant discrepancies between investment assumptions and the actual level of financial burdens. Clear and detailed regulation of these matters is therefore crucial for assessing the actual profitability of the investment and the level of economic risk.

Maintenance and repairs

An investment agreement for an aparthotel or condohotel should also precisely regulate matters relating to property maintenance and necessary repairs. Depending on the terms of the agreement, the investor may be obliged to carry out or finance repairs and maintenance work within their unit. This applies in particular to areas not covered by the operator.

For example, the investor may be responsible for repairs within their own unit, whilst the operator handles the maintenance of the communal areas. Of course, in practice there are other ways of regulating this matter; however, it is essential that these are clearly defined and that their interpretation is not ambiguous.

Insurance

Another key element of an aparthotel/condohotel investment agreement is property insurance. The agreement should require the investor to maintain adequate insurance covering the risks associated with the use of the property. This includes insurance against damage occurring during owner stays, as well as other situations that may affect the value and functionality of the premises.

Reporting issues

An important obligation of the investor is to inform the operator of any issues with the property that may affect its operation or impact rental income. Such issues may include technical faults, problems with installations, as well as matters relating to guest safety and comfort. The agreement should also clearly specify the operator’s response to technical issues, such as breakdowns, damage caused by guests, and repair procedures.

Regular maintenance, upkeep and management

The property management company should ensure regular upkeep, maintenance and comprehensive management of the property. This includes daily cleaning, providing access to essential services such as internet and television, as well as managing bookings and guest services. The contract should specify the scope of these services and the standards to be adhered to. Properly worded provisions in an investment contract for an apartment property regarding the operator’s obligations to repair faults quickly and effectively are crucial for ensuring the uninterrupted operation of the facility and protecting the investor’s interests.

Reporting and accounting

An investment agreement for a condo-hotel or aparthotel should clearly set out the arrangements for reporting and accounting for profits. The operator should regularly provide the investor with reports on financial performance and the condition of the property. These reports should contain detailed information on rental income, maintenance costs and any investments in the property. Transparent accounting of rental income and other costs is essential from the point of view of legal and financial security.

Marketing

A key element of managing an aparthotel or condohotel is effective marketing aimed at maximising the property’s occupancy period and, consequently, the investor’s revenue. The operator should be responsible for promoting the property, attracting tenants and managing the short-term rental process.

The investment agreement for a condo-hotel should set out marketing strategies and rental terms, including pricing policy and booking procedures. The marketing provisions may specify in detail:

• the scope of marketing activities (marketing strategy, promotional plans),
  
  
• the marketing budget and an indication of how much funding will be allocated to specific activities and channels,
  
  
• who finances the marketing activities (the operator, the investor, or both) and in what proportion,
  
  
• details of marketing campaigns (types of marketing campaigns to be implemented, e.g. online campaigns (SEO, PPC, social media), offline campaigns (press advertisements, billboards), email marketing, loyalty programmes, cooperation with travel agencies),
  
  
• branding and image,
  
  
• monitoring and reporting of the results of marketing activities.

Contractual penalties in a condo-hotel agreement

The investment agreement should include provisions regarding contractual penalties for failure to meet specific obligations, such as late payments or failure to fulfil the agreed obligations (as described above). A detailed description of the obligations and rules regarding penalties in the agreement helps to ensure transparency and protect the interests of both parties, as well as the effective enforcement of the agreement’s provisions. A party that breaches the agreement may be required to pay compensation for losses incurred by the other party as a result of the breach.

In addition, an investment agreement for the purchase of an aparthotel or condo-hotel may provide for the obligation to provide financial security or guarantees, which may be utilised in the event of a breach of contract by the developer or operator. It will be crucial to specify the financial and legal consequences of terminating the contract, as well as the possibilities for selling the hotel unit to another investor.

Term of the agreement

Lease agreements for apartments in condo and aparthotel schemes are generally long-term contracts, entered into for a period of 10 to 30 years, with the option to extend for further years. When comparing a lease agreement under the condo system with a standard property lease, which is usually concluded for a period of 1–3 years and involves the need to find tenants, maintain the property and the possibility of the premises standing vacant for periods of time, a long-term lease appears to be more profitable from the investor’s perspective.

Such a long term of the investment agreement ensures the investor investment security and steady returns throughout its duration, without the need for significant involvement in property management. During the term of the agreement, a condo-style apartment may also be freely sold at market price, although it is clear that the value of such a property increases with each passing year, resulting in a double profit: in the form of regularly paid returns and a profit arising from the increase in the property’s value upon expiry of the agreement’s term.

From the investor’s perspective, however, an investment agreement concerning a condo-hotel or aparthotel should precisely specify, amongst other things:

• the notice period, which must be observed by each party, e.g. 30 days, 60 days, 90 days,
  
  
• the form of notice, e.g. written notice sent by registered post or email,
  
  
• the grounds for termination under which the contract may be terminated without notice (e.g. the operator’s failure to fulfil its obligations, a material breach of contract),
  
  
• the consequences of terminating the contract in terms of fees, penalties and other financial implications for each party,
  
  
• settlement of costs, e.g. cleaning, repairs, etc.,
  
  
• rules governing the return of the property.

Investing in a condo-hotel, investing in an aparthotel – the most common issues

Our experience shows that legal disputes concerning investments in condo-hotels and aparthotels generally arise from the following causes:

• developers/investors failing to comply with the terms of the contract, for example by failing to pay profits to investors, mismanaging the property, or failing to meet service quality standards,
  
  
• issues relating to property ownership rights and mortgage encumbrances on the property,
  
  
• financial issues, for example discrepancies in financial reports, lack of transparency in the distribution of profits, and unfair financial practices,
  
  
• disputes relating to the possible termination of the agreement / notice of termination or withdrawal from the investment agreement by the investor or operator, claims for damages.

However, a well-drafted investment agreement can significantly reduce the risk of such conflicts by clearly defining the rights and obligations of each party. Clear and detailed contractual provisions will enable effective management of expectations and minimise potential misunderstandings that could lead to disputes.

A practical example from Polish case law:

“The defendant engaged in an unfair commercial practice consisting of providing potential investors, whilst presenting the features of the investment product, with information regarding the possibility of purchasing a flat in a hotel complex (…) in W. in a manner that misled consumers regarding the risks associated with investing funds in the product in question and highlighted only the benefits of that investment. Consequently, there were grounds for the claimant’s liability for damages towards the plaintiff (…).” (judgment of the Polish Court of Appeal in Warsaw, 6th Civil Division, dated 23 June 2022, ref. no. VII AGa 526/22).

Investing in a condo-hotel, investing in an aparthotel – this is how we can help you

Given the complex nature of matters relating to condo-hotels and aparthotels, it is advisable to consult a lawyer specialising in property and contract law before investing your funds. As a law firm specialising in property law:

• we will review the draft investment agreement for a condo-hotel or aparthotel – we will highlight key contractual provisions, legal safeguards and any potential pitfalls or legal uncertainties (including those relating to payments, the schedule, property maintenance, renovations, insurance and legal safeguards; we will highlight unclear or vague provisions that may be interpreted differently by the parties, as well as financial risks,
  
  
• we will identify risky contractual clauses and advise you on how best to protect your interests at every stage of the investment,
  
  
• we will review the prospectus for the condo-hotel/aparthotel so that you can understand the details of the investment, the implementation schedule, and any potential legal risks,
  
  
• we will review the method of financing the investment (developer’s funds, funds from a bank loan or corporate bond issue, investor contributions),
  
  
• we will check whether the company is newly established (which entails greater investment risk) or has already completed projects,
  
  
• we will analyse the financial statements to determine the company’s financial health,
  
  
• we will check the company’s shareholders in terms of their past investment activities.

We can also assist you if you are already in a dispute with the developer by:

• issuing a formal demand to the operator or developer for payment of outstanding amounts, fulfilment of specific obligations, or compliance with the terms of the investment agreement relating to the aparthotel / condohotel,
  
  
• conducting negotiations with the operator on your behalf, aiming to secure the best possible contract terms, resolve disputes or renegotiate payment terms,
  
  
• representing you in civil proceedings – should negotiations fail to yield the desired results, we can draft a claim against the operator or developer, then bring the case to court and represent you during the hearings,
  
  
• enforcing a court judgment issued against the developer/operator.

Please feel free to contact us.