Blog: Modular Build - Are “Lego” Hotels the Future?

Cassy Auld is a Partner in Weightmans’ Scottish Real Estate team based in Glasgow.

Modular build is an attractive option for property developers, and especially for hotel developers and operators it can provide significant benefits in cost and time saving and consistency of product. However, there are legal considerations to keep in mind.

For the delivery of turnkey hotels, modular allows the hotel to be designed and fitted out quickly and consistently after the completion and approval of a prototype or model room. Aiming to considerably reduce construction time, modular technology is billed as safe, quiet and cleaner than traditional methods of construction. It offers designers and architects flexibility and can offer developers and operators certainty.

Compared to traditional construction, modular construction time can be reduced by 30 per cent - 60 per cent. On-site labour can be reduced providing benefits on site for access, storage of materials and Health & Safety issues. As a result, modular building companies offer reductions in the overall capital costs of development of 10 per cent - 30 per ent, through greater efficiencies of design, delivery and onsite management.

Bristol Airport announced earlier this year that it will be the first site for a CIMC-Hilton hotel model using modular build technology. The new 201-room hotel, owned and financed by CIMC Group, a $12 billion-turnover Chinese plc specialising in modular-build, is due to open later this year. The hotel will be operated under management contract by Hilton Worldwide as a ‘Hampton by Hilton’ Brand. Taking into account the potential cost savings and weighing those against the price pressures that could follow Brexit, it seems likely that other developers and operators in the hotel sector will be watching the deal with interest. For stand-alone new hotels it could prove to be a game-changer.

However, developers, operators, funders and contractors should be aware of some of the legal issues that can arise around modular build.

Accuracy of design is particularly important in modular construction. If upon their arrival at site it is found that the modules do not fit properly, and in particular if the services and connection points do not match with the existing, it will be necessary for re-works to take place on site. If there is nowhere to store the modules whilst this is done, there will be double handling and lost time as a result.

Provision needs to be made in the contract for securing payment for off-site materials and the ability for the developer to step in and take possession of the modules under fabrication in the event of insolvency.

However, in modular construction a considerable portion of the building (and as a consequence it’s value) is constructed off-site. The manufacturer of the modules will want to be paid progressively. Before making such payment, the developer will want security for such payment in case the manufacturer becomes insolvent. The simplest way to achieve this is by way of bank guarantee or bond. That will secure the payment but won’t necessarily cover the delay caused to the project if the module manufacturer becomes insolvent and the modules are not available.

Provision should be made in the contract to maintain and check for quality control. A prudent developer will want to ensure that the modules are well constructed, not the least to ensure that the building will be free from latent defects upon handover.

The consequences of a manufacturer’s failure to deliver on time or at all can be serious, particularly if the modules are fabricated abroad. Unless both the contractor and the developer have great confidence in the manufacturer, the risk and the contractor’s allowance for that risk in its tender price for the project will be considerable. It is not unlikely that the contractor and developer will make specific provision as to who will bear that risk in the contract as it will have a direct bearing on the contract sum. Consider that on conventional construction projects, if the tiler does not turn up, the builder can usually replace the tiler quite quickly. However, if the modules don’t turn up, the project stops.

The contract will also need to make provision for dealing with the consequences of breakages and spares. If a module is damaged on the way to site, provision needs to be made for another to be fabricated within such time as will minimise downtime on site.

From a contractual perspective the module manufacturer may not even be considered a subcontractor. It may be considered as a product supplier but this creates the need for additional risk management. Provisions dealing with retention, insurance, indemnity, bonds, and warranties need to be separately negotiated for purposes of a modular manufacturer. Care is required and documentation may deviate from the normal standard form construction contracts which can result in additional legal time.

If “Lego” hotels are the future, and there are compelling reasons to think they are, then these technical legal issues should be carefully considered. They should be covered off early in the contract negotiations to ensure time gained in construction is not time lost in legals.