With the current economic climate and slowdown in property growth and value, Fractional Ownership is likely to continue gaining popularity as an affordable, accessible and efficient means of owning leisure accommodation.
Primarily a marketing concept, it is borrowed mainly from the United States where it was initially developed to cater for joint ownership of yachts and private jets and where it now also encompasses all aspects of leisure and holiday accommodation. However, as is often the case with marketing concepts, scant consideration is given to the applicable legislative environment within which developers and marketers of fractional ownership products should operate.
Whilst the marketing term "fractional ownership" may appear to be novel, the legal precepts in South Africa upon which it is based, are not.
A simple fractional model envisages one property being owned by 13 owners, each owner being entitled to 4 weeks use of the property per annum on a roster or some other time-sharing basis. More sophisticated models envisage private residence clubs with access to multiple properties and hotel-type facilities and amenities. The underlying legal principles are however, fundamentally the same.
In its simplest form, fractional ownership is no more than joint ownership, with two or more persons owning undivided shares in immovable property, which share in the property can then be registered in the owner's name in a separate title deed.
Whilst joint ownership structures, close corporations and trusts may be used to house a fractional product, a company is the most commonly-used form, with shares in the company being sold to purchasers as a "fractional share". Ownership of the share entitles the shareholder to use a property or a range of properties for certain determined periods each year.
As straightforward as it may appear, fractional ownership falls within the constraints of a range of legislation which needs to be considered, particularly where a company structure is used. The Companies Act (61 of 1973), the Share Blocks Control Act (59 of 1980), the Property Time-Sharing Control Act (75 of 1983), the Consumer Affairs (Unfair Business Practices) Act (71 of 1988) (Notice 459/2006) as well as the common law may have application.
South African common law provides that no joint owner may appropriate any part of a jointly owned property for his exclusive use, but is entitled to demand partition. Whilst these issues may be dealt with in an appropriate agreement between the parties, difficulties may arise in devising a mechanism that can exist in perpetuity, if necessary, and bind successors-in-title. This is problematic as it is uncertain whether an agreement amongst joint owners to postpone the right to demand partition (which right can only be postponed for a fixed time, not indefinitely) and to regulate their occupancy rights, is capable of registration as a real right against the title deeds to the property, or whether it is merely a personal right, terminating on death and being incapable of alienation or transfer.
The Property Time-Sharing Control Act would also apply to a fractional scheme where the accommodation is allocated on a roster or shared basis. A time-sharing interest is defined very broadly, and in relation to a property time-sharing scheme as "any right to or interest in exclusive use or occupation, during a determined or determinable period during any year, of accommodation." Thus, even if use can only be determined on the basis of availability, on a first-come first-serve or roster type system, that use right would be determinable and would fall within the parameters of this Act.
The Companies Act prohibits the sale or issue of shares to members of the public without a prospectus. However, a prospectus is not required for the offer of sale of a shareblock share if the provisions of the Share Blocks Control Act, relating, in particular, to certain minimum disclosure requirements, are met. Whether or not a company is a shareblock company is a matter of fact. The Share Blocks Control Act defines a share block scheme very broadly as being "any scheme in terms of which a share, in any manner whatsoever, confers a right to, or an interest in the use of immovable property". The Act furthermore contains a provision that "any company shall be presumed to operate a share block scheme if any share of the company confers a right to or an interest in the use of immovable property or any part of immovable property".
Almost every fractional product in South Africa will fall within the parameters of the Time-Sharing and/or Share Block legislation. With this comes onerous disclosure requirements, mandatory management structures if a shareblock company does not own the property, and civil and criminal sanctions for failure to comply. Both pieces of legislation require certain minimum information to be disclosed in the sale documents and advertisements, and contain restrictions as to when a purchaser's money can be paid to a developer. Importantly, in terms of the Property Time-Sharing Control Act, a developer may not receive any sale consideration unless the accommodation has been completed and a certificate of completion issued by an architect. This would therefore prohibit the sale of a fractional product on a so-called "off-plot" basis where the purchaser pays in instalments and at stated milestones on building progress.
Finally, the provisions of the Unfair Business Practices Act should be considered even though it may have limited application in the fractional industry. A developer who promises the investor a return on investment, may well have to comply with the comprehensive and onerous disclosure requirements.
Whilst much of the legislation discussed is designed to protect the consumer, purchasers of a fractional product should research the product carefully before investing. It is imperative that appropriate shareholders and use agreements are in place, that efficient and competent management structures are established and that the underlying structure of the fractional product is legally sound and compliant.
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