Fractional ownership: is it timeshare in disguise?

Chris Bannister GRMChris Bannister, a solicitor from Gregory Rowcliffe Milners, gives the legal perspective.

As the fractional ownership sector develops and expands its influence across the leisure property world, there are many who seek to disassociate it from its timeshare roots.

A great deal of intellectual capital has been expended over the years by regulators and others in trying to devise a watertight definition of "timeshare" – and even more by the creators of the many timeshare-like products that have sprung up in structuring their products and schemes to avoid falling within such definitions.

However, the result of that (and the dubious sales and marketing practices that have so often accompanied such schemes) has only been to tarnish and stigmatise the reputation of timeshare, which began as a straightforward and ingenious means of sharing the use of property or other assets between multiple users on a time basis but now seems to be regarded by many as the work of the devil!

In contrast, fractional ownership and its destination club and private residence club cousins have become associated with millionaire lifestyles and a little slice of heaven - and long may that continue.

From a sales and marketing perspective, fractional ownership and traditional timeshare are of course often very different products and sold in very different ways – not least because the time periods being sold and the amounts involved with fractional ownership sales are generally that much bigger and the expectations of the customer are therefore that much higher.

If the fractional ownership label leads to improvements in sales practices and differentiates the product in the public perception from the tarnished view of timeshare that many have, then so much the better. However, in legal terms, there is really little (if any) difference between fractional ownership and timeshare and the structures generally used for both are much the same.

A common misconception is that with "fractional ownership" the buyer gets to own a part of the "bricks and mortar" and with “timeshare” one does not. Whilst it may be true that fractional ownership can involve a share in the legal title to a property or asset, it certainly is not the case for very many large scale fractional projects, particularly outside the US, where club or corporate vehicles are often used – usually combined with trust arrangements – to hold the legal title to the underlying property and buyers are simply buying equity in that company or (more often) a beneficial interest under a trust backed up by various contractual rights.

Such structures have been borrowed directly from the timeshare world and have operated very successfully for many years and with high levels of consumer protection. Equally, there are a number of jurisdictions where timeshare is sold only as a "deeded" product (with the buyer getting a registrable interest in the legal title to the underlying property itself), either as a result of local legislative or regulatory requirements or simply because the products would effectively be unsaleable in those jurisdictions otherwise.

Many would argue in fact that the alternative structures that have developed for modern timeshare and fractional ownership projects are superior to real estate interests - which can involve far more expense and much less flexibility when owners come to sell their interests - and in any event a share in the title to a property in itself provides no guarantees as to continuing maintenance of that property or the services which are fundamental to the enjoyment of it.

With the implementation of the new Timeshare Directive (2008/122/EC) across the EU by 23rd February 2011, this question will effectively soon be an academic one, as there seems to be little doubt that fractional ownership products (however they are described or structured and whether they are real estate or use right based) fall fully within the scope of the definition of "timeshare contract" included in the new Directive: i.e. "a contract of a duration of more than one year under which a consumer, for consideration, acquires the right to use one or more overnight accommodation for more than one period of occupation".

It is difficult to see how a meaningful fractional ownership product can be created or operated in the EU outside the scope of this new definition and anyone attempting to do so (or merely ignoring the laws and regulations implementing the new Directive) is likely not only to incur the wrath of the local regulators and enforcement authorities but also to risk severe reputational damage to the nascent fractional ownership sector as a whole.

This will mean that fractional developers selling projects in Europe (or who are selling fractional interests to EU residents outside Europe) will need to comply fully with the new Directive, including for example providing full multilingual disclosure and a minimum fourteen calendar day cooling off period on all sales and observing a strict ban on taking any deposit (in any form) during that period.

Perhaps an unfair legacy for others’ sins of the past – but also a clear framework to ensure that those sins are not repeated and that the fractional industry can develop to its huge potential across Europe and beyond.

Chris Bannister
Gregory Rowcliffe Milners

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