1 / 81

Fractional Ownership : A Legal Perspective VOASA Conference August 2010

Fractional Ownership : A Legal Perspective VOASA Conference August 2010. Presented by Shelley Mackay-Davidson Edward Nathan Sonnenbergs. Outline. What is Fractional Ownership? Marketer/Developer perspective Legal perspective Commonly used structures Co-ownership Company

heather
Download Presentation

Fractional Ownership : A Legal Perspective VOASA Conference August 2010

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Fractional Ownership :A Legal PerspectiveVOASA ConferenceAugust 2010 Presented by Shelley Mackay-Davidson Edward Nathan Sonnenbergs

  2. Outline What is Fractional Ownership? Marketer/Developer perspective Legal perspective Commonly used structures Co-ownership Company Close Corporation Club

  3. Outline (cont) • 2. Applicable law and legislation • Common law • Companies Act No 61 of 1973 • Share Blocks Control Act No 59 of 1980 • Property Time-Sharing Act No 75 of 1983 • Consumer Affairs (Unfair Business Practices Act) No 71 of 1988 – Notice 459/2006

  4. Outline (cont) • 2. Applicable law and legislation (cont) • Value-Added Tax Act No 89 of 1991 • Transfer Duty Act No 40 of 1949 • Financial Advisory and Intermediary Services Act No 37 of 2002 • National Credit Act No 34 of 2005

  5. Outline (cont) • Consequences of non compliance with legislation • Marketing and Selling • Advertising and promotion requirements • FAIS • Estate agents • Form and content of sale agreement and documents • General Issues • Question and Answer

  6. 1. What is Fractional Ownership?* Marketer/Developer perspective • 1. www.vaaldegrace.co.za • The buyer/investor gets the benefit of property ownership on a luxury golf estate at a fraction of the full cost. This mechanism allows the buyer to pay only for the period of the year that he/she intends to use the property. For the remainder of the year, when the property would normally be unoccupied, it is sold to other buyers who would then use it for those specific periods. The shares in the property are generally owned through a company, providing a legal structure to regulate the relationship between all the parties and ensuring the continued satisfaction of all parties.

  7. 1. What is Fractional Ownership?* Marketer/Developer perspective (cont) 2. www.sa.fractional.com Fractional ownership is a percentage share of an expensive asset. Shares are sold to individual owners. A fractional owner enjoys priorities and privileges, such as reduced rates, priority access on holidays and income sharing.

  8. 1. What is Fractional Ownership?* Marketer/Developer perspective (cont) • 3. www.beachfrontproperties.co.za • Our new concept will be marketed in South Africa as an alternative to this old system: not merely a share but the ownership of a title deed and will make luxury properties, especially Beachfront Properties more affordable to all South Africans and a lot more attractive due to the high capital growth beachfront investments offer and don’t forget the daily rental furnished beachfront apartments, B&B’s and guesthouses offer. It takes care of all the hidden cost of maintaining property! ALL OF US WANT TO OWN A BEACHFRONT APARTMENT OR HOME THAT MAKES FINANCIAL SENSE! (sic)

  9. 1. What is Fractional Ownership?* Marketer/Developer perspective (cont) • 4. www.fzp.co.za • Fractional Ownership (Property Syndication) is a method of co-owning a single asset by more than one individual or entity – a group of investors. It is a legal entity through which a number of investors become shareholders (owners) of a leisure property (holiday home). The costs and usage of the property is shared amongst the shareholders in relation to the percentage shareholding. The shareholders are the owners of the property, and therefore control all aspects of the property through a private company. The company allows shareholders time periods to utilize the property by means of a shareholders’ agreement. An 8% share would allow 4 weeks usage per annum. • This investment method offers the most favourable and optimal combination of leisure lifestyle, investment and property ownership, by offering a share in an appreciating asset at a fraction of the cost – without the burden of management and maintenance. Note… You own 8% of the value of the total property – an appreciating asset.

  10. 1. What is Fractional Ownership?* Marketer/Developer perspective (cont) • 5. Courtesy Pam Golding Properties/Golding Hotel Investment Consultants • Classic Model • • A syndicated property • • Typically 13 owners • • Usage right of 4 weeks per annum through rotation • • From 2 bedroom apartment (urban) to 4 bedroom house (resort) • • Annual levies from R6 000 to R8 000 per fraction per annum • • Typically priced from R220 000 to R490 000 per fraction • • No exchange programs at present • • Very limited support and hospitality services

  11. 1. What is Fractional Ownership?* Marketer/Developer perspective (cont) • 5. Courtesy Pam Golding Properties/Golding Hotel Investment Consultants (cont) • High End Fractional Model • Similar to classic fraction as far as: • Syndication and structure • Number of owners • Annual usage right • Apartment or house typically part of multiple properties at same location • Includes hospitality services such as: • Central Reservations • Housekeeping • Maintenance, Refurbishment and Administration

  12. 1. What is Fractional Ownership?* Marketer/Developer perspective (cont) • 5. Courtesy Pam Golding Properties/Golding Hotel Investment Consultants (cont) • High End Fractional Model (cont) • Management presence, control and regulations • Caters for certain facilities and amenities • Caters for exchange nationally and internationally • Flexible usage as opposed to rotation • Annual levies from R6 000 to R10 000 per annum • Typically priced from R350 000 to R590 000 per fraction

  13. 1. What is Fractional Ownership?* Marketer/Developer perspective (cont) • 5. Courtesy Pam Golding Properties/Golding Hotel Investment Consultants (cont) • Private Residence Club Model • Two bedroom apartment up to 4 bedroom villa typically very luxurious and adjacent to or part of a five star boutique Hotel • The absolute best in terms of quality, services, amenities and facilities • Very strict in terms of management control and exclusivity • Will typically leave a considerable number of weeks unsold, enhancing flexible and ease of access

  14. 1. What is Fractional Ownership?* Marketer/Developer perspective (cont) • 5. Courtesy Pam Golding Properties/Golding Hotel Investment Consultants (cont) • Private Residence Club Model (cont) • Caters for top international exchange and additional stay • Annual usage from 3 weeks to 3 months • Annual levies from R6 000 per week; typically less than 25% of the daily rack rate of equivalent hotel accommodation • Average entry level of R650 000

  15. 1. What is Fractional Ownership ?* Legal perspective • 1. “The inherent contradiction encompassed in the combination of the terms “fractional” and “ownership” in this new brand of leisure accomodation suffices to bring on the warning lights.” • Professor JC Sonnekus • Sectional Title, Share Blocks and Time-sharing • (Vol 2 Share Blocks and Time-sharing) • LexisNexis Butterworths • 2. “Developers and marketers would have the public believe that fractional ownership is a new form of ownership … The fractional ownership concept is not new, only the name is new.” • Arthur Schoeman • De Rebus, November 2007

  16. 1. What is Fractional Ownership ?* Legal perspective (cont) • 3. “Fractional ownership … is a marketing term, mostly focused on offering opportunities to wealthy investors to purchase shares in luxury holiday accomodation.” • Lorette Janse van Rensburg and Una Du Toit • Petzer du Toit & Ramulifho Attorneys

  17. 2. Commonly used structures* Co-ownership • In its simplest form - 13 co-owners • Each owner is entitled to use property on an agreed roster-type basis • Relationship between co-owners governed by agreement between them • Title deed registered in name of each owner, ie. could have 13 title deeds registering 1/13th undivided share in each owners name

  18. 2. Commonly used structures* Company • Most commonly used structure • In its simplest form-one company owns one property • Company has for e.g. 13 shareholders, each entitled to use property on roster-type basis for 4 weeks per annum • Nothing to prevent one company owning multiple properties and shareholders using properties on a roster-type basis as well

  19. 2. Commonly used structures* Company (cont) • Relationship between shareholders governed by • Memo and Articles of Association • Use Agreement (which would include roster) • Shareholders Agreement

  20. 2. Commonly used structures* Close Corporation • The CC owns the property • Maximum of 10 members – so will not fit into the commonly used structure of 13 shareholders, each entitled to 4 (four) weeks usage per annum • If Trusts are members - beneficiaries must be taken into account when calculating number of members • Use rights are governed by agreement between members – no Memo and Articles • New Companies Act – no new CCs can be registered

  21. 2. Commonly used structures* Club • A company or other legal entity, eg. Trust, owns the property/ies • Investors may buy shares in the property/ies and at the same time, apply for membership in a club, or may only apply for club membership • The company has an agreement with a managing agent to handle bookings and reservations • No use rights in articles to company • No use rights attaching explicitly to shareholding • Club membership entitles the member to use of the property/ies owned by the company

  22. 3. Applicable law and legislation* Common law • Pertinent to joint ownership • 2 fundamental rules • no joint owner may appropriate any part of property for his exclusive use • joint owners can demand partition • Owners would need to agree to suspend or postpone these common law rights but cannot postpone indefinitely • Need to regulate by agreement or title deed conditions • pre-emptive conditions • use and co-ownership agreement binding on successors-in-title

  23. 3. Applicable law and legislation* Companies Act • Offer of shares to public Section 143(1) • No person shall offer any shares to the public otherwise than in accordance with the provisions of this Act • Sale of Shares Section 146 • No person shall make any offer to the public for the sale of any shares unless it is accompanied by a prospectus complying with the requirements of this Act and registered in the Companies Registration Office • If shares in a share block company are being sold, prospectus not required if disclosure schedule in terms of Share Blocks Control Act furnished

  24. 3. Applicable law and legislation* Companies Act (cont) • Subscription of Shares Section 145 • No person shall make any offer to the public for the subscription of any shares unless it is accompanies by a prospectus complying with the requirements of this Act and registered in the Companies Registration Office Section 144(b) • An offer of shares relating to an offer for subscription shall not be construed as an offer to the public if the offer for subscription is of such a nature that the total acquisition cost of the shares for a single addressee acting as principal is at least R100,000 or such other amount as the Minister may, by notice in the Gazette, determine • Prospectus required for subscription of share block shares unless falls within one of the exemptions in terms of Section 144 of the Companies Act

  25. 3. Applicable law and legislation* Share Blocks Control Act • Definitions • “Immovable property” in relation to a share block company, means land, and includes any building erected or to be erected, eg. golf course land, house, block of flats • “Share” • a share as defined in Section 1(1) of the Companies Act, and includes a debenture • any other interest in a company • excludes right derived from lease of company assets • “Share Block Company” a company the activities of which comprise or include the operation of a share block scheme

  26. 3. Applicable law and legislation* Share Blocks Control Act • Definitions (cont) • “Share Block Scheme” 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 • “Use agreement” means any agreement conferring a right or an interest in the use of immovable property in respect of which a share block scheme is operated

  27. 3. Applicable law and legislation* Share Blocks Control Act (cont) • Some important provisions • Section 4 • A 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 • ie. if share = use = Act applicable • Section 5 • No share block scheme shall be operated in respect of : • agricultural land • other immovable property upon which a building is erected in conflict with an approved or proposed town planning scheme

  28. 3. Applicable law and legislation* Share Blocks Control Act (cont) • Section 5A • No person shall, before the company has been incorporated, receive any consideration in respect of any right to a share from any person, other than the share block developer, unless: • the consideration is paid into an attorneys or estate agent’s trust account until company formation, or • an irrevocable and unconditional bank guarantee is furnished to repay the consideration in the event that the company has not been formed within the time period specified in the agreement • Once incorporated, can receive consideration but BEWARE Property Time-Sharing Control Act

  29. 3. Applicable law and legislation* Share Blocks Control Act (cont) • General • Each share must confer a right of use • Each share shall confer the same vote as every other share • Special rules about appointment, dismissal, powers and duties of directors • Prospectus not required for offer of shares for sale to public if an offer is accompanied by a statement in terms of Section 17, ie. disclosure document required in terms of Schedule 2 • Offer for subscription must comply with Companies Act

  30. 3. Applicable law and legislation* Share Blocks Control Act (cont) • General (cont) • Special rules about form and content of contract – discussed later • Use agreement • to secure and entrench occupancy rights – lodged and registered with Registrar • right is conferred in Articles, but use agreement between company and members can be tailor-made to suit development • sale of share automatically includes cession and delegation of use agreement – inseverable

  31. 3. Applicable law and legislation* Property Time-Sharing Control Act • Purpose of Act • To regulate the alienation of time-sharing interests pursuant to property time-sharing schemes • Definitions • “Accommodation” in relation to a time-sharing interest means any immovable property or any portion or part thereof • “Alienate” in relation to a time-sharing interest means sell or let for utilization over a prescribed period of at least three years • “Immovable property” means land, and includes any building, other improvements on land whether of a permanent nature or not, erected or to be erected, eg. could include tented camp

  32. 3. Applicable law and legislation* Property Time-Sharing Control Act (cont) • Definitions (cont) • “Property Time-Sharing Scheme” Any scheme, arrangement or undertaking in terms of which time-sharing interests are offered for alienation or are alienated by • share block • club structure • undivided shares in sectional title • or otherwise • any scheme declared a property time-sharing scheme by the Minister • “Time-Sharing Interest” • in relation to a property time-sharing scheme, means any right or interest in the exclusive use or occupation, during determined or determinable periods, during any year, of accommodation

  33. 3. Applicable law and legislation* Property Time-Sharing Control Act (cont) • General • Section 5, regulations • no person may sell a time-sharing interest in a particular property time-sharing scheme unless all available residential accommodation in the immovable property relating to the time-sharing scheme is utilized for purposes of the scheme • No building or part thereof may be used for time-sharing scheme unless 75% of owners in a sectional title scheme or shareholders in a share block scheme have consented thereto in writing • Content of contract prescribed – disclosure requirements, otherwise could be void

  34. 3. Applicable law and legislation* Property Time-Sharing Control Act (cont) • General (cont) • How scheme is advertised and contents of advertisement, otherwise could be void • Cannot receive consideration, unless have architect’s certificate of completion, or • paid in trust to attorneys or estate agent until certificate furnished OR • unconditional and irrevocable bank guarantee is furnished • If scheme is run as a share block scheme, certain provisions relating to e.g. management, are not applicable. • Consumer protection paramount

  35. 3. Applicable law and legislation* Consumer Affairs (Unfair Business Practices) Act • General Notice No 459/2006 published by Department of Trade & Industry • Deals with syndications • Definition • “Public property syndication scheme” • Assembly of investors who pool their resources to purchase/invest in property”, commercial and residential • Through companies, close corporations, trusts, partnerships or individuals • Individuals share in profits and losses in the property and/or enjoy benefits of net rental growth through proportionate share of income.

  36. 3. Applicable law and legislation* Consumer Affairs (Unfair Business Practices) Act (cont) • Requirements • Minimum information to be contained in a property syndication disclosure document, inter alia • Funds to be held in trust until registration of transfer into syndication vehicle • Details of capital raised by promoter • Full details of promoter of scheme • Full details of management • Company description and structure

  37. 3. Applicable law and legislation* Consumer Affairs (Unfair Business Practices) Act (cont) • Requirements (cont) • Full details of property investment • property details • servitudes • zoning • development potential • buildings erected • physical address • insurance cover • cost of property • valuation of property • mortgage bond details

  38. 3. Applicable law and legislation* Consumer Affairs (Unfair Business Practices) Act (cont) • Requirements (cont) • Tenants • Income and Expenditure – projected income and expenditure and basis of calculation

  39. 3. Applicable law and legislation* Consumer Affairs (Unfair Business Practices) Act (cont) • * Distinction between Fractional Ownership and Syndication * • Fractional ownership • residential + right to use property + added benefits (e.g. concierge, golf course, club facilities) • management generally outsourced – rental return not main driving force • Syndication • investment in managed, structured, unlisted entity • where investor expects a rental return on investment • detailed disclosure requirements and minimum information required – onerous – basically a mini-prospectus • Prevailing view is that typical fractional model does not fall under provisions of this notice. But always check • CONSUMER PROTECTION PARAMOUNT

  40. 3. Applicable law and legislation* Value Added Tax (“VAT”) Act • Levied in terms of the Value-Added Tax Act No. 89 of 1991 • Levied on the “consideration” received for the “supply” of “goods” or “services” by a “vendor”

  41. value-added tax (“VAT”) (cont.) • Fixed property • “Goods” include “fixed property” • Definition of “fixed property”:“land (together with improvements affixed thereto), any unit as defined in section 1 of the Sectional Titles Act, 1986, any share in a share block company which confers a right to or an interest in the use of immovable property and in relation to a property time –sharing scheme, any time-sharing interest as defined in section 1 of the Property Time-Sharing Control Act, 1983; and any real right in any such land, unit, share or time-sharing interest”

  42. 3. Applicable law and legislation* Transfer Duty Act • Levied in terms of the Transfer Duty Act No. 40 of 1949 • Levied on any acquisition of “property” • “Property” includes shares in a “residential property owning company” (i.e. a company owning dwelling-houses, holiday homes, etc that is not an apartment complex, hotel, guesthouse or similar structure that is let to more than 5 unconnected persons or an “enterprise”) • Certain exemptions: • No transfer duty if VAT payable on transaction

  43. 3. Applicable law and legislation* Financial Advisory and Intermediary Services Act Purpose and scope of the Act • the purpose of the Act is to “regulate the rendering of certain financial advisory and intermediary services to clients”. The Act prohibits anyone from acting as a financial services provider, unless that person is licensed by the relevant regulator, namely the Financial Services Board. • the scope of the Act is wide and any person who enters into contracts of a financial nature and gives advice may fall within the ambit of the Act and will accordingly be required to comply with the licensing requirements set out in the Act.

  44. key prohibition in the Act • the key element of the Act is contained in section 7(1), which provides as follows: “with effect from a date determined by the Minister by notice in the Gazette, a person may not act or offer to act as a financial services provider unless such person has been issued with a licence under section 8.” • a “financial services provider” is therefore any person who, as a regular feature of its business, furnishes “advice” or renders an “intermediary service”, or both.

  45. defined terms • “financial services provider” is defined as: any person, other than a representative, who as a regular feature of the business of such person: furnishes advice; or furnishes advice and renders any intermediary service; or renders an intermediary service.

  46. advice • “advice” is defined inter alia as: • subject to subsection (3)(a), any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients: • in respect of the purchase of any financial product; or • in respect of the investment in any financial product and irrespective of whether or not such advice: • is furnished in the course of or incidental to financial planning in connection with the affairs of the client; or • results in any such purchase, investment, transaction, variation, replacement or termination, as the case may be, being effected.

  47. intermediary service • “intermediary service” means: • subject to subsection (3)(b), any act other than the furnishing of advice, performed by a person for or on behalf of a client or product supplier: • the result of which is that a client may enter into, offers to enter into or enters into any transaction in respect of a financial product with a product supplier; or • with a view to: • buying, selling or otherwise dealing in, managing, administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier or in which the client has invested

  48. financial product • this term is widely defined and includes inter alia: • securities and instruments, including: shares in a company other than a “share block company” as defined in the Share Blocks Control Act, 1980 (Act No. 59 of 1980) • “product supplier” is defined to mean: any person who issues a financial product by virtue of an authority, approval or right granted to such person under any law, including the Companies Act, 1973.

  49. 3. Applicable law and legislation* National Credit Act Background and Purpose • consumer credit legislation in need of overhaul due to the perception of: • regulatory weakness and • fragmented, outdated and ineffectual regulatory framework • the Act repeals the: • Credit Agreements Act 1980 • Usury Act 1968 • Exemption to the Usury Act (Micro lending)

More Related