Property Investor News, February 2012 – Stephen Gilchrist discusses timeshares

Is there Trouble in Paradise?

February 2012

By Stephen Gilchrist

Over past decades Timeshare selling has developed an unviable reputation. The industry has certainly attracted its share of rogue traders. Aggressive sales techniques (often starting only metres from airport arrivals) , and 'free trips' to mainland Europe with a condition of having to sit through a lengthy, hard sell presentation, have not engendered confidence in this sector.

More recently some legitimate traders and resort developers have tried to market their product by terming it 'fractional ownership', a US concept. There is some confusion surrounding the difference between the two. Both are a form of shared ownership in leisure properties or holiday homes. But in its purest form fractional ownership and timeshare properties are very different. Obviously everything depends on the wording of the purchase agreement. Fractional ownership may actually be nothing more than timeshare in real terms.

Timeshare typically involves the purchase of one or two weeks per annum use share while true fractional ownership involves the purchase of a 'fraction' of real estate.

This difference, for UK purposes, may impact upon the legitimacy of the underlying sale by the trader and the rights of a consumer.

To put it briefly, timeshare sales would normally amount to what is known as a 'collective investment scheme' (CIS). Under the Financial Services and Markets Act 2000, operation of a CIS is a regulated activity requiring FSA authorisation. The essential criteria of such schemes are:

• Participation or receipt of profits or income from the acquisition;
• No day-to-day control by the participants;
• And either: (a) pooled contributions or (b) management by or on behalf of the operator of the scheme (think Unit trusts)

Obviously most, if not all, traders selling timeshare rights are not authorised by the FSA.

However, certain arrangements are excluded from what would otherwise amount to a CIS, specifically under The Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (the Order).

Under the Order, arrangements do not amount to a collective investment scheme if the rights or interests of the participants are timeshare rights.

Likewise arrangements are exempt if the predominant purpose of the arrangements is to enable the participants to share in the use or enjoyment of property or to make its use or enjoyment available gratuitously to others.

The Timeshare, Holiday Products, Resale and Exchange Contracts Regulations 2010 define a 'Timeshare contract' as a contract of 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.

Thus to take advantage of the exemption, the sale must be of 'timeshare rights', or the predominant use provisions.

This brings me back to 'fractional ownership'. If the terms of the contract either do not fall strictly within the timeshare definition or the predominant use provision is not met (for example where the real intention of the contract, and its main purpose is to transfer actual real estate- as opposed to just a slice of time for personal use), then it could be construed as a CIS outside the exemptions. In such a case, the unauthorised operator could be liable to civil and criminal and civil sanctions consequent upon inviting investment in a CIS and all such contracts are unenforceable and monies paid by the consumer/purchaser would have to be returned.

Sellers of this type of product should therefore be sure of their ground and take legal advice to ascertain whether the sale of their product is exempt. Otherwise, there may be trouble ahead!

The author: Stephen Gilchrist is a solicitor and Chairman and Head of Regulatory Law at Saunders Law Limited - www.saunders.co.uk