Fractional ownership of holiday homes: A fresh look

Summer is here, the sun is shining (sporadically), and the pound is gaining strength against the euro, so expect the market for holiday homes to grow once again.

Fractional ownership, which gained recognition in the US some years ago, offers the buyer an element of ownership and control which is lacking in either property bonds or timeshare operations.

It is that very element of apparent ownership which can give rise to concern, and why it is important for practitioners to fully understand the method and structures adopted by developers offering fractional ownership schemes.

Veritably fractional

One of the first aspects to address is: ‘Is it truly fractional?’. One scheme taking place invites participants to acquire a fraction of a cottage built in a holiday village and offers guaranteed annual returns, but places an obligation on the investor to sell back the property at the end of a five-year term to the developer.

While at first that appears an attractive way for someone to test out whether fractional ownership will work for them, it also raises the question of whether it is a genuine fractional scheme, (and thus outside the remit of the Financial Conduct Authority (FCA), something of which the client must be made aware), or if it is actually a neat funding exercise for the developer, which could be regarded as a ‘collective investment scheme’, in which case it should fall within FCA regulation and where the client should, perhaps, be told to steer clear.

After determining whether or not the ownership element is in itself genuine and continues for an appropriate time, step back from the detail and see whether what is being offered to your client has been properly priced. Do the sums: multiply the number of fractions by the price sought to see what total you come out with as a result. If that is more than 150 per cent of the market value of the property, then in many cases it could well mean the property is being overpriced. Of course, obtaining comparators may be difficult but the client should be advised to do their homework.

Moreover, remember that advising on fractional purchases involves two separate elements; there is a structured nature of fractional ownership which sits on top of a conventional property transaction, so both corporate and real estate disciplines need to be brought into play.

Off-plan sales

Many schemes are sold off-plan, which highlights the necessity to carry out due diligence – simply relying on CGI images is far from sufficient. Ensure there is a contractual obligation placed on the developer to deliver against an agreed specification and ideally within an agreed timeframe.

Try to get the fractional buyers to act in concert in order to retain a chartered surveyor who will oversee construction, and build in a contractual requirement that the buyer’s surveyor has to sign off the property and ensure it is genuinely habitable and properly furnished before completion.

Check to see whether the client will be acquiring fixed weeks per annum or whether they will be in rotation with the other owners so they can equally enjoy the property in different seasons.

Maintenance costs

Ensure the client recognises
that the greater the number
of fractions per property, the greater the usage will be, leading to higher maintenance costs and the necessity to replace furnishings more frequently. Four owners sharing the property each for three months are unlikely to be there as much as 12 fractional owners each entitled to four weeks per year.

Recognise that most developers may want to use the deposit or call for stage payments, so look carefully at the developer’s funding arrangements. Are you comfortable that they have adequate resources to complete the transaction? Ensure that any deposit monies and stage payments are held as stakeholder’s funds by solicitors, rather than being released to the developers before completion.

Ensure there are tight contractual obligations on the developer so they cannot unilaterally call for completion when there are still outstanding issues.

Likewise, do not forget
to explain to a client that
while they may be acquiring ‘ownership’, this will not be the same as acquiring an asset outright, which is capable
of being used as collateral
for a loan. Discuss carefully
with the client funding the arrangements.

Similarly, if clients are
raising money, look carefully
at the fractional scheme documentation to see
whether or not the client
will be entitled to permit others to use the property during their period of ownership. An express prohibition will mean the client will not be able to make the property self-financing by letting it.

Also, look at the articles of association of the fractional company in which the client is to have a share to establish the arrangements with regard to succession and alienability.

As always, the devil is in
the detail. SJ

Jonathan T R Silverman is a head of the commercial team at City law firm Silverman Sherliker