The financial trouble being experienced by fractional ownership investors in luxurious villas at some of SA’s top golf estates has raised some serious legal questions about this type of investment scheme.

At least one attorney believes fractional property ownership is “nothing more than glorified time share” and he warns the public may be at risk in buying into fractional ownership agreements.

The Golf & Leisure Joint Ownership fractional property company, a former Seeff franchisee, is being investigated by the Estate Agency Affairs Board after many investors discovered their properties were still in debt, even after they had paid for their share of the villas in full.

The board’s spokeswoman, Portia Mofikoe, says fractional ownership refers to the division of any asset into portions or shares and, if the asset is a property, the title to that property being similarly divided into shares.

Fractional ownership falls within the definition of “immovable property” in section 1 of the Estate Agency Affairs Act.

In some cases, such as this one, a “mezzanine structure”, or a company that owns the property, is formed to permit multiple owners to purchase shares in the company. This allows the transfer of shares in the company without the necessity of reflecting ownership changes from time to time on the title deed to the property. Shared ownership of the property entitles shareholders to certain usage rights, usually a number of weeks per year in accordance with a roster agreed upon with the other joint owners.

Corrie de Jager, a director at Snyman De Jager Attorneys, says fractional property schemes “blatantly disregard” provisions of the Share Blocks Control Act and the Property Time Sharing Control Act. Owing to this noncompliance, fractional scheme agreements are either “void or voidable”.

“The risks are huge” for purchasers investing in such schemes, says Mr de Jager.

Provisions in the Companies Act, and this includes the new act, are even more severe on fractional property schemes, he says.

For instance, section 38 (1) states that no company may, either through loan, guarantee, or any other security, give assistance to any person taking up shares in a subsidiary, or holding company.

Section (2A) states that a company may provide assistance for the purchase or subscription of shares in itself, as long as its board is satisfied that the consolidated assets of the company — fairly valued — will be more than the consolidated liabilities.

The board also has to be satisfied that the company is in a position to pay its debts.

The terms of the assistance have to also be sanctioned by a special resolution of company members.

Section 20(1)(c) prohibits the sale of shares in a private company to the public. As many of the fractional ownership companies are private and not public companies, “this provision is fatal to these schemes”, says Mr de Jager.

There are many other sections of the Companies Act that may be applicable, he says.

Some agents do not disclose the contents of the shareholders agreement to potential purchasers, and as this agreement governs the potential relationships between the parties, purchasers really need to do their homework.

He says there is a misconception in fractional ownership schemes that the purchaser becomes a coowner of the asset. In fact, the purchaser becomes a co-owner of shares in the company that owns the asset.

Frans van Hoogstraten, a director at Bowman Gilfillan, believes that the name “fractional ownership” emerged from attempts by property brokers and developers to try to avoid using the term “time share”.

He says fractional ownership is a legal risk for the investor if the scheme is an attempt to avoid the Share Blocks Control Act or the Property Time Share Control Act.

“My sense is that many fractional property schemes were set up where the developers felt they did not need to comply with either of the acts,” he said.

Source: Business Day