2 Fractional Ownership : A Legal Perspective VOASA Conference August 2010 Presented byShelley Mackay-DavidsonEdward Nathan Sonnenbergs
3 What is Fractional Ownership? OutlineWhat is Fractional Ownership?Marketer/Developer perspectiveLegal perspectiveCommonly used structuresCo-ownershipCompanyClose CorporationClub
4 Outline (cont) 2. Applicable law and legislation Common law Companies Act No 61 of 1973Share Blocks Control Act No 59 of 1980Property Time-Sharing Act No 75 of 1983Consumer Affairs (Unfair Business Practices Act) No 71 of 1988 – Notice 459/2006
5 Outline (cont) 2. Applicable law and legislation (cont) Value-Added Tax Act No 89 of 1991Transfer Duty Act No 40 of 1949Financial Advisory and Intermediary Services Act No 37 of 2002National Credit Act No 34 of 2005
6 Outline (cont) Consequences of non compliance with legislation Marketing and SellingAdvertising and promotion requirementsFAISEstate agentsForm and content of sale agreement and documentsGeneral IssuesQuestion and Answer
7 1. What is Fractional Ownership? * Marketer/Developer perspective 1.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.
8 1. What is Fractional Ownership? * Marketer/Developer perspective (cont) 2.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.
9 1. What is Fractional Ownership? * Marketer/Developer perspective (cont) 3.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)
10 1. What is Fractional Ownership? * Marketer/Developer perspective (cont) 4.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.
11 1. What is Fractional Ownership? * Marketer/Developer perspective (cont) 5. Courtesy Pam Golding Properties/Golding Hotel Investment ConsultantsClassic 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 R to R per fraction• No exchange programs at present• Very limited support and hospitality services
12 1. What is Fractional Ownership? * Marketer/Developer perspective (cont) 5. Courtesy Pam Golding Properties/Golding Hotel Investment Consultants (cont)High End Fractional ModelSimilar to classic fraction as far as:Syndication and structureNumber of ownersAnnual usage rightApartment or house typically part of multiple properties at same locationIncludes hospitality services such as:Central ReservationsHousekeepingMaintenance, Refurbishment and Administration
13 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 regulationsCaters for certain facilities and amenitiesCaters for exchange nationally and internationallyFlexible usage as opposed to rotationAnnual levies from R6 000 to R per annumTypically priced from R to R per fraction
14 1. What is Fractional Ownership? * Marketer/Developer perspective (cont) 5. Courtesy Pam Golding Properties/Golding Hotel Investment Consultants (cont)Private Residence Club ModelTwo bedroom apartment up to 4 bedroom villa typically very luxurious and adjacent to or part of a five star boutique HotelThe absolute best in terms of quality, services, amenities and facilitiesVery strict in terms of management control and exclusivityWill typically leave a considerable number of weeks unsold, enhancing flexible and ease of access
15 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 stayAnnual usage from 3 weeks to 3 monthsAnnual levies from R6 000 per week; typically less than 25% of the daily rack rate of equivalent hotel accommodationAverage entry level of R
16 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 SonnekusSectional Title, Share Blocks and Time-sharing(Vol 2 Share Blocks and Time-sharing)LexisNexis Butterworths2. “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 SchoemanDe Rebus, November 2007
17 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 ToitPetzer du Toit & Ramulifho Attorneys
18 2. Commonly used structures * Co-ownership In its simplest form - 13 co-ownersEach owner is entitled to use property on an agreed roster-type basisRelationship between co-owners governed by agreement between themTitle deed registered in name of each owner, ie. could have 13 title deeds registering 1/13th undivided share in each owners name
19 2. Commonly used structures * Company Most commonly used structureIn its simplest form-one company owns one propertyCompany has for e.g. 13 shareholders, each entitled to use property on roster-type basis for 4 weeks per annumNothing to prevent one company owning multiple properties and shareholders using properties on a roster-type basis as well
20 2. Commonly used structures * Company (cont) Relationship between shareholders governed byMemo and Articles of AssociationUse Agreement (which would include roster)Shareholders Agreement
21 2. Commonly used structures * Close Corporation The CC owns the propertyMaximum of 10 members – so will not fit into the commonly used structure of 13 shareholders, each entitled to 4 (four) weeks usage per annumIf Trusts are members - beneficiaries must be taken into account when calculating number of membersUse rights are governed by agreement between members – no Memo and ArticlesNew Companies Act – no new CCs can be registered
22 2. Commonly used structures * Club A company or other legal entity, eg. Trust, owns the property/iesInvestors may buy shares in the property/ies and at the same time, apply for membership in a club, or may only apply for club membershipThe company has an agreement with a managing agent to handle bookings and reservationsNo use rights in articles to companyNo use rights attaching explicitly to shareholdingClub membership entitles the member to use of the property/ies owned by the company
23 3. Applicable law and legislation * Common law Pertinent to joint ownership2 fundamental rulesno joint owner may appropriate any part of property for his exclusive usejoint owners can demand partitionOwners would need to agree to suspend or postpone these common law rights but cannot postpone indefinitelyNeed to regulate by agreement or title deed conditionspre-emptive conditionsuse and co-ownership agreement binding on successors-in-title
24 3. Applicable law and legislation * Companies Act Offer of shares to publicSection 143(1)No person shall offer any shares to the public otherwise than in accordance with the provisions of this ActSale of SharesSection 146No 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 OfficeIf shares in a share block company are being sold, prospectus not required if disclosure schedule in terms of Share Blocks Control Act furnished
25 3. Applicable law and legislation * Companies Act (cont) Subscription of SharesSection 145No 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 OfficeSection 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, determineProspectus required for subscription of share block shares unless falls within one of the exemptions in terms of Section 144 of the Companies Act
26 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 debentureany other interest in a companyexcludes 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
27 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
28 3. Applicable law and legislation * Share Blocks Control Act (cont) Some important provisionsSection 4A 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 propertyie. if share = use = Act applicableSection 5No share block scheme shall be operated in respect of :agricultural landother immovable property upon which a building is erected in conflict with an approved or proposed town planning scheme
29 3. Applicable law and legislation * Share Blocks Control Act (cont) Section 5ANo 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, oran 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 agreementOnce incorporated, can receive consideration but BEWARE Property Time-Sharing Control Act
30 3. Applicable law and legislation * Share Blocks Control Act (cont) GeneralEach share must confer a right of useEach share shall confer the same vote as every other shareSpecial rules about appointment, dismissal, powers and duties of directorsProspectus 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 2Offer for subscription must comply with Companies Act
31 3. Applicable law and legislation * Share Blocks Control Act (cont) General (cont)Special rules about form and content of contract – discussed laterUse agreementto secure and entrench occupancy rights – lodged and registered with Registrarright is conferred in Articles, but use agreement between company and members can be tailor-made to suit developmentsale of share automatically includes cession and delegation of use agreement – inseverable
32 3. Applicable law and legislation * Property Time-Sharing Control Act Purpose of ActTo regulate the alienation of time-sharing interests pursuant to property time-sharing schemesDefinitions“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
33 3. Applicable law and legislation 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 byshare blockclub structureundivided shares in sectional titleor otherwiseany 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
34 3. Applicable law and legislation 3. Applicable law and legislation * Property Time-Sharing Control Act (cont)GeneralSection 5, regulationsno 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 schemeNo 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 writingContent of contract prescribed – disclosure requirements, otherwise could be void
35 3. Applicable law and legislation 3. Applicable law and legislation * Property Time-Sharing Control Act (cont)General (cont)How scheme is advertised and contents of advertisement, otherwise could be voidCannot receive consideration, unless have architect’s certificate of completion, orpaid in trust to attorneys or estate agent until certificate furnishedORunconditional and irrevocable bank guarantee is furnishedIf scheme is run as a share block scheme, certain provisions relating to e.g. management, are not applicable.Consumer protection paramount
36 3. Applicable law and legislation 3. Applicable law and legislation * Consumer Affairs (Unfair Business Practices) ActGeneral Notice No 459/2006 published by Department of Trade & IndustryDeals with syndicationsDefinition“Public property syndication scheme”Assembly of investors who pool their resources to purchase/invest in property”, commercial and residentialThrough companies, close corporations, trusts, partnerships or individualsIndividuals share in profits and losses in the property and/or enjoy benefits of net rental growth through proportionate share of income.
37 3. Applicable law and legislation 3. Applicable law and legislation * Consumer Affairs (Unfair Business Practices) Act (cont)RequirementsMinimum information to be contained in a property syndication disclosure document, inter aliaFunds to be held in trust until registration of transfer into syndication vehicleDetails of capital raised by promoterFull details of promoter of schemeFull details of managementCompany description and structure
38 3. Applicable law and legislation 3. Applicable law and legislation * Consumer Affairs (Unfair Business Practices) Act (cont)Requirements (cont)Full details of property investmentproperty detailsservitudeszoningdevelopment potentialbuildings erectedphysical addressinsurance covercost of propertyvaluation of propertymortgage bond details
39 3. Applicable law and legislation 3. Applicable law and legislation * Consumer Affairs (Unfair Business Practices) Act (cont)Requirements (cont)TenantsIncome and Expenditure – projected income and expenditure and basis of calculation
40 3. Applicable law and legislation 3. Applicable law and legislation * Consumer Affairs (Unfair Business Practices) Act (cont)* Distinction between Fractional Ownership and Syndication *Fractional ownershipresidential + right to use property + added benefits (e.g. concierge, golf course, club facilities)management generally outsourced – rental return not main driving forceSyndicationinvestment in managed, structured, unlisted entitywhere investor expects a rental return on investmentdetailed disclosure requirements and minimum information required – onerous – basically a mini-prospectusPrevailing view is that typical fractional model does not fall under provisions of this notice. But always checkCONSUMER PROTECTION PARAMOUNT
41 3. Applicable law and legislation * Value Added Tax (“VAT”) Act Levied in terms of the Value-Added Tax Act No. 89 of 1991Levied on the “consideration” received for the “supply” of “goods” or “services” by a “vendor”
42 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”
43 3. Applicable law and legislation * Transfer Duty Act Levied in terms of the Transfer Duty Act No. 40 of 1949Levied 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
44 3. Applicable law and legislation 3. Applicable law and legislation * Financial Advisory and Intermediary Services ActPurpose and scope of the Actthe 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.
45 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.
46 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; orfurnishes advice and renders any intermediary service; orrenders an intermediary service.
47 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; orin respect of the investment in any financial productand 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; orresults in any such purchase, investment, transaction, variation, replacement or termination, as the case may be, being effected.
48 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; orwith 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
49 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.
50 3. Applicable law and legislation * National Credit Act Background and Purposeconsumer credit legislation in need of overhaul due to the perception of:regulatory weakness andfragmented, outdated and ineffectual regulatory frameworkthe Act repeals the:Credit Agreements Act 1980Usury Act 1968Exemption to the Usury Act (Micro lending)
51 Application of the ActSubject to certain exceptions, the Act applies to all credit agreements:in terms of the Act, to be a credit agreement there must be:some deferral of repayment or prepaymenta fee, charge or interest imposed with respect to deferred paymentdiscount given for prepayments
52 Circumstances when the Act will not apply The Act will not apply in the following circumstances:agreements between parties dealing closer than at “arms length”loans to the state, any organ of state,loans to any juristic person whose asset base or turnover exceeds a prescribed threshold (R1 million)agreements where the credit provider is the South African Reserve Bank
53 Circumstances when the Act will not apply The Act will not apply in the following circumstances:real property mortgages or other transactions whose principal value exceeds a prescribed threshold, and the consumer is a juristic person whose asset value or turnover is lower than the prescribed thresholdinsurance policies or real property leaseswhere a debt arises without any intention on the part of a creditor to enter into a credit agreement
54 Limited application of the Act The NCA has limited application wherethe agreements are “incidental credit agreements” orwhere the consumer is a juristic personWhere credit is extended to juristic persons the following provisions do not apply:marketing practices and negative option provisionsreckless creditdebt review and rescheduling of debtsprovisions relating to fees, charges, maximum interest rates and credit insurance
55 4. Consequences of non-compliance with legislation Companies ActSections 145(2) and 146(3)Offer of shares to the public for sale or subscription without prospectus, unless falls within Section 144 exemptions, shall constitute an offence by director or officer knowingly a party to contravention
56 4. Consequences of non-compliance with legislation (cont) Share Blocks Control ActFailure to comply with form of contract can result in nullityFailure to comply with Act – criminal offence :with fines between R500 and R2,000 or between 6 months and 2 years’ imprisonment, or both, depending on which Sections have been contravenedNB. A waiver by a shareholder of any right conferred upon him by the Act = null and voidWhere contract is of no force and effect, the seller and purchaser are entitled to reclaim from the other party what they have performed Purchaser may also claim :interest at 12% per annum on any payment/sreasonable compensation for expenses incurred in preservation or which enhanced market value of property
57 4. Consequences of non-compliance with legislation (cont) Property Time-Sharing Control ActFailure to comply with form and content of contract – on application to Court, may be declared void ab initio or an order for rectification may be grantedWhere contract is of no force and effect, each party is entitled to reclaim from the other what he has performed, plusthe purchaser may reclaim :interest at 12% per annum on any payment/sreasonable compensation for expenses incurred in preservation or which enhanced market value of propertythe seller may reclaim :reasonable occupational consideration for use of propertycompensation for damage caused to property
58 4. Consequences of non-compliance with legislation (cont) Property Time-Sharing Control Act (cont)Notwithstanding the above, a contract shall be valid ab initio if full consideration paid and time-sharing interest transferred or vests in purchaser
59 4. Consequences of non-compliance with legislation (cont) Consumer Affairs (Unfair Business Practice) Act General Notice 459/2006Where prescribed information is not furnished, the business practice (syndication) is declared unlawfulFailure to comply = criminal offence :fines of up to R200,000 or up to 5 years’ imprisonment, or both
60 4. Consequences of non-compliance with legislation (cont) 4. Consequences of non-compliance with legislation (cont) * Financial Advisory and Intermediary Services ActPenalties and in certain circumstances, may be guilty of an offence and liable on conviction to a fine or to imprisonment for a period not exceeding one year.Section 36: offences and penaltiesThe Act provides for a fine not exceeding R1 000 000 or for imprisonment for a period not exceeding 10 years, or for both such fine and such imprisonment in instances of contravention or failure to comply with certain of the provisions of the Act, or in instances of deliberately misleading, false or deceptive statements.
61 section 33: civil remedies The registrar may, when satisfied on the basis of available facts and information that a person has contravened or not complied with any provision of this Act, or is likely so to contravene or not to comply, apply to a Court for an order restraining such person from continuing to commit any such act or omission or from committing it in future, and requiring the person to take such remedial steps as the Court deems necessary to rectify the consequences of the act or omission, including consequences which prejudiced or may prejudice any client.
62 section 33: civil remedies (cont) The registrar may institute action in a Court against any person who has contravened or not complied with any provision of this Act, for payment of:an amount determined by the Court as compensation for losses suffered by any other person in consequence of such contravention or non-compliance;a penalty for punitive purposes in a sum determined in the discretion of the Court but not exceeding three times the amount of any profit or gain which may have accrued to the person involved as a direct result of any such act or omission;interest; andcosts of suit on such scale as may be determined by the Court.
63 4. Consequences of non-compliance with legislation (cont) 4. Consequences of non-compliance with legislation (cont) * National Credit Actsection 161: penaltiesAny person convicted of an offence in terms of this Act, is liable:in the case of a contravention of section 160(1), to a fine or to imprisonment for a period not exceeding 10 years, or to both a fine and imprisonment; orin any other case, to a fine or to imprisonment for a period not exceeding 12 months, or to both a fine and imprisonment.
64 5. Marketing and Selling * Advertising and Promotion requirements Companies ActProspectus required for offer of sale or subscription of shares to members of the public, unless sale of share block shares or Section 144 exemptions applyShare Blocks Control ActSection 11 – offers for salean offer of shares for sale to the public must be accompanied by Section 17 disclosure documentcopy of proposed sale contract available for inspection at address indicated in disclosure documentrules relating to prospectus not required for newspaper or other advertisement if advertisement states that contract is in terms of section 17 and is available for inspection at address indicated in disclosure documentOffer for subscription to the publicProspectus required unless falls within exemptions of section 144 of Companies ActSection 17Schedule 2 shall accompany sale contract
65 5. Marketing and Selling * Advertising and Promotion requirements (cont) 2. Share Blocks Control Act (cont)Schedule 2Name, address and registered office of companyDirectors and managementAuditorSecretaryPropertydescriptionwhether leased or ownedmortgage detailsDate upon which purchaser entitled to use propertyParties to contractDescription of share and details of other shares
66 5. Marketing and Selling * Advertising and Promotion requirements (cont) 2. Share Blocks Control Act (cont)Schedule 2 (cont)Purchase price and interest paymentsContributions to levy fundDetails of company’s loan obligation as reflected in financial statementInsuranceDocuments to accompany contractuse agreementnumber of shares allocatedlatest audited financial statementsdetails of sectional title scheme (if applicable)
67 5. Marketing and Selling * Advertising and Promotion requirements (cont) Property Time-Sharing Control ActSection 6No person shall advertise for alienation, any time-sharing interest unless prescribed information regarding relevant time-sharing interest, property time-sharing scheme and alienation is disclosed in advertisementContravention = an offence with fine up to R1,000, imprisonment for 1 year, or bothSection 3 regulationsAdvertisement for alienation of a time-sharing interest shall include :type of accommodation, eg. apartment, hotel room, caravan sitelegal basis on which time-sharing interest could be acquiredtotal number of years during which purchaser will be entitled to exercise rightsname and physical address of propertyintended date of completion of property, if not completecontravention = criminal offence with fine up to R1,000 or 1 year’s imprisonment
68 5. Marketing and Selling * Advertising and Promotion requirements (cont) 4. Consumer Affairs (Unfair Business Practice) Act General Notice 459/2006Purpose of Notice is to deal with promotion of syndicationsBasically, a mini prospectus is required containing information detailed above
69 5. Marketing and Selling * Form and content of sale agreement and documents If falls within parameters of Share Block Control Act and Property Time-Sharing Control Act, must comply with provisions thereof, namelyShare Block Control ActSection 16 - sale contract and use agreement must be in writing and signed by parties, otherwise of no force and effectSection 17Contents shall contain the matters referred to in Schedule 2 as dealt with above, and be accompanied by the documents referred to thereinA rouwkoop stipulation, subject to Conventional Penalties ActCopy of contract plus stipulated documents must be handed to purchaser
70 5. Marketing and Selling * Form and content of sale agreement and documents (cont) Property Time-Sharing Control ActSection 3 – purchaser can choose official language of contractSection 4 – contents of contract inter alia :purchaser and seller detailsdescription of legal basis of time-sharing interest and schemedescription of immovable property and whether owned or leaseddetails of owner of propertymortgage bondamount and nature of consideration, interest, instalments, due datedate by when architect’s certificate of completion will be issued (which shall be no later than 3 years from date of contract)statement of place at which and hours during which written details of scheme availableinventory of movablesstatement as to official language chosen by purchaserNB restriction on receipt of consideration
73 6. General * Shareholders and co-ownership agreement dealing with issues inter alia :appointment of directors if companyexit mechanismsbreach and forced sales (parate executie)transfer and sale of shares in company or propertyfunding running expenses and creation of levy fundappointment of management company or administrator – NB onerous management provisions of Property Time-Sharing Control Act not apply to share block scheme
74 6. General * ManagementProperty Time-Sharing Control Act – onerous management provisionsIf share block, don’t need to comply with these provisions – board of directors, who usually outsourceCo-ownership would need to be dealt with in an agreement between partiesWhether single property or complex hotel scheme, management structure should be tailor-made to suit particular development
75 6. General * Rental pools Companies Act Section 30 Section 31 “no company, association, syndicate or partnership consisting of more than 20 persons shall be permitted or formed in the Republic for the purpose of carrying on any business that has for its object the acquisition of gain by the company, association, syndicate or partnership, or by the individual members thereof, unless it is registered as a company under this Act”Section 31“no association of persons formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or by the individual members thereof, shall be a body corporate, unless it is registered as a company under this Act”ie. no corporate personality to such an association unless registered as a company
76 6. General * Rental pools Companies Act (cont) Section 31 “no association of persons formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or by the individual members thereof, shall be a body corporate, unless it is registered as a company under this Act”ie. no corporate personality to such an association unless registered as a company
77 6. General * Rental pools Companies Act (cont) What is legal nature of rental pool?A body as contemplated in Section 30?Depends on how obligation to participate in rental pool is createdagreement between partiesArticles of company
78 6. General * Rental pools Tax implications Income Tax Agent relationship – rental and deductions in hands of investorIncome tax on management fee – may deduct expenditure incurred
79 tax implications (cont.) VATRegistered separately in terms of section 52Output on rental of commercial accommodationTransfer of property held in rental pool may be zero-ratedTransfer DutyAt election of purchaser, transfer of property held in rental pool may be exempt form Transfer Duty