Sectional Titles

Fractional ownership revisited

We have previously expressed our serious concerns about the blatant disregard of the provisions of the Share Block Control Act (Act 58/1986) and the Property Time Sharing Control Act (Act 75/1983) by some of the leading role players in the property industry where the so called "Fractional Ownership" sales of shares are concerned.

Please refer to our notes on Fractional Ownership sales dated 21 May 2009 - Fractional concerns - where we urged compliance with the said Acts in order to avoid the sales agreements being void or voidable.

The current rumours about the possible mismanagement of funds by administrators of some of these Schemes necessitates another urgent and critical look at the position of Directors, Shareholders and also the exposure of the Banks who grant financial assistance to these Companies.

The relationship of these Companies, their directors and shareholders are governed by:
- The relevant legislation, being the:
o Share Block Control Act,
o Property Time - Sharing Control Act and
o the Companies Act.
- The Memorandum and Articles of Association of the Company.
- The sale agreement between the Company and the purchaser (future shareholder / director).
- Any shareholders agreement.
1.1 The Share Block Control Act (59/1980)
Section 4 reads as follows:
"Presumption as to operation of share block Scheme by Company
For the purposes of this Act 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."

1.2 The Property Time - Sharing Control Act (75/1983) and in particular the definitions in section 1 (xiii) (a) describing a property time sharing Scheme and in Section 1 (xviii) describing a time sharing interest.

NOTE: Where shares, which grant the purchaser certain rights to the Company's property, are sold the provisions of these two Acts are unavoidable and non compliance will result in these agreements being either void or voidable.

The majority of "Fractional Ownership" contracts fall within this category and even if the provisions of these two Acts were not applicable the provisions of the Companies Act (61/1973) (This Act is to be replaced with the New Companies Act which contains similar provisions)are even more severe:

1.3 The Companies Act (61/1973)

  1. Section 38 (1)
    "No Company shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares of the Company, or where the Company is a subsidiary Company, of its holding Company."

    Section 38 (2A)
    "Subsection (1) does not prohibit a Company from giving financial assistance for the purchase of or subscription for shares of that Company or its holding Company, if -

    (a) the Company's board is satisfied that -
    (i) subsequent to the transaction, the consolidated assets of the Company fairly valued will be more than its consolidated liabilities; and
    (ii) subsequent to providing the assistance, and for the duration of the transaction, the Company will be able to pay its debts as they become due in the ordinary course of business; and
    (b) the terms upon which the assistance is to be given is sanctioned by a special resolution of its members."

    If purchasers of shares in a "Fractional Scheme" are required to share in the responsibilities for the repayment of a mortgage bond over the Company's property the provisions of Section 38 are applicable and strict compliance with Section 38 (2A) is required.

  2. Section 20(1)(c) prohibits the sale of shares in a private Company (Pty) Ltd) to the public and as many of the Fractional Ownership Companies are private and not public Companies, this provision is fatal to these Schemes.

  3. Section 146 prohibits the sale of shares (in a public Company) to the public without a prospectus. We are not aware of one such Scheme being marketed complying with the provision of this Section.
Non compliance with any of these provisions constitutes an offence and can result in the criminal prosecution of the directors and their agents.
There are many other sections of this Act which may also be applicable

This document governs the functioning of the Company and its directors. The power to lend monies is regulated by Article 61 of the Articles (as per Table B to the Act) and the majority of Companies adopt this article without modification. The said article states that such loan may not exceed one half of the amount of the issued share capital plus the amount of the share premium account (if any), or of the stated capital unless such a loan has been sanctioned by the Companies shareholders in general meeting."
As the share capital in the "Fractional" Companies is mostly nominal in nature Banks should take cognisance of this requirement in granting a loan.
Purchasers in these Schemes should take heed of all the other provisions of the Memorandum and Articles of Association.

This document may be void or voidable due to non compliance with the provisions of the various Acts and potential purchasers are advised to tread carefully when entering into these agreements. Obtain expert advice before committing you to these schemes.

Most agents do not disclose the existence of the contents of a shareholders agreement to potential purchasers and as it governs the potential relationships between the parties, purchasers must do their homework.

In VOASA (Vacational Ownership Association of South Africa)'s website: they make the startling statement that "Fractional Ownership can be defined as shared ownership ... as the asset is owned by more than one individual".

This statement is blatantly wrong as the purchaser of these shares only becomes a shareholder in the Company which owns the property. The Purchaser himself does not become owner or co-owner of the asset.

Banks should take extreme caution when financing a Company where the bonded property is the subject of a Fractional Scheme. Their security may be at risk and the validity of the transaction may be at stake.

Purchasers investing in these schemes must similarly tread very carefully as the risks are huge.
Caveat Emptor! (Purchaser Beware)

Corrie de Jager

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