Commercial Property- South Africa Fractional ownership is a relatively new form of shared real estate ownership in South Africa. This update considers whether fractional ownership is something new or is merely a new generic term for various existing forms of shared real estate ownership. The term 'fractional ownership' is commonly used in various jurisdictions throughout the world in the context of the shared use of not only real estate, but also luxury goods (eg, motor vehicles, boats and aircraft).
A trend that has recently developed in the South African real estate market is the marketing of real estate (particularly leisure developments) in the form of fractional ownership. The purchaser acquires a share in (or a 'fraction' of) the land in question. However, what precisely is fractional ownership?
There are a number of legal bases for the sale of real estate as fractional ownership. The oldest form of fractional ownership is probably joint ownership, whereby the property concerned is acquired by a group of individuals in undivided shares. Each member of the group acquires ownership of a specified undivided share in (as opposed to a specified portion of) the property concerned. They will typically enter into a co-owners' agreement regulating their respective rights and obligations as co-owners of the property. Issues such as their obligations to contribute to common expenses and their rights of use of the property will be addressed. The biggest drawback of this form of ownership is that the transfer of ownership of an undivided share in real estate can be effected only by way of a deed of transfer registered under the Deeds Registries Act. Such transfers have adverse cost and timing consequences.
There are also a number of alternative schemes whereby indirect title to the property concerned is acquired through an intermediary vehicle, such as a company, close corporation or trust. All these forms of fractional ownership allow for flexibility and ease of transfer of ownership, but they have the potential of subjecting the purchaser to risk. The chosen vehicle acquires ownership of the property concerned and the purchaser or investor acquires an interest (through shareholding or other equity) in that vehicle. The interest is readily transferable with minimal formalities. The difficulty is that the purchaser or investor acquires only an interest in the vehicle which owns the property. The purchaser or investor may have no control over the activities of the chosen vehicle and may be unable to prevent the property concerned from being encumbered or alienated, or to prevent the vehicle from incurring unnecessary debt.
The most commonly used form of fractional ownership is in terms of the Share Blocks Control Act (59/1980). The act regulates the operation of share block schemes (ie, schemes where "any share of the company confers a right to or an interest in the use of immovable property") and generally protects the rights of investors. By way of example, the power and capacity of the company to conduct any other business and the company's rights to alienate and/or encumber the property are severely curtailed. Share block schemes confer on purchasers and investors the best protection of all of the forms of indirect fractional ownership available under South African law.
Another form of indirect fractional ownership (which is limited to real estate acquired for investment purposes only and not for personal use) is property syndication. Typically, the syndication company will acquire an income-producing property with investors acquiring shares in that company. The shareholders enter into a syndication or shareholders' agreement which regulates their respective rights and obligations as shareholders. Because such schemes merely confer on the investor the right to receive a dividend or return on its investment and do not confer the right to or an interest in the use of the property, such schemes are not regulated under the Share Blocks Control Act. Syndication schemes remain subject to the provisions of the Companies Act, including restrictions on the offer of shares to the public without the issue of a prospectus.
Generally, the concept of fractional ownership encompasses various existing legal and commercial transactions whereby the shared ownership and/or use of real estate is acquired by a group of individuals. The basic concept is nothing new. Provided that such transactions are correctly structured and managed, they present sound investment and ownership opportunities.
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