These Appendices to the Article published in this Blog regarding the “Legal Validity of the Club/Trustee System in Spain” are not intended to provide additional legal arguments but, rather, to explain the reasons it was introduced in Spain, despite the confusion which has been created in this Sector (of the Tourism Industry) as regards the general denomination of this kind of contracts, and the importance to the Spanish economy of Timeshare, particularly where it relates to the main market of timeshare tourists in relation to our country as main destination of the latter.

(I)

ISYNOPSIS OF THE CLUB/TRUSTEE SYSTEM

The summary figures we have taken from the Study on the Economic Impact of Timeshare (see below  -Paragrph III) illustrate its importance, not only for the European Economy, but particularly for Spain, which is currently the country receiving the third most timeshare tourists (after the USA, which is also the country with the most consumers of this kind –although it is certainly an internal market– and Mexico, which currently ranks second).

But they have also shown us a very important and conclusive fact to understand the different structures or systems used to operate timeshare businesses in Spain since its inception in the 1970s, i.e. that the majority of promoters were British and, more importantly, that most timeshare consumers and users in Spain come from the United Kingdom. Spain is still today the main destination for timeshare tourists and Spanish promoters represent a substantial part together with British promoters, but also most of the tourists who access Spanish resorts through timeshare continue to be British, with a strong entry of Irish, Scandinavian, Finish, etc who, while not purely Anglo-Saxon, are familiar with many of the Anglo-Saxon legal institutions due to their commercial leadership?.

Consequently, if the operators in Spain were mostly British at the beginning and so were the majority of these new consumers, it made sense to import into Spain (with the relevant process of adaptation) the legal systems or structures which in their country had proved most efficient and flexible for commercialisation purposes; an efficiency and flexibility which the British, pragmatic as they are, knew would be inextricably linked to consumer protection as a means to earning their trust. And the legal system or structure which aimed to provide consumers and users (the owners or holders of those timeshare rights) with such protection was no other than the Club/Trustee system, which we will in this section try to summarise, at least in its most widespread formulation.

In time, and with the boom of this economic activity, Spanish operators entered the market, and so did consumers from Spain and from other European areas, for whom it was felt that it was necessary to operate under other structures which would be more understandable in the context of their own legal culture, which gave rise to various formulas using Spanish legal concepts, such as civil partnerships, “multi-leases” or the better known “multi-ownership”. And all of them –including the Club/Trustee system– were obviously subject to the principles of our legal system of free will and freedom to contract, as well as that of being subject to foreign substantive laws provided that they would not come into conflict with Spanish public order legislation, and also under international treaties entered into by Spain.

After this introduction, it is necessary to summarise the purpose of the globally widespread legal system known as Club/Trustee, which is no other than to offer, fundamentally, “safety” to the purchaser. Such safety is the key to its success, together with its simplicity (once familiar with it), its adaptation to specific needs in each case and its ability to serve as a means to preventing numerous conflicts.

The very name of this system contains its two main elements, i.e. the “Club” and the “Trustee”.

• THE CLUB

 A Club is not a legally-typified entity in the United Kingdom, but one based on a spontaneous creation in the Anglo-Saxon tradition and is often defined as a unincorporated entity in the sense that it simply constitutes an “associative” covenant which does not have a legal personality of its own and does not need to be registered with Companies Registry or entered on any register of associations or any administration, nor does it require any special formality such as a public deed, etc.

It is therefore a contract of association which is governed by its own rules and to which third parties may adhere for a specific purpose.

For merely explanatory purposes, we will refer to the version of this system (of which there will be as many as freedom to contract allows so long as they do not go against the law) which is most commonly used in this sector of tourism.

The Club was normally set up by two members, usually two companies, which entered into an Association or Club Constitution Contract which basically defined:

• The Founder Members (or promoters of the Club in commercial terms), who had the right to admit new members (to whom we could refer as Ordinary Members).
• The Purpose of the Club: To enable its members to use and enjoy an apartment, house, room, etc, whether pre-determined or determinable, during a pre-determined or determinable annual period until the end of the Club’s lifetime according to its own Rules.
• The Rules of the Club (or Constitution), which included the rights and obligations of the Founder Members (promoters) and of the Ordinary Members (users), the Governing Bodies of the Club (its Committee), its length (normally in perpetuity, 80 years, etc, although the current tendency is to make it shorter owing to market demands).
• Admission of Members: As many Members could be admitted as “Rights of Occupation” were available, i.e. as many as occupation periods there are (normally weekly periods, which means 51 or 52) per apartment or accommodation unit “ATTACHED” to the Club.
• Commercialisation. Form of Admission of new Members, which is normally for valuable consideration following an agreement freely reached by the seller of the Membership or Affiliation (the Founder Member) and the purchaser (the consumer). The Affiliation would be acquired by a “Purchase Contract”, but the right to effective use of the Unit was reflected in the “Club Membership Certificate”.
• Obligation to pay an Annual Fee for the provision of services to the holder of the right and to the Unit and the Resort in which the Unit is located, as well as the consequences of non-payment.
• Management Committee of the Club, on which the Founder Members and the “Ordinary” Members were represented and whose members were normally elected by the (normally Annual) General Meeting of Members.

But, what happened if a fraudulent promoter sold more rights of occupation than were available or sold the units registered in its own name, for example, without any liens noted on the Register?

A response to this important question which, at least at the beginning, was one of the main points of contention, was provided by the operators with the formulation of legal structures which allowed an effective control of the commercialisation of these affiliation rights, the main ones being, on the one hand, the so-called “multi-ownership” system or functional or fixed-purpose community of property, which made use of the controlling role of notaries and registrars and eventually was somehow adapted by the REA 42/1998 in the form of an in-rem leasehold right of rotational enjoyment –the registration of which at the Land Registry was mandatory– and, on the other hand, the “Club/Trustee” system, of proven practical efficiency in the United Kingdom, i.e. in the main origin market for these consumers in all of Europe and specifically those with Spain as their destination, which made it a suitable option insofar as these consumers and users were familiar with it.

It was not, therefore, some clever invention, but a system already known by the majority of the consumers to whom it was aimed –a knowledge which would later become widespread– which worked as an actual provider of protection to the consumers.

• THE TRUSTEE

The Trustee is a typically Ango-Saxon concept, widely spread across the whole world and very particularly in the context of trade activities, whereby –in the case at hand– ownership of the property or the rights to be used by the Ordinary Members or timeshare purchasers is vested or owned by a third party (the Trustee) on whom confidence is placed to hold title thereto and to keep them free from liens and encumbrances, so that they can be used at all times by the Members, and to ensure that the Founder Members (promoters), even if they hold a majority –which at the beginning they always do- , will be unable to administer or mortgage or dispose of them in any way that would prevent the rights of occupation from being exercised.

• THE DEED OF TRUST

The Trust is created by virtue of the Deed of Trust, whereby the Founder Members of the Club (its only members at the beginning) appoint a special company or ‘Trustee’.

Under the law governing its legal structure, the Trustee is an independent company which, as every company, has its own personal assets, its own income and expenditure and its own profit or loss, and whose mission is to provide a specific service to third parties (in this case the Club and its Members), such as holding title to the property “attached” to the Club thereby assuming a custodian role.

These assets, which in this case mainly consist of real property (apartments or other kind of accommodation for tourist use in Spain), are acquired by a holding company whose owner is the trustee albeit not for its own benefit but for the benefit of the Members of the Club. These assets, therefore, are kept separate from the trustee company’s own assets as, like any other company, it is exposed to the circumstances affecting any business, bankruptcy included, and must therefore meet its liabilities out of its own assets, but never out of the assets held in trust, which are separate and independent and which, if things came to that, would all be transferred to another trustee without the problems of the former trustee to hold them as custodian on behalf of the beneficiaries of the Club (mainly its timeshare members).

By virtue of the Deed of Trust, the Club, as a subject capable of having rights and obligations, instructs the special trustee company to purchase, through a company denominated “Owning Company” which is solely owned by the Trustee and whose only business is to hold property for the benefit of the Club Members –hence it is called a non-trading company– the real property to which the timeshare rights inherent in the membership relate. Neither the Founder Member, fundamentally, nor the Ordinary Members may, even by majority decision, obligate the Trustee to administer or dispose of these properties in any way which contravenes the Rules and Regulations of the Club and which, therefore, prevents the members-users from using and enjoying the occupation period to which they are entitled.

In summary, once the properties to which the members’ rights of occupation relate have been acquired, the commercialisation process is as follows:

1. When the promoter or marketer enters into a contract with the consumer, the contract, as well as any monies paid or to be paid by the consumer, are sent to the Trustee.

2. The Trustee verifies that the marketer has proper authority to do this and to transfer the right insofar as relating to an existing apartment which is “attached” to the Club and on which there are no liens or encumbrances nor has the same right already been sold. Once this has been ascertained, the Trustee issues the Membership Certificate to the purchaser and then sends the money obtained from the sale to the marketer. Otherwise, the money will be reimbursed to the purchaser-consumer.

3. The Trustee will support a proper operation of the Club as an “independent third party” by, among other things, attending the General Meetings of Club Members at which the annual Budget is to be approved in the form pre-established in the Club Rules. This Budget contemplates the income of the Club, which mainly comes from the annual fee payable by the Club Members for the services provided to them, and all the expenses the Club has to meet –including the Resort-, among which is the remuneration payable to the operating or management company-service provider, which is normally set at between 10% to 15% of the total Budget in order to prevent abusive remunerations.

The foregoing is certainly a very abridged explanation, but the conclusion of this section is very simply that the Club/Trustee system has been generally accepted until now and has been adopted in many countries, including those which have their own system of rights in rem, such as the Portuguese “Derecho de Habitacion”.

(II)

-DENOMINATION AND OBJECTIVE DELIMITATION OF THE ROTATIONAL ENJOYMENT / TIMESHARE CONTRACT  

A).- AS REG:ARDS DENOMINATION

The legal definition of aprovechamiento por turno –rotational enjoyment– in Spanish encompasses and includes all in-rem or personal rights whose objective scope is that defined in Directive 1992/47/EC, the Spanish REA 42/1998 or in Directive 2008/122/EU and the Spanish REA 4/2012.

The variety of names given to this kind of schemes and reflected in the contracts concluded for their commercialisation has from the start, after the coming into force of the 1994 Directive and the 1998 Spanish Act and until now, led to confusion which, I dare say, has in this case been particularly detrimental to the marketer as regards the use of such names in the legal forum, although certainly also to the consumer.

Therefore, my personal opinion is that aprovechamiento por turno,  or even tiempo compartido –Spanish translation of ‘timeshare’, the most widely used term throughout the world–, must or can be used as a general, equivalent denomination which encompasses all these contracts.

In addition, the specific denomination corresponding to the legal right to which these contracts relate or could relate must be clarified both in any informative and promotional documentation intended for the commercialisation of this kind of rights and in the specific contracts of transfer thereof.

Without aiming to be thorough, it would be advisable or necessary in this sense to list the following rights insomuch as their denomination refers exclusively to their very legal nature:

• Right in Rem of Rotational Enjoyment of Real Property.
• Personal Right of Seasonal Leasehold or Rotational Enjoyment Leasehold of Real Property.
• Personal Right of Membership or Affiliation to a timeshare Club or Club-Trustee.
• In the case of the pre-existing “multi-ownership” right, such a word may not be used for commercialisation purposes, which has not precluded its commercialisation provided that it was first adapted to the REA 42/1998 by publication but without any transformation of its legal nature (although this is what the Supreme Court has now denied in the aforementioned Judgements) and that the sale contract and the mandatory informative document included an explanation of its legal nature, which is doubtlessly that of a “functional or fixed-purpose community of property or of property owners”, as an undivided share of ownership is thereby acquired.

B).- AS REGARDS OBJECTIVE SCOPE: 

From the various definitions of this kind of rights, particularly the most recent definition contained in the European Directive and in the Spanish Act currently in force, we can take the characteristics which make up the objective scope of the contract or right to which rotational enjoyment or timeshare refers which, in my view, are:

• It relates to a “service” for the occupation of holiday accommodation.

The elements of such a service are, in my judgement, as follows:

• The accommodation may not be a residential home but an accommodation unit (room, apartment, home, country house, caravan on a camping site, etc) which is part of a holiday accommodation establishment (hotel, apartment-hotel, holiday apartments, hostels, country homes or even private homes for tourist use, etc).

Such establishments must contain the architectonic specifications, furniture, facilities, installations, means of access, etc which are determined by the legal rules on tourism and, consequently, both the operating company and the establishment itself have to be registered with the “Tourism Registry” of the Autonomous Community –Region of Spain– in which they are located.

• Specific services. The services inherent in this kind of establishments according to their type, category, location and other parameters need to be provided: reception, restaurants, number of beds, water, electricity, telephone, cleaning and linen, restaurants, etc.
• Temporary nature. Use of the units is essentially temporary.
• Commercialisation: This is fundamentally done either directly at the establishment itself or through what is nowadays known as touristic supply channels and in any way admitted by Law, such as:

•         Direct contracting at the establishment.
•         Advanced contracting, whether individual or for groups.
•         Reservations through own or third-party channels.
•         Multiple reservations.
•         Contracting as a “rotational enjoyment right”.
•         Indirect contracting by “exchange of rotational enjoyment rights”.

• It is a tourism-related product, not a real property product.

Therefore, it is not a real estate product but a purely touristic economic activity and, just as a hotel stay or a “Bancotel” voucher or multiple reservations or similar rights of occupation are not a real estate product, neither is this specific form of commercialising bed nights in holiday accommodation units. Rotational enjoyment is thus regarded by the rules governing tourism: It does not relate to a type of touristic accommodation unit but merely to a way of commercialising this kind of units (i.e. rules of Andalucía and the Canaries).

It is a matter, therefore, of banishing the idea that this is a real property-related right, a tendency which started with the REA 42/1998 by prohibiting the use of the word ownership or multi-ownership for marketing purposes, a prohibition which, I understand, only relates to “ownership of a real property”.

This leads us to two basic considerations:

• Contracting for this kind of right to stay overnight in tourist accommodation units may fundamentally take the form of contracts involving personal obligations subject to non-Spanish law, without prejudice to the alternative of doing it, if so allowed by the lex rei sitae, as a contract involving an in-rem or leasehold right.
• The REA 42/1998 was from its coming into force intended to exclude (without prejudice to the personal rights which existed previously) the commercialisation of any personal right on a timeshare basis. And it failed to achieve this, to a considerable extent, due to the strength of the facts: The Land Registry is not the right Body to control this kind of tourist contract, nor are Notaries and Registrars, who were made to act as the “police of the system” but were never provided with appropriate instruments or tools to perform such a role which, on the other hand, was not their own.

    The business sector of timeshare carries out an economic activity like any other, according to specific regulations and generally abiding by the applicable legal rules. However, as with every human activity, there are and there will be pathological behaviours, but this does not justify a general demonisation of the sector, as can also be said of politicians, airlines, taxi drivers, judges, public servants, trade unionists or any human activity, although such pathologies must certainly be cracked down on using the right means.

(II)

THE TIMESHARE INDUSTRY IN SPAIN

The aforementioned Judgements rendered by the 1st Chamber of the Supreme Court, to which all the operators in the Sector have expressed a general –or, rather, virtually unanimous– disagreement and which, if they become consolidated Case Law, can be hugely detrimental to entrepreneurs, workers, suppliers, users and even private individuals who transferred their rotational enjoyment right (in summary, to the national economy), unexpectedly embraced an interpretation of the REA 42/1998 which has come as a surprise to virtually all the legal operators, from an absolute majority of first instance or provincial court Judges (if we go by what they have more than repeatedly stated in their Judgements) to Case Law, lawyers, the notaries and registrars who authorised Deeds of Adaptation and the Registrars who registered them and, I dare say, all those who somehow or other participated, whether directly or indirectly, in the drafting of this Act. Obviously, this does not mean that we must not respect –albeit not necessarily share– the opinion of the Judges of said 1^st Chamber and certainly observe their Judgements in each specific case, without prejudice to our belief that the Court of Justice of the European Union may rule on this matter (certainly in the long run) in similar cases.

But if we talk about a detrimental impact on the national economy, it would not be fair simply to make such a statement without anything to support it, so it seems appropriate to provide some data to explain what this sector means to the national economy. While the following figures are from 2007, we believe that they have since experienced a growth.

The Study “Market Characteristics and Economic Impacts of the Euopean Timeshare Industry 2008” was prepared by The Christel DeHaan Tourism & Travel Research Institute – University of Nottingham, United Kingdom.

The Christel DeHaan Tourism & Travel Research Institute has undertaken project work for national and regional government organisations, international organisations and tourism businesses, and it has led projects for the World Tourism Organisation (UN), the European Commission, ASEAN (Association of Southeast Asian Nations), OIT, OCDE, United Kingdom Ministries and international organisations in Brazil, Spain, Cyprus and Malta.

This Study provides figures –which are even more important today – of the Industry in 2007, among which, by way of a summary, the following should be highlighted:

General characteristics of the Timeshare Industry in Europe:

• In 2007 over 1.5 million European households owned timeshare. It should be taken into account that almost all the timeshare consumers are “households”, so if we consider an average 3-member household, this amounts to over 4.5 million people.

 The UK and Ireland form the largest market having 589,653 timeshare owners (an average 1,768,905 people), followed by Germany and Italy.

• Most resorts are concentrated in Spain with 26.3% of the total, 14.94% in Italy and 11.05% in the UK & Ireland.

 There were a total of 1,312 resorts in Europe.

• The total number of units in European resorts is 73,540, resulting in 67,590 million bed nights.

• Average occupancy levels across completed European resorts were 71.7%.

 Economic impacts of the timeshare industry in Europe

 € 3.2 billion of expenditure was generated by the European timeshare industry in 2007.

• European timeshare owners spent € 1.6 billion during their timeshare vacation, plus € 957 million on timeshare purchases and € 618 million on timeshare maintenance fees.

• The top spending market is the UK, generating € 1.4 billion (about half the total expenditure) in timeshare.

• The average expenditure per trip (or vacation) was €1,588 per family, which was mainly spent on restaurants, car rental, parking and petrol, groceries, accommodation and gifts, souvenirs and clothes.

• In terms of employment, a total of 69,836 jobs are directly sustained by the timeshare industry.

• The overall employment costs for the timeshare developers sector across all resorts is €1.28 billion (€1.06 billion if considering only resorts on the twelve European countries of this study).

Figures for Spain. From the figures reflected in the Report for Europe, we can extract the following figures in relation to Spain:

Spain is one of the markets with the highest potential for development of the timeshare industry and leads the European ranking for number of resorts, accommodation units and bed nights.

• Number of timeshare owners (households) in Spanish resorts: 715,000.

The above includes 623,000 non-Spanish households (with three family members on average) and 92,000 Spanish households. United Kingdom is the country with the most timeshare users (278,000), followed by Germany with almost 106,000 users.

•  47% timeshare owners in Europe have bought into Spanish resorts.
• Number of timeshare resorts in Spain: 345
• 26% of all European resorts are in Spain.

Distribution of resorts:

• Balearic Islands: 35
• Canary Islands: 150
• Costa del Sol: 98
• Rest of Mainland Spain: 62

– The Spanish resorts contain approximately 23,000 accommodation units, which represents 31.2% of the European supply.

– The average number of bed nights in timeshare accommodation units per annum is 22 million.

• Impact of the Timeshare Industry in Spain:

-Timeshare owners generate about 500 million euros per year in Spain.

– The average expenditure per family and trip during their holidays in Spanish resorts was €2,349.

 These figures show the importance of timeshare to the Spanish economy, to employment and to overcome the seasonality of the tourism industry in general.

 

Lizarza Abogados

September 2015