LEGAL VALIDITY OF THE “CLUB-TRUSTEE” SYSTEM: BEFORE, DURING AND AFTER THE SPANISH TIMESHARE ACT 1998


FOLLOWING SUPREME COURT JUDGEMENTS NUMBERS 774/2014 (15.01.2015) AND 431/2015 (05.07.2015)

This article is intended to make particular a study of the impact which the aforementioned Judgements have had or may have on the Timeshare Industry insofar as they proclaim the nullity of contracts which, being based on legal systems in place before (pre-existing) the Spanish Rotational Enjoyment Act 42/1998, failed to be transformed after the coming into force of said Act <abandoning their preceding legal system> to become the rights in rem or leasehold rights created ex novo by the new Act.- This could, without a doubt, have an impact on “almost all” the systems where other methods of adaptation –which all those involved in the legal profession deemed (until the recent Judgements were rendered) to exist and to be possible – were chosen.
The Article comes to the conclusion, for the legal reasons described in it, that timeshare contracts based on legal systems or schemes subject to non-Spanish law but relating to properties located in Spain (i.e. the Club-Trustee System) are clearly lawful given the prevalence, as a higher-ranking rule, of the 1980 Rome Convention on the choice of applicable law as regards personal obligations over the Rotational Enjoyment Act 42/1998, a lower-ranking rule.
Various Appendices will soon be added to this Article to try to show once again that the timeshare industry, and timeshare itself, is not a fraudulent system, but an economic operation or activity which responds to consumer demand, a lawful supply by entrepreneurs-developers and the interests of the national economy where the tourism sector, now more than ever, is the driving force of the Spanish growth. Therefore, these Appendices will be aimed at studying the detrimental consequences of confusing the various names given to this kind of contract, the raison d’etre of the Club-Trustee System or the economic impact of timeshare in Europe and, specifically, in Spain.

“VALIDITY OF THE CLUB-TRUSTEE-SYSTEM”

INTRODUCTION:

Before addressing the merits of the legal validity in Spain of the legal system known as Club-Trustee, we need to make some clarifications concerning the very name of this kind of “rights, products and services relating to the periodic occupation of holiday accommodation” in relation to the name of these legal systems and types of contracts, which we will generally refer to, indistinctly, either as Timeshare or as Rotational Enjoyment, without prejudice to the specific name of each right in relation to the specific system involved in each case.

-I-
BEFORE THE COMING INTO FORCE OF THE ROTATIONAL ENJOYMENT ACT 42/1998 (REA 42/1998).

The “Rotational Enjoyment Of Real Property For Tourist Use And Taxation Rules Act 42/1998 of 15 December” (hereinafter “REA 42/1998” for ease of reference), incorporated Directive 2004/47/EC into Spanish Law and was the first legal rule in Spain which established a set of regulations on timeshare, which in said Act started to be called “rotational enjoyment”. However, the fact that before the appearance of this Act there was not any specific rule regulating these contracts does not mean that this activity was clandestine or outside the Law.

There are two governing principles in Spain -“free will” and “freedom to contract”- which, as an expression of persons’ freedom, allows individuals to create, modify and terminate legal relationships; within the scope of a legal transaction, and also by virtue of the “freedom to contract” principle, persons are at liberty to undertake any obligations they may freely agree on.

This, however, is not an absolute right but one with limitations laid down by Law, and such limitations are becoming increasingly restrictive in situations affecting third parties who are regarded as more defenceless, such as consumers or users.

And where a contract which is formally envisaged by Law is entered into, the parties are free to determine its covenants provided that the end is lawful and that the mandatory precepts for such a contract are observed; otherwise, there is absolute freedom.

For this reason, when contracts from the Anglo-Saxon tradition are imported into Spain, any person –Spanish or otherwise – may freely enter into such contracts and, in addition, they may do so with the application of concepts existing in Spain (such as community of property, simple contracts involving personal obligations or other associative systems, etc) but without any obstacle to do so according to a non-Spanish law –as per the freedom to contract principle– provided that no mandatory law of Spain is thereby contravened.

Of utmost importance to understand the limits set by Spanish Law in delimiting its exclusive and excluding jurisdiction (as a public order rule) is the content of Article 10.1 of the Civil Code, which states that:

“Possession, ownership and other rights over real property, as well as the publication thereof, shall be governed by the law of the place in which they are located”.

We would certainly need to analyse this precept, particularly as regards “other rights over real property”. That is, we need to study the scope of this precept both in relation to the hierarchy of the rule in which it is contained (Civil Code) –in order to ascertain whether it is applicable given that it does not come into conflict with any higher-ranking rule of the Spanish legal system– and in terms of the actual material scope inferred from the same rule.

It is therefore necessary to determine whether the phrase “other rights over real property” encompasses all the rights of occupation which directly (as a right in rem) or indirectly (as a personal right) relate to a =real property/holiday accommodation= which, consequently, would have to be constituted and governed by Spanish Law on an exclusive and excluding basis if the property is located in Spanish territory. In other words, to determine whether only Spanish Law can substantively regulate these rights, whether they are rights in rem or merely personal or binding rights.

If we confine ourselves to what is stated in the current Rotational Enjoyment Of Property For Tourist Use Act 4/2012 of 6th July (hereinafter referred to as REA 4/2012), this is not the case, as the latter rule expressly acknowledges that the EU Regulation Rome I <which is also a higher-ranking rule than this Act> is applicable even if it goes against the provisions of its articles by virtue of the express acknowledgement contained in the 8th paragraph of Article 23, which says:

“The provisions of this title do not preclude the validity of any other type of contract whereby a right of a personal or an associative nature is created whose subject is the use of one or several accommodation units for overnight stay during more than one period of occupation and which has been created under, and on the terms of, the rules of the European Union, particularly Regulation (EC) no. 593/2008 of the European Parliament and of the Council of the 17th June 2008 on the law applicable to contractual obligations (Rome I) and the international conventions to which Spain is a party. The provisions of Title I of this Act shall be applicable to all such types of contracts”

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32008R0593

We have certainly taken a leap forwards in time by citing the new REA enacted in 2012 when we were discussing the situation created during the validity of the now repealed REA 1998; such a leap would not make any sense were it not to prove that the rule whereby any right over real property is to be governed, on an exclusive and excluding basis, by the law of the place where the real property is located (lex rei sitae), does not apply where such a right is one of a personal or merely binding nature subject to non-Spanish law.

If it is now acknowledged that the Rome I Regulation (2008) is a higher-ranking rule than the REA 4/2012 and allows the subjection to non-Spanish law of personal (not in-rem) timeshare or rotational enjoyment rights relating to real property located in Spain, the same argument must be adopted in regard to the situation created by the preceding REA 42/1998, which is aware and even acknowledges –albeit chooses to ignore– that a higher-ranking rule was in force at the time which, on similar terms, allowed the subjection of personal rights of rotational enjoyment or timeshare rights to non-Spanish law; such a rule was none other than the Rome Convention Concerning The Law Applicable To Contractual Obligations of 19th June 1980, amended in Funchal on 18th May 1992, which was published in the Spanish Gazette on 19th June 1993 and came into force on 1st September 1993 (therefore before the REA 42/1998).

It should also be noted that, even though the 1980 Rome Convention is a multilateral treaty, it now constitutes a “rule of the European Union”, which may open the door to the possibility that the issues concerning its application can be resolved before the Court of Justice of the European Union after all the Spanish judicial instances have been exhausted.

In this sense, the 1980 Rome Convention Ratification Instrument signed in Funchal by the Kingdom of Spain and The Republic of Portugal explains the motivation of such ratification as follows:

“Considering that, by becoming members of the European Union, the Kingdom of Spain and the Republic of Portugal undertook to adhere to the Convention concerning the Law Applicable to contractual Obligations, which became open for signature in Rome on 19th June 1980…”

(https://www.boe.es/buscar/doc.php?id=BOE-A-1993-18896)

In this regard, Sánchez Lorenzo states that: “The Rome Convention was born as a corrective or balancing element of the European Legal Space, directly associated through the Brussels Convention to Article 220 of the European Constitutional Treaty itself”.

http://digibug.ugr.es/bitstream/10481/15141/1/CONVENIO%20DE%20ROMA%20(1999).pdf

Or, as stated on the website EUR Lex:

The Convention on the law applicable to contractual obligations became open for signature in Rome on 19th June 1980 for the then nine Members of the European Community (EC). Later, all new members of the EC signed this Convention….

In addition, all new Member States of the Community were on signing the Rome Convention demanded to adhere to the Protocol concerning the interpretation of the Convention by the Court of Justice.

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV:l33109

Without needing to state the validity and application of the 1980 Rome Convention since it came into force for Spain in 1993, the truth is that, even before, taking only into account the domestic, “exclusively Spanish” rules prior to the REA 42/1998, the possibility of constituting rights of a personal or binding nature over real property located in Spain under a non-Spanish substantive law was never called into question, whether they related to apartments or residential homes or to properties/accommodation part of holiday establishments; this resulted in the predominant, if not exclusive, constitution of systems which were subject to the law of an Anglo-Saxon country, fundamentally the aforementioned Club-Trustee system.

In any case, however, it is my view that, after the Rome Regulation became applicable in Spain in 1993, the opposite may no longer be argued despite the strong current of thought doubtlessly promoted by traditional hotel businesses and legal agents who intended to adapt the phenomenon of the timeshare economic-touristic activity to one only formula involving the constitution and application of this kind of contracts to a new “right in rem” named “rotational enjoyment”, which had to be reflected in a public Deed and registered at the Land Registry so that notaries would control the constitution of the system (first compliance check) and they would have access to the Land Registry (second compliance check).

In addition to that, there would be a notarial control of the commercialisation and transfer of the RERs (rotational enjoyment rights) by public Deed to which the purchasers would voluntarily have access after the verification of the existence of the system and its rules, the RER itself and the situation concerning ownership and liens as recorded at the Land Registry.

However, the Spanish legislator, no doubt with the best intention but certainly taking an unrealistic stance, failing to take into account the very nature of the timeshare product and moving away from the identification made in Directive 94/47/EC of the problems being encountered before 1994 in this economic-touristic sector –which did not so much relate to the legal form or nature of these contracts but to the commercialisation thereof, i.e. the promotion and subsequent sale of the product–, chose not to regulate a “market” but to cause it to fall within other Spanish legal institutions of recognised effectiveness in other areas and to cause it to be controlled through public deeds and the Land Registry by the equally prestigious and competent body of Public Notaries and Registrars.

The problem, however, was that the activity of Notaries and Registrars, old but constantly adapted to real property transactions and to the frequent variations taking place from time to time, was never created or modified to regulate, for the benefit of the consumers, the mercantile transactions brought about by this type of commercialisation of rights concerning overnight stay in holiday accommodation.

And this has caught on among Spaniards and foreigners alike in the form of the misconception that the only form of acquisition (purchase) of real property in Spain is by executing a mandatory public deed which must then be registered at the Land Registry, when the truth is that such a transfer of property is equally valid (albeit it does not have the same degree of protection as against third parties) if done through a private contract where this is accompanied by possession (title and handover).

But such a mistaken belief stems from the fact that that is the most effective means to protect the purchaser’s right at the time of purchasing a real property and to retain ownership thereof undisputedly. This is why, whenever a real property is now purchased in Spain, the transaction is reflected in a public Deed and registered with the Land Registry in an overwhelming majority of cases.

But the same thing does not happen with rotational rights of occupation for the very simple reason that these rights are not a real property product –even though it has been intended to formulate them as a right in rem– but a merely touristic product or right.

This is why, after the coming into force of the REA 42/1998, the public Deed and registration have been overwhelmingly absent in the commercialisation and transfer of in-rem or leasehold rights of rotational enjoyment. In default of statistical data, I believe that it would not be unreasonable to say that the incorporation or RERs into a public Deed and the subsequent registration thereof does not reach one percent of all cases. That is, this control and protection method is good and effective for the purposes of real property development, but not for the promotion and marketing of holiday accommodation stays.

-II-
SYSTEMS WHICH PRE-EXISTED ACT 42/1998 OF 15 DECEMBER UNTIL THE COMING INTO FORCE OF REGULATION (EC) 593/2008 CONCERNING THE LAW APPLICABLE TO CONTRACTS ENTERED INTO AS FROM 17 DECEMBER 2009 (ROME I).

Before the aforementioned Judgements of the Supreme Court were rendered, the validity of the personal timeshare systems which pre-existed the REA 42/1998 was almost unanimously never questioned provided that they simply complied with a consumer protection rule of adjective law, i.e. that they be given public status by registration thereof at the Land Registry (without the obligation, therefore, to transform them into the new in-rem or leasehold right of rotational enjoyment); also, where the lifetime of the pre-existing system was in excess of the 50-year term laid down ex novo by the new Act for all new schemes, the pre-existing duration could be preserved provided that such longer validity was expressly mentioned in the Deed of adaptation-publication.

When an Act or its pre-legislators and legislators deliberately ignore the problem which may be posed by the existence of other rules, including higher-ranking rules, they can create an even bigger problem and, eventually -15 years later–, a seriously detrimental situation for the citizens, whether they are entrepreneurs, consumers, users or employees, as is to be expected after the Supreme Court Judgements.

The National Association of Timeshare Businesses (currently the Spanish Chapter of RDO), acting responsibly, raised these issues at various forums and directly to the General Secretariat for Tourism, the bodies of the Ministry of Justice with jurisdiction on the matter, Regional Parliaments and Members of Parliament and the Senate who generally, without denying the existence, validity and scope of the 1980 Rome Convention (which had already been pointed out by the State Council in its Report on the Bill preceding the Act), chose a set of confusing regulations for the sake of increasing the level of protection to consumers through an exclusive system of rights in rem, the consequences of which had become evident even before the Judgements of the Supreme Court which, in our view, go far beyond what was justified by the Rationale and provided for by the Articles of the REA 42/1998 itself.

By virtue of a surprising interpretation which, as far as we know, had never been adopted in any Treaty or by the vast majority of the Provincial Courts in establishing their Case Law over the last fifteen years, these Supreme Court Judgements basically indicate that the adaptation of any scheme pre-existing the REA 42/1998 was not valid if performed by simply publishing all or part thereof as they should have involved the “transformation or conversion” of both the pre-existing limited or full ownership rights in rem (i.e. community of property on a multi-ownership basis) and the also pre-existing personal rights (whether subject to Spanish Law or otherwise, such as the Club-Trustee system) under penalty of absolute nullity of the contracts marketed after that deadline.

Indeed, the aforementioned Supreme Court Judgement no. 774/14 (and no. 431/15 in a similar sense) literally states as follows:

However, the interpretation of said paragraph 3 of the second transitional provision adopted by the appellant on which it rests its case, does not respect the sense arising out of the systematic connection thereof to paragraph 2 of the transitional rule itself, whose content the former respects in any case – “[without prejudice to the provisions of the last preceding paragraph…]” – and which sets forth that any titleholder –consequently also the current appellant – wishing to “commercialise the occupation periods not yet transferred, after the Deed of Adaptation, as rotational enjoyment rights”, was to constitute the scheme “with regard to the available periods and in compliance with the requirements established in this Act”, among them the temporal requirement laid down by Article 3, paragraph 1.

As mentioned, while we respect the doctrine contained in these Judgements, we understand that it is radically contrary –and therefore not shared by them from the start– to the position of virtually all the treaty writers who addressed the issue before and on complying with the Act within the timeframe thereby established for “adaptation” of the pre-existing schemes, the numerous notaries who authorised the adaptation thereof by publication and the registrars who entered the deeds on the Register, who almost unanimously (!) understood that something entirely different is clearly inferred from the Transitional Provisions in relation to the Rationale of the REA 42/1998.

We further understand that this Supreme Court doctrine comes into conflict with, and fails to take into account, the prevailing application of the higher-ranking rule which is the 1980 Rome Convention over the lower-ranking REA 42/1998 (possibly because debate in a trial is confined to or limited by the respective petitions of the plaintiff and the defendant by virtue of the principle of consistency of rulings –ne ultra petita– and this was never a subject of debate in the cases which gave rise to the Supreme Court Judgements).

Such a possible conflict of rules during the pre-legislative and legislative process which resulted in the enactment of the REA 42/1998 existed previously and was as evident as noted by Hernández Antolín in a premonitory article entitled “The So-Called Right Of Rotational Enjoyment Of Real Property: Its Peculiar Problems Within The Framework Of The Current Timeshare Market Worldwide”, which he published months before the publication of the REA 42/1998 in issue no. 33 of the Magazine “Civil News” of 14 September 1998, out of which we should cite and transcribe –in italics– the following:

5) The projected legislation is a deterrent to cross-border transactions.

The fundamental goal of the European Union is the creation of a single market of products, services, capitals and factors of production.

However, the Project, far from being instrumental in achieving this goal, imposes a brake on an activity in which most of the purchasers and most of the promoters are not resident in Spain.

– Because it attempts to prevent the constitution of timeshare schemes under foreign Legislation (1st Additional Provision).

– Because it demands that service companies have to be domiciled in Spain (Article 16.1), which seems to prevent the existence of multinational companies (unless they set up affiliated companies of Spanish nationality).

– Idem as regards the owner or promoter insomuch as, if it is a company, the obligation is thereby imposed (as documentary evidence is demanded) to be registered with Companies Registry, which seems to exclude promotion by an EU company which does not have a branch, agency or office (only foreign companies with access to Companies Registry): Article 9.9.

– Idem as regards exchange companies, albeit in this case it is thereby demanded that they have an open, registered branch in Spain (Article 5.2).

This attempt to exclude foreign entities is all the more serious given that major multinational companies in the tourism and leisure sector (Disney, Marriott’s, …) are now entering the timeshare sector. It seems clear that, if the Spanish legislation is restrictive and deterring, we can expect the diversion of these investments to other countries whose legislation is more flexible (France, Italy, …).

But, perhaps more importantly, after the rationale he goes into an analysis of this matter considering the “legal system as a whole” by stating:
“6) The Bill may come into conflict with various international Treaties signed by Spain”.

“The validity in Spain of International Treaties is set forth in Article 96.1 of the Spanish Constitution, which states that they are part of our internal regulations (Constitutional Court Judgements 76/82 of 14th December, 30/86 of 20th February and 37/88 of 3rd March, and many others) and that their provisions may only be repealed, modified or suspended in the form established by the Treaties themselves or in accordance with the general rules of International Law”.

“The Project lacks rules concerning conflict of laws and jurisdictions: it only has one rule, the 2nd Additional Provision, which sets forth that «all contracts, whatever the place and date of execution, which relate to real property located in Spain, are subject to this Act. The covenant of express submission to the law of another State shall be deemed to be made in circumvention of the Law».

In my judgement, such a precept may be in contravention of various International Treaties entered into by Spain in relation to conflict of laws and jurisdictions. The most striking thing is that in paragraph VII of the Rationale it is stated that the said 2nd Additional Provision is supported by the Brussels, Lugano and Rome Conventions.

Conflict of applicable Laws: the Rome Convention

Spain has ratified the Rome Convention On The Law Applicable To Contractual Obligations of 19th June 1980, amended in Funchal on 18th May 1992, which was published in the Spanish Gazette on 19th July 1993 and came into force on 1st September 1993.

Three Articles of the said Rome Convention must be examined:

— Article 3: It provides that contracts shall be governed by the law expressly or tacitly chosen by the parties and that a change of applicable laws shall be admitted after the execution of the contract except insofar as this may affect third parties’ rights (paragraph 1).
An exception is thereby provided (Article 3.2) where the law of the relevant country does not allow this (Safeguard Clause), provided that all the elements of the relationship are located in said country (place of execution, place of compliance, residence of the parties to the contract…).

-Article 4.3: It states that, where the subject of the contract is a right in rem or a right to use a real property, it shall be presumed that the contract has closer ties to the country where the property is located. But this precept is only applicable in default of any choice of applicable law.

-Article 5: Where contracts are entered into by consumers, the consumer may not be deprived of the mandatory rules of the country where they habitually reside.

During the processing of the EU Directive, the Spanish Delegation –who were not unaware of the problems which the application of the Rome Convention could pose– proposed the following wording for Article 9.1 of the Directive Project: «Where the real property to which the rotational enjoyment contract relates is located in a Member State, the contract shall be subject to the legislation of the relevant Member State».

The Legal Services of the European Community (Document 7719/93 of July 1st) issued a Report in which they cast doubt over the compatibility of the Spanish proposal with the Rome Convention, as a result of which the Spanish proposal was not accepted.

By reason of the foregoing, I consider that the 2nd Additional Provision may clash with the Rome Convention, at least with regard to contracts entered into by non-residents or executed outside Spain, insofar as there is no room for the Safeguard Clause in such cases. In order to find compatibility, and considering that our Civil Code sets forth that the transfer of rights in rem demands the concurrence of title and handover (609.2 Civil Code), a distinction would need to be made:

— The contract itself: submission to foreign law is possible on the terms of the Rome Convention.

— Right in rem: As the right involved relates to real property, exclusive sovereignty of the State can exist in this case.

Conflict of jurisdictions:

After several considerations concerning the conflict of jurisdictions, Hernández Antolín raises the following question:

And what does the Project say on the matter of conflict of jurisdictions? And he goes on to answer it:

It is mentioned in the Rationale that the 2nd Additional Provision prevents submission to the jurisdiction agreed on by the parties, which seems to point to the exclusive and excluding competence of the Spanish jurisdiction. This instruction is said to be supported by the Brussels and Lugano Conventions, which the Act claims to respect. But if we consider the wording of the said 2nd Additional Provision, it turns out that it does not contemplate the possibility of a conflict of jurisdictions. Therefore, the aforementioned Conventions must be regarded as fully applicable notwithstanding the spirit of the Project: this will entail the more than certain possibility that the foreign jurisdictional Body may stress the full validity of the foreign legislations to which the parties have agreed to submit themselves (by application of the Rome Convention), a conclusion which is radically contrary to the aforementioned 2nd Additional Provision.

In light of all the above, and going back to the title of this Article, we can now answer the question which it poses:

Is the Club-Trustee system valid in Spain after the coming into force of the REA 42/1998 of 15 December?

With express authorisation from its author, Hernández Antolín, this question can be answered by the literal transcription of his lecture given at the “Rotational Enjoyment Seminar” held on October 1st, 1999, which was organised by the Spanish Association of Timeshare Businesses (A.N.E.T.C.), currently the Spanish Chapter of the European entrepreneurial organisation “Resort Development Organisation” (RDO), specifically the following section:

“XII.- ADMISSIBILITY OF THE CLUB-TRUSTEE SYSTEM AFTER THE APPROVAL OF THE ACT.

Experience tells us that, of the numerous systems under which timeshare (hereinafter TS) is currently operated, the most widespread system in our country is the one called Associative System and, within it, the Club-Trustee System. Can this system continue to be operated in our country?

To answer this we need to make a distinction between the EXTERNAL SCOPE and the INTERNAL SCOPE:

* External Scope: Can the Club or any other foreign form of association which, according to the rules of the country in which it was constituted, has full legal capacity, hold title to a real property? The answer can only be AFFIRMATIVE, as it is so acknowledged by the Spanish Constitution (Art. 13.1), the Civil Code (Art. 27), the Code of Commerce (Art. 15) and various International Treaties entered into by Spain (particularly the European Union Treaties which establish the free movement of persons, whether physical or legal, and of capitals).

* Internal Scope: Can the relationship, of a PERSONAL nature, between the Club and the users of the properties on a timeshare basis be governed by the foreign law to which the parties freely agree to submit themselves? This is the key point.
This subject is far from being uncontroversial, as the intention of the drafters of the Project was the inadmissibility thereof so that all new schemes should be constituted in accordance with the new “rotational enjoyment right” created by the Act, or the so-called “holiday leasehold”. It is thus clearly inferred from:

a) The Rationale of the Act, in which it is stated that: “The key question in terms of legislative policy was to determine whether several institutional formulas should be regulated or such regulation should be limited to one formula, all the others being left out. A middle path was chosen which consisted of the detailed regulation of a rotational enjoyment right while at the same time allowing the configuration of the right as a variation of the seasonal leasehold…”.

b) The articles of the legal text, of a markedly MANDATORY nature, as evidenced by:

– The contract by virtue of which any in-rem or personal right relating to the use of one or more real properties during a pre-determined or determinable period each year is constituted or transferred outside the scope of this Act shall be regarded as executed in circumvention of the Law and shall not prevent the application thereof…(Art. 1.7).
– All contracts relating to rights of use of one or more real properties located in Spain during a pre-determined or determinable period each year, whenever and wherever executed, are subject to the provisions of this Act (2nd Additional Provision).

As mentioned in the last preceding section, the 2nd Additional Provision may in certain cases clash with the Rome Convention, at least where the contract has been entered into by non-residents or executed outside Spain, provided that a right of a BINDING nature is thereby attributed to the parties and that the parties EXPRESSLY CHOOSE the law which is to be applicable.

The following can be inferred from the above:

-We are discussing the choice of the rule applicable to a contract relating to the use of a real property on a TS basis, not the submission to the competent jurisdiction as, this being a consumer relationship, both the European Community’s regulations and the domestic regulations impose restrictions on the consumer’s waiver of their own jurisdiction.

-At least one of the elements must be external as, otherwise, if all the elements are located in one only country, the safeguard clause can operate where mandatory provisions are involved. Such a foreignness requirement is met insofar as the Club is of foreign nationality (as the Spanish legislation does not confer a legal personality on Clubs outside the scope of the Associations Act or of sport rules).

-The guiding principle of the Rome Convention is the free choice of applicable law, and such a choice of applicable law does not need to refer to the law of one of the countries which have signed the Treaty, as its purpose is to establish uniform rules of conflict. It is thus provided for by Article 2 of the Convention, which sets forth that the designated law shall apply “even if it is the law of a non-contracting State”. Therefore, the choice of law is admissible whether or not the chosen law is that of a Member of the European Community and whether or not it is a signatory to the Rome Treaty (see: list of countries which have entered into the Treaty).

In the case of schemes constituted under foreign legislation which establish rights of a personal nature of the consumer over the property (whether in the case of the so-called multi-ownership configured as a personal right or in the case of the so-called associative multi-ownership), the aforementioned SAFEGUARD CLAUSE may not operate (and it was thus stated in the Report issued by the Legal Services of the Community). Hence this case must be excepted and no CIRCUMVENTION OF LAW may be deemed to have taken place, as the parties have exercised a legitimate right (see: definition of Circumvention of Law contained in Article 6.4 of the Civil Code: “Actions performed under the text of a rule with the intention to achieve an outcome which is prohibited by, or contrary to, the legal system”

The following should also be taken into account:

– The European Union intends to create a Single Market of products, services, capitals and factors of production.

– The transnational element is particularly important in the Timeshare Sector: this justified the drafting of a European Community Directive.

– The existence of important MULTINATIONAL COMPANIES in the business sector aiming to operate the various resorts located in different countries under the same system of operation and always on the basis of a scheme of PERSONAL RIGHTS.

For all these reasons, it would have been advisable (and it was thus proposed by some amendment brought to Parliament which was not finally adopted) for the text of the Act to contain some precept establishing that its content should be understood to have the exceptions provided for by the International Treaties entered into by Spain. A precept, however, which would have been unnecessary in any case (because, as mentioned, Treaties prevail over domestic rules), all the more so because it is thus acknowledged in the Rationale of the Act.

CONCLUSIONS OF THIS SECTION:

Respecting the doctrine of the Supreme Court contained in the aforementioned Judgements –albeit disagreeing with its interpretation of the transitional rules of the REA 42/1998– we could say that contracts commercialised after the REA 42/1998 based on pre-existing schemes of a personal nature and subject to non-Spanish law, despite not having been adapted to become in-rem or leasehold rights of rotational enjoyment, continue to be fully valid.

On the other hand, all contracts based on pre-existing systems (of a personal or in-rem nature) subject to Spanish Law which were not adapted by the transformation thereof into in-rem or leasehold rights in the form provided for by Article 1 of the REA 42/1998 are null and void and, as a consequence, the following contracts are null and void following its enactment:

• Almost all contracts commercialised on the basis of the so-called system of community of property on a multi-ownership basis.

• Contracts commercialised on the basis of other types of in-rem rights, but also of personal rights based on Spanish Law.

At this point, we should address the reason why this article has focused on showing the, in our view, obvious lawfulness of the Club-Trustee system, as well as of other systems of personal or merely binding rights subject to non-Spanish law, as according to the 1980 Rome Treaty they are perfectly valid in Spain if they are valid according to the law of the country to which they were submitted.

And they are, like we say, because the transitional rules of the REA 42/1998, the way they have been interpreted in the aforementioned Judgements, contravene the higher-ranking rule which is the Rome Treaty open for signature in 1998 and also, after its coming into force, the Rome I Regulation. That is:

• The obligation to transform pre-existing systems to the REA 42/1998 does not operate and is not applicable to pre-existing systems of personal rights subject to non-Spanish law. A consequence of this could be that contracts based on systems subject to non-Spanish law which pre-existed the REA 42/1998 and which have not been adapted according to the only possible method of adaptation, i.e. the mandatory transformation, continue to be valid. I am aware that this may be a bold statement, but if we go by the doctrine of the Supreme Court, we can conclude:

o That there is one only form of adaptation, the purpose of which is the conversion of the pre-existing scheme (whatever its legal nature and governing law) into a system of rights of rotational enjoyment constituted in accordance with Article 1 of the REA 42/1998.

o That the adaptation of the pre-existing system for publicising purposes does not preclude the nullity of the contracts after the enactment of the REA 42/1998.

o That the lower-ranking rule –REA 42/1998 – which demands the adaptation-transformation may not be applicable to systems of personal rights based on the higher-ranking rule which is the Rome I Regulation.

o It may be further considered that, if the docrine to be applied is that contained in the Supreme Court Judgements concerning the mandatory adaptation-transformation, then we will find that any contracts commercialised after the coming into force of the REA which are based on “Spanish” systems of “community of property on a multi-ownership basis”, other kinds of rights in rem (i.e. “multi-usufruct”), “multi-leases”, associative systems in general or those involving merely personal obligations, which were adapted by publication and without such a transformation, all of them, are fully null and void.

These Judgements of the Supreme Court declare the radical nullity of such contracts of personal rights subject to non-Spanish law without applying the provisions of the 1980 Rome Treaty as a higher-ranking rule, and they do so, in my view, because the reply to the claims filed with the Court did not raise any opposition to the application of the Safeguard Clause of the 2nd Additional Provision to the REA 42/1998 on the grounds that it contravenes the 1980 Rome Convention. It is fair to say that, in my opinion, the mandatory application of the higher-ranking rule to the detriment of the lower-ranking rule was not raised or requested, without a doubt, because Case Law of lower courts and provincial courts –including that of the Supreme Court which handed down the Judgement which resulted in an Appeal for Reversal– subsequently changed its own jurisprudential criteria, going back to the former interpretation which is now contrary to that of the Supreme Court.

Consequently, it may be possible in future court claims to oppose the likely action for nullity requested by the claimants based on the above-mentioned Case Law of the Supreme Court by arguing that the obligation to “adapt/transform” the pre-existing right into the rotational enjoyment right typified by the REA Act 42/1998 may not (could not) be demanded in the case of contracts relating to schemes subject to non-Spanish law by virtue of the mandatory application of the 1980 Rome Convention.

Some final comments to abide by the title of this chapter, not in relation to pre-existing schemes but to those constituted, also subject to Spanish Law, after the coming into force of the REA 42/1998 and until the Rome I Regulation started to be applied:

1.- It is our view that rotational enjoyment or timeshare schemes of personal rights subject to Spanish law –or any rights other than the in-rem and seasonal leasehold right of rotational enjoyment – may not be constituted since the coming into force of the REA 42/1998.

2.- However, it has been possible validly to constitute schemes of personal rights subject to non-Spanish law under the provisions of the 1980 Rome Convention and of the Rome I Regulation after the latter came into force to replace the former.

-III-

AFTER THE COMING INTO FORCE AND APPLICATION OF THE ROME I REGULATION AND UNTIL NOW.

1.- RIGHTS SUBJECT TO SPANISH LAW. During the validity of the REA 42/1998, of Royal Decree-Law 8/2012 of 16th March and since the enactment of the current Act 4/2012 of 6th July, the only valid systems subject to Spanish Law are those constituted by the transformation or creation ex novo of the in-rem or seasonal leasehold right of rotational enjoyment of property for tourist use.

2.- PERSONAL RIGHT SYSTEMS SUBJECT TO NON-SPANISH LAW: Those previously constituted, before and after the REA 42/1998, during the validity of Royal Decree-Law 8/2012 of 16th March and since the enactment of the REA 4/2012, as well as new schemes now created –albeit the latter no longer based on the 1980 Rome Convention but on the Rome I Regulation– continue to be valid.

This is an opinion article written without prejudice to a more knowledgeable or better informed opinion.

Francisco J Lizarza
Lizaza Abogados S.L.P.

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