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.

APPPENDICES TO “THE CLUB-TRUSTEE SYSTEM IN SPAIN”

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.
  1. 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.
  1. 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 1st 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

 

 

 

 

 

 

SIGNIFICANT INCREASE IN HOME SALES TO BRITISH CITIZENS IN SPAIN

ICONO PEQUEÑA BRITANICA Many factors are contributing to an important  increase in housing purchases by British citizens in Spain, including the following:

PRICES ARE STILL RELATIVELY LOW

House prices are still relatively low compared to the period before the economic crisis.

MORTGAGE MARKET OPENING

During the economic crisis, and specifically during the correlative banking crisis, banks and saving banks practically stopped granting mortgages.- This trend has completely reversed and especially for foreigners, who are favored by it.

SAFE DESTINATION

Due to the political uncertainty in the Arab countries of the Southern Mediterranean, the economic instability of Greece and the geopolitical situation of Turkey,  Spain’s perception as  a comfortable and safe destination is being consolidated.

SPANISH ECONOMIC GROWTH

After the debt crisis, Spain is now the fastest growing economy in Europe, currently growing at more than 3% and, according to the latest predictions, it  will reach 4% by the end of the year.

FAVOURABLE EXCHANGE RATE OF STERLING AGAINST THE EURO

If last January the Euro exchange was approximately €1.25 per Pound, it now exceeds 1.41 Euros for one pound, which is a great advantage for the British. Pound sterling Libra esterlina Sterlina britannica

CANARY ISLANDS: NEW REGULATIONS ON THE RENTAL OF PRIVATE HOMES FOR TOURIST USE.

OLD CANARY MANSION

The operators of tourist accommodation establishments in Spain (hotels, apartment-hotels, holiday apartments, etc) have for many years strongly opposed the existence of what they regarded as a clandestine activity of seasonal rental of private homes to national or international tourists by their owners (first or second residence).

Indeed, many owners of homes which are not part of a tourist establishment would during the high season rent out to tourists their own homes, which were in some cases their firstHIresidence and in some other cases their second residence, so they would even vacate the property and move in with some relative or into cheaper tourist areas during that period.

Tourism operators used to and still claim that this constitutes a source of fiscal fraud, a service which in some cases does not meet the appropriate conditions and may even pose risks and, in any event, an instance of unfair competition, as while they and their facilities were obligated to meet strict safety, quality, etc requirements, the private owners didn’t meet any.

Private renters, on the other hand, claimed that renting out a home is as lawful an activity as any other and that, if their home is legally fit for habitation by them, then it should also be fit for habitation by third parties, and they argued that the rent thereby received is like any other income on which the person receiving it has to pay tax.

It was in this context that the Urban Lease Act (L.A.U.), which regulated urban land and property and, very particularly, “living accommodation” contracts, was amended in 2013. But living accommodation for the purposes of this Act is not to be regarded as a building in which it is possible to live, but as a much “narrower” concept based on the intended use thereof, as the “rental of living accommodation as regulated by the L.A.U.” is “that which relates to a habitable building which is intended to satisfy the renter’s need to have permanent living accommodation” (Article 1 L.A.U.). On the other hand, “seasonal” house rental contracts were also included in the scope of this Act.

The aforementioned amendment of the L.A.U. in 2013, on the other hand, excluded (by virtue of article 5.e L.A.U.) the “temporary assignment of use of a house in its entirety which is furnished, equipped and fit for immediate use and which is marketed or promoted through tourism offer channels with a view to obtaining a profit, where it is subject to a specific scheme as a result of its zoning regulations”.

The content of this article pointed to the way of regulating houses for tourists use; a regulation which does not fall within the jurisdiction of the State but of the various Autonomous Communities.

An analysis of the aforementioned precept shows us the characteristics of the activity and the contracts which should be met by those referred to as “living accommodation for tourist use”, i.e.:

1.- These rentals are euphemistically referred to as “temporary assignment of the use of a home” instead of seasonal rental.

2.- The rental must refer to the “house in its entirety”.

3.- It must be furnished, equipped and fit for immediate use.

4.- Marketed and promoted through tourism offer channels.

5.- The purpose of the rental must be that of obtaining a profit.

6.- And it must be subject to a specific scheme arising out of its zoning regulation. It must be noted that such a specific scheme has to be regulated by the legal rules of the Autonomous Communities, which have exclusive jurisdiction in this regard.

The Autonomous Communities (albeit not all of them) have more or less recently started to regulate this kind of tourist accommodation. In the Canaries, for example, the process of publication of the aforementioned decree project has now started, thus opening the legislative way to its coming into force.

In the meantime, I think it would not be unreasonable to say that, in default of such a rule, the rental of these houses constitutes a seasonal leasehold regulated by the current Urban Lease Act (L.A.U.).

Of all the characteristics which according to the L.A.U. define “tourist houses” as a reason to exclude them from its regulatory scope, the most defining or important one is that it must be <<marketed and promoted through tourism offer channels>>. All the other characteristics mentioned above certainly are or can be common to the rentals regulated under the L.A.U., particularly as regards seasonal rentals. The last characteristic, or rather in this case, requirement, is the “subjection to the tourism zoning regulations”; in other words, the acknowledgement that all the former requirements are met (including that of being offered through tourism channels).

I believe, on the other hand, that it would be highly questionable to say that homes may not be rented out as “tourist accommodation” until such time as legal regulations on the matter have been established.

It is my view (unless otherwise justified) that the following conclusions can be gathered from the above:

Roques de Tejeda Gran Canaria 180911 (27)

  • Seasonal rental of homes to tourists is legally feasible where the renter is attracted outside the tourism offer and promotion channels.
  • It would be more questionable to state that homes may not be rented out to tourists until such time as specific regulations on the matter are in place, even if they are rented through those channels. Obviously, this doubt will be cleared in each territory once the zoning legislation has been enacted, as now intended in the Canaries.

PROJECT TO REGULATE PRIVATE HOMES FOR TOURIST USE IN THE CANARY ISLANDS

The Regulation Project starts by defining private homes for tourist use as, fundamentally, those meeting the requirements mentioned in article 5.e of the L.A.U. which result in exclusion from its scope of application, which have been listed above. Of all those requirements for exclusion, which on the other hand are listed in such wide terms that they should be construed on an ‘included but not limited to’ basis, the condition relating to promotion and marketing through tourism offer channels is particularly emphasised.

It is important to stress its operation regime, in which respect we would highlight that:

  • Use of the home must be assigned to one only user (although the latter may be accompanied by their family, friends, etc). That is, the home may only be marketed as a whole, not divided into units.
  • In homes or buildings subject to a ‘horizontal property’ system, ‘authorisation from the Community of Property Owners’ is required.

We consider that this is an essential point to determine the feasibility of this kind of operation, so it will be dealt with in more detail at the end of this article.

  • Registration with the Canary Islands’ Tourism Registry.
  • The owner of the home must upon formalising the contract submit a document containing information such as the name of the owner of the property, registration number with the aforementioned Registry, number of persons who will occupy the property, etc.

On the other hand, the home must have a door sign identifying it as a property for tourist use, and the marketing thereof must comply with certain requirements relating to information and publicising.

Chapter II of the Decree Project, on the other hand, refers to conditions of use (habitability and safety regulations, cleaning, civil liability insurance, etc), technical requirements (furniture, minimum size, etc) and minimum equipment required (security locks, first aid it, lighting, household items, linen, kitchenware, etc).

In particular, a binding price list must be made available to the users in accordance with those publicly advertised or publicised.

Finally, Chapter III relates to the process of commencement and performance of the activity, and Chapter IV regulates claims and the inspection and sanction system.

REQUIRED AUTHORISATION FROM THE COMMUNITY OF PROPERTY OWNERS

We have commented above on the decisive importance of this requirement, which we believe will determine the greater or lesser feasibility of the operation of many homes for tourism purposes, as it can be a very difficult requirement to be met in many cases.

While we do not have any statistics concerning the number or percentage of homes in a horizontal property system which will need to obtain authorisation from the Community of Property Owners in order to be used for tourist use, we can certainly state that most newly-constructed homes are subject to such a system.

MANSION

Traditionally, the homes which are not subject to this system are old dwellings –whether on one or on several floors-, old multi-family and single-family homes located in streets of the town centre and in the countryside, and homes built as part of “de facto” developments. However, homes built as part of multi-storey buildings since the nineteen-sixties and those which are part of developments, even in the case of single-family homes, are normally subject to a horizontal property system, whether mandatorily or by reason of convenience (e.g. vertical property division). Nowadays there are probably more homes subject to a horizontal property system than not.

How is authorisation obtained from the Community of Property Owners?

First of all, if the Statutes of the Community included in its “Constitutional Title” contain a provision whereby such tourist use is allowed, in our opinion this will suffice and no agreement of the Community of Property Owners will be necessary, as the Community may only reject it by virtue of a unanimous resolution to amend the Statutes. However, it is highly unlikely for the Statutes of the Community to say anything in this regard insomuch as it has not occurred in the past, unless the existence in the Statutes of a general authorisation to carry out commercial or business activities –such as “…may carry out any lawful commercial activity”- is considered sufficient authority.

This certainly is a personal opinion, which also admits the opposite interpretation. That is, if the Statutes specifically prohibit the tourist use of the properties or the performance of commercial or business activities, then the Statutes would have to be amended by unanimous resolution in order for the amended text to envisage such an authorisation, whether specifically or generally and with or without the addition of the correlative authorisation from the General Meeting.

Normally, however, in default of such a Statutory clause, any owner wishing to use their home for tourism purposes will need to obtain authorisation from the Community of REUNIONProperty Owners, and this is the scenario in which it is necessary to define how the authorisation can be validly granted.  We consider that the President of the Community may not grant such an authorisation by themselves, as this is not a responsibility included in their Community representation duties, so it will need to be approved in General Meeting by a majority of owners who also represent a majority of participation coefficients.

The need to obtain the Community’s approval as aforesaid will probably be an insurmountable requirement in many cases for the home to be used for tourism purposes and, in any event, it will significantly reduce the number of homes which do have authorisation to such end.

One last comment to be made in relation to this activity is that it constitutes an economic-entrepreneurial activity (inclusion in the tourism registries being required) and, therefore, the relevant fiscal regulations need to be complied with, i.e. as an entrepreneurial organisation.

“PRIVATE RESIDENCES” AS HOMES FOR TOURIST USE”

CASA LUJO ANDALUCIAAn example of the highest quality products of the holiday industry, particularly as regards the so-called “new holiday products” (traditional rotational enjoyment, fractional, destination clubs, etc), are the so-called private residences, which are accommodation units aimed for one only user/client (obviously accompanied by their family, friends, etc), normally large in size, luxurious and with added up-market services such as private cook, vehicle with driver, etc.

From a legal point of view, this is normally formalised as a “Rotational Enjoyment” contract, so the clients purchasing this kind of enjoyment right do so for a longer period than the traditional week and with the inclusion of the aforementioned additional services, and the right normally does not (although it can) relate to a specific property but to various determinable properties in several countries. The “residences” to which these enjoyment rights relate are singular properties by reason of their location, age, magnificence, destination, etc, and they are rarely part of a traditional tourist resort.

We therefore believe that the operation of these residences as homes for tourist use can be very useful for their development in a professional manner.

 

 (See in internet:  Preferred Residences  &  and The Registry Collection

 

 

 

Lizarza Abogados

February the 5th – 2015

 

 

PART II : RELINQUISHMENT OF ROTATIONAL ENJOYMENT RIGHTS OF A DIFFERENT LEGAL NATURE (I.E. WITH A DIFFERENT LEGAL STRUCTURE) TO THE AFOREMENTIONED “MULTI-OWNERSHIP”.

triplesunrise_diacon

In line with the legal grounds of the DGRN Resolution with regard to the relinquishment of “multi-ownership” rights, in this case we set out to study the possibility of unilateral relinquishment of rights whose main subject is the rotational enjoyment of an accommodation unit but which, rather than being constituted as a community of multi-ownership, are based on typical or atypical contracts relating to in rem or personal rights different from those mentioned above.

 Very different legal formulas and structures other than “multi-ownership” are and have been employed. Therefore, being unable to be exhaustive, we will only refer to the main or most commonly used structures, albeit taking also into account the time when they were constituted in relation to the Spanish legal regulations on the matter and the validity over time of each of their provisions.

1.- ROTATIONAL ENJOYMENT SCHEMES AND CONTRACTS PRIOR TO THE COMING INTO FORCE OF THE ROTATIONAL ENJOYMENT OF PROPERTY FOR TOURIST USE ACT (TIMESHARE ACT 42/1998).

Before the appearance of this Act, there was not any specific legal regulation governing what was then almost exclusively known as “multi-ownership” or, otherwise, timeshare; in the case of the former name (multi-ownership), its use is practically confined nowadays to the “community of multi-ownership” as described above, while the second term (timeshare) would be used to refer to almost all the remaining legal formulas of this phenomenon at the time, albeit predominantly to the legal system called “club-trustee”, now and then the most commonly used system in Spain.

 There not being a specific Act during this period, the various schemes were constituted under the general principles of Spanish Law known as “principle of free will” and “right to freedom of contract” and, therefore, took any form that was not contrary to Law and to the remaining general principles of our legal system.

        Among the most widely used schemes-structures, in addition to the aforesaid multi-ownership, we would mention: “Club-Trustee”, “Multi-leasehold” scheme, Trading Company, Civil Partnership, Associations, etc.

As these schemes of rotational enjoyment rights established under the freedom of contract principle are not legally defined, we could say that their own Rules and Regulations, insofar as they have been accepted, constitute their “law between the parties”. There being no provisions in these Rules concerning unilateral relinquishment of Rotational Enjoyment Rights, it can be concluded that:

        –If the right is of a contractual nature, which it is most likely to be, then Article 1256 CC (Civil Code) will apply. By virtue of this article, compliance with a contract may not be left to the discretion of one of the parties; i.e. the obligations of the parties may not be determined by one of them but must be previously determined in the contract or, at least, the rules for determination of the future obligation must be contained in the contract. No provisions typical of Anglo Saxon law such as “from time to time” or “as reasonably determined” etc may be employed in this case.

        –If the right is of any other nature, then the same considerations contained in the doctrine established by the Resolution, and other doctrine of the DGRN by analogy, could be applicable.

        –As regards the effects of the relinquishment, if admissible, the relinquished rights would revert back to the developer of the scheme or to the seller of the right unless otherwise provided in its rules and regulations.

        –Of especial note are the associative and corporate schemes which were constituted under Spanish law before being prohibited by Act 42/1998, particularly those formalised as civil partnerships and trading companies. Suffice it to mention the legal arguments of the Resolution transcribed in Part I of this article which, insofar as including references to the rights of one and the other and notification requirements which are analogously applicable to the relinquishment of a right in a multi-ownership community, may lead us to conclude that, also in these cases, the relinquishment is detrimental to the members themselves, so their consent needs to be obtained or, at least, they must be notified of the relinquishment in order to exercise the right of opposition and take any legal action to which they may be entitled (1705 CC).

In this sense, as with the community of multi-ownership, the effects of the relinquishment, if admitted, would accrue to the remaining members.

        2.- ROTATIONAL ENJOYMENT SCHEMES AND CONTRACTS AFTER THE COMING INTO FORCE OF ACT 42/1998.

        A.- IN REM AND LEASEHOLD RIGHTS OF ROTATIONAL ENJOYMENT.

        In this case we will refer to both in rem rights and personal leasehold rights constituted under the Rotational Enjoyment Act 42/1998, in force from 04/01/1999 until the coming into force of Royal Decree 8/2012 on 18th March which was subsequently repealed by Act 6/2012 on 8th July of the same year.

Both in rem and leasehold rights of rotational enjoyment are regulated by the three aforementioned sets of legal rules in essentially the same manner –or very similar in any event– so, for the purposes of this section, we will refer to them jointly.

 Having established, as indicated in Part I of this article, that every person is entitled to relinquish a right, and having also established the limitations to such a relinquishment of rights –that it may not be detriment to third parties or constitute an abuse of law-, we should now determine who would be prejudiced by the relinquishment in order to meet the indispensable requirements (i) of obtaining consent from the prejudiced party, or (ii) of serving notice on the prejudiced party so that the latter can formally oppose the relinquishment.

        In relation to the above, it would first be of interest to know whether the relinquished right becomes the property of the State or otherwise accrues to any of the parties involved in these schemes.

        Both in the case of in rem RERs and in the case of leasehold RERs, what is inappropriately referred to as ‘division of property’ takes place upon the constitution of the scheme:

  • In respect of the actual property on the one hand albeit without the use thereof, which by analogy in terms of in rem usufruct rights could be called “bare ownership”. Such ownership without entitlement to use the property continues to be held by the owner/developer of the property.
  • On the other hand, the “right of rotational enjoyment of the accommodation unit”, which could also be compared to ‘usufruct’ or ‘use and enjoyment’, although in this case the unit can only be occupied as tourist accommodation, whether for valuable consideration or gratuitously.

When the RER is constituted by public instrument, fee simple ownership is formally and legally broken down into the aforementioned rights and the two rights are at that moment held by the same owner and/or developer of the scheme, until the right of rotational enjoyment is transferred to a third party.

Contrary to what happens in the case of the in rem usufruct right, the law governing RERs (currently Act 4/2012, according to article 23.4, 3rd paragraph) provides that “the fact that an in rem right of enjoyment and the ownership, or a share thereof, are held by the same person, does not involve the expiry of the limited in rem right, which shall continue to exist during the whole lifetime of the scheme”. That is, even if the owner of the property should by any title re-acquire the RER, the RER will not expire.

Once the RER has been transferred to a third party, the latter becomes liable for the annual service or maintenance fees to the owner of the properties operated under the scheme, who is always accountable for the service even where the provision thereof has been contracted for with a third party. This is without prejudice to the existence of further obligations being taken on by the third-party owners of the RERs, e.g. by virtue of resolutions passed by the “community of RER holders”.

Obviously, the owner may not in any way pass on to the remaining RER holders what, as owner (not, therefore, as holder of title to the underlying property), they have the obligation to bear.

Consequently, the relinquishment of a right involves that a share becomes vacant which, in the case of an in rem right, is blended with the right from which it arises; that is, it would revert back to the developer (who would become liable for the fees) but the scheme would not expire until its termination.

DCITAMEN

The conclusion to be drawn is clear: the owner and/or developer is the prejudiced party, insofar as they recover ownership of the RER but also the obligations inherent therein. And, as prejudiced party, the developer could object to the relinquishment, so notice of the relinquishment must be served to enable the developer to express its opposition.

But, is the owner and/or developer of the scheme always the person to whom a detriment is caused by reason of ownership reverting back to it?

In relation to the quantification of the annual service fee, Article 30.1 of Act 4/2012 provides (as did the preceding regulations) that the RER Contract must express:

The price to be paid by the purchaser and the amount which, according to the regulatory deed, has to be paid after the purchase of the right on an annual basis to the services company or to the owner where the latter has taken on such a provision by virtue of the regulatory deed, in respect of which it shall be mentioned that such a price must be updated in accordance with the Retail Price Index published by the National Institute of Statistics except where any other updating system has been agreed by the parties –which may not be left to the discretion of either of them. Also, the average index over the preceding five years shall be mentioned to provide an approximate idea of its magnitude”.

From the above follows that there are two different ways of determining the fee on the basis of the amount reflected in the contract (and normally also in the rules and regulations of the scheme). The first one is the annual updating of the fee by application of the Retail Price Index, and the second one is any updating system which may be agreed on by the parties.

The second updating option was included in the Act at the proposal of ANETC-OTE (currently the Spanish Chapter of RDO), as it was felt that updating the fee during a 50-year period on the basis of the Retail Price Index was not realistic and would soon become outdated.

Therefore, the rule whereby <<another updating system>> is allowed opens the door toASAMBLEA what, by experience, was already considered a realistic updating formula, which is none other than the approval and implementation of an annual budget by the “community of right holders” and by the owner and/or developer or the services company respectively. Such a budget should contemplate all the expenses required to maintain the services (including the remuneration to be received by the service provider) against the income which, fundamentally, will come from the fees paid by the affiliates. This way, the fees to be paid by the affiliates are not determined at their discretion by the owner and/or developer or by the services company as the case may be.

However, this formula may entail a transfer of the RER holder’s obligation and, therefore, it may be detrimental to third parties in the event of relinquishment of their right, as if the cost of the service in its entirety is borne by the members “as a community”, then the debtor may well be the community itself or, at least, insofar as every RER holder is liable to the creditor (owner and/or developer or services company) and the income must be in line with the expenditure, the relinquishment of a RER may entail an increase of the fee payable by each member to cover what should have been paid by the relinquisher.

Obviously, it will be necessary to follow the rules of the “community of RER holders”, which may be freely determined with the sole exception of the majorities required for the passing of resolutions in each case. For any matters not envisaged by its own rules and regulations, the “rules applicable to communities of property owners under the Horizontal Property Act” are applicable on a subsidiary basis.

Also, the community may have other activities not included in what may be called the “provision of ordinary services”, such as the introduction of new facilities not legally mandatory (internet or any other which may be introduced in future, etc), the cost of which would be borne by the RER holders on a pro rata basis.

Consequently, I consider that the legal grounds of the DGRN Resolution may be applicable to: (i) the community of holders of in rem rights of rotational enjoyment, more clearly, and (ii) the community of leasehold RER rights, in terms of the detriment caused in both cases to the community and/or to its members by reason of the relinquishment, which would determine that consent from the community, or the service of notice thereof on the community to enable it to express its opposition, would be necessary for the relinquishment to be valid.

 B.- ROTATIONAL ENJOYMENT RIGHTS OF A PERSONAL NATURE CONSTITUTED UNDER “NON-SPANISH” LAW.- THE ‘CLUB-TRUSTEE’ SYSTEM.

THE CLUBAlthough numerous RER schemes of a personal-associative nature in pursuance of predominantly Anglo-Saxon law –the so-called “Club-Trustee” system– were constituted before Act 42/1998, the actual change introduced by the new regulations of 2012 was that, while the preceding Act prohibited the constitution of any scheme other than those involving in rem or leasehold rights (although it did not go as far as to mention explicitly that the 1980 Rome Convention was not applicable in that case), the new Act recognised that, in addition to the two aforementioned formulas of in rem and leasehold rights, other formulas of an associative nature, with a merely contractual or binding content and subject to foreign law (of an EU State or otherwise), may be employed under (EC) Regulation no. 593/2008 on contractual obligations. This is doubtlessly an extremely important fact, as one of those schemes, i.e. the Club-Trustee system, which is normally subject to Anglo-Saxon laws, is still –and is expected to continue to be– one of the favourite systems for the future given its flexibility and the fact that it provides consumers and users with practical protection in several relevant aspects.

Schemes have been constituted on that basis to operate in Spain under the Club-Trustee formula to such an extent that this is currently the system adopted by a majority of operators.

For this reason, we need to consider whether the unilateral relinquishment of club affiliation rights or, in other words, the rights inherent therein to occupy tourist accommodation in Spain on a rotational basis, and the associated obligation for the member to bear the communal expenses, has to be compliant with the Spanish laws or must be subjected to those of the legislation under which they were constituted.

The provisions of the current (Spanish) RER Act 4/2012 are certainly applicable to rotational enjoyment schemes configured as a “Club-Trustee System” where these relate to property located in Spain or marketed from Spain, but only insofar as relating to the rules transposing Directive 2008/122/EC, which fundamentally refer to consumer data protection rules such as information to the consumer, withdrawal and termination right, prohibition of advanced payments and other rules concerning the marketing of the product.

But the aforementioned Directive does not address the issue of what the legal nature of the rights is or must be, as this falls under the exclusive jurisdiction of the States.

The exclusive jurisdiction for substantive regulation of in rem and leasehold rights does certainly lie with the State where the property is located (hence in rem rights and the alternative leasehold rights of rotational enjoyment are exhaustively regulated by Act 4/2012). However, insofar as the right is configured as a merely personal, contractual and binding right, the above-mentioned Regulation (EC) no. 593/2008, which is an internal rule of Spanish Law as it is of the remaining States which have adopted it, allows the constitution of such personal or binding rights –even where they relate to property located in another State–, which are solely governed by the rules of the State to whose jurisdiction they are subject.

In the case of ‘Club-Trustee’ schemes, if the constitution is subject to British Law (for example’s sake), then the scheme –i.e. the Club– shall be substantively regulated by British rules, among them the rules governing the acquisition of club membership (namely the acquisition of this kind of rotational enjoyment right) and the forfeiture of such membership.

We therefore consider that the unilateral relinquishment of Club affiliation rights, whether to the detriment of the remaining club members or consented by the latter or otherwise, shall be valid or null as determined by British Law.

In this regard, Philip Broomhead (legal director of FNTC) states that:

Whether an owner, who owns timeshare in a club trust resort, can relinquish his ownership without penalty earlier than the stipulated termination date will normally depend on the provisions of the club’s constitution or rules or the agreed established practice at the club. 

The general rule is that an owner cannot relinquish his timeshare before the expiry of the club unless there is a specific provision allowing this within the constitution or rules. 

However some clubs, whether by historical practice or by agreement with the Club Committee or developer/management company, allow owners to relinquish their weeks provided all management fees are up to date.  Some clubs require that between one and three years’ future management fees are paid in advance before early relinquishment is allowed. 

In other circumstances, owners may be permitted to leave early where they have reached a certain age, or the owner or a partner is infirm or medically unable to travel or the owner or partner has been made redundant or bankrupt. In these latter scenarios, appropriate evidence will be required.  In all these situations, the management fees will at least have to be paid up to date.

 There are cement fees after a given period by treating the default as a substantial breach of the constitution or rules.  However this is not normally publicised and it happens only as a last resort where the club has pursued the owner with a number of reminders.  Where a club has a small number of owners, this is unlikely to be permitted because the burden of financing the defaulters is taken on by the small number of remaining owners who have to pay an ever increasing annual management fee to cover the defaulters.  In well-funded resorts where there is still a developer present, then cancellation is more likely to be tolerated as the developer can then take back the defaulted week and resell it or cover the management fees on the repossessed week by using them for marketing or rental purposes.  If there is no established practice or the rules or constitution doesn’t permit early termination, then the club may issue court proceedings against the owner for breach of contract for the non-payment of management fees and then, on obtaining a court judgment, the club may pursue recovery of the debt through various legal means open to it.lubs which simply cancel members who have not paid their current year’s manag

 In all these circumstances it is important for the owner to consider the rules or constitution carefully to see what is permitted or to look at any agreed adopted practice of the club regarding relinquishment before actually doing so.    

 SOL BRILLANTE

FINAL CONCLUSION:

As previously indicated, given the great variety of systems which have been or may be constituted in future, we have analysed those which have been most commonly used to date. In respect of all of them, and of all those which have not been analysed, the conclusions to be drawn, in my view, are as follows:

  1. Covenants and contracts must be honoured by the parties who freely consented to them.

This is the reason why the consumer protection rules of Directive 2008/122/EC, implemented in all the EU States, focus primarily on protecting the consumers at the moment of giving their consent, which consent must be free (without aggressive sales practices), informed (pre-contractual information document) and pondered (14-day free withdrawal period during which no advanced payments may be made).

  1. Also to be protected are the rights of all the other parties, such as the developer of the scheme and the services company, hence the person who has already become a user of rotational enjoyment rights may only “relinquish their right unilaterally and abdicatively” where no detriment is thereby caused to third parties or, if it is, where the prejudiced third party’s consent is obtained or the latter does not formally oppose the relinquishment where applicable.

 Francisco J. Lizarza_MG_7643

 Lizarza Abogados                                                                                   

Marbella, January 2015

IS IT LEGALLY VALID FOR AN OWNER UNILATERALLY TO RELINQUISH AND GIVE UP THEIR MULTI-OWNERSHIP WEEK IN SPAIN?

<<FURTHER TO THE RESOLUTION ISSUED BY THE GENERAL DIRECTORATE OF PUBLIC REGISTRIES AND NOTARIES ON 21 OCTOBER 2014 CANCELLING THE REGISTRATION OF A DEED OF MULTI-OWNERSHIP RELINQUISHMENT>>

PART I

This first sets out to analyse the Resolution of the General Directorate of Public Registries and Notaries in relation to the unilateral relinquishment and abandonment of “multi-ownership” rights in a strict sense, as it is rotational enjoyment rights to which the Resolution specifically relates. The second part of this article will, in light of this Resolution and of other applicable regulations, analyse the same kind of unilateral, abdicative relinquishment as regards other legal structures under which rights of rotational enjoyment of property for tourist use have historically been created. 

The economic crisis, new better and cheaper offers or simply age, have led some owners of rotational enjoyment rights (in any of its forms) to come to the decision to terminate their right, of their own volition and without any relevant legal motive, with a view –in some cases – to recovering whatever part of the original investment they may be entitled to get back (or at least the part relating to the rights not enjoyed), or simply to give up and withdraw from their right without taking into consideration the will of the party who transferred such a right (developer of the scheme or seller as the case may be), of the remaining owners or of the company in charge of maintenance of the system, with the sole intention to give up their obligations. The question is, is this legally possible in Spain?

– Some owners, sometimes with an opportunistic spirit or merely intending to recover the money they invested, have simply attempted to terminate their contract alleging reasons which had been more or less made up or lacked the legal relevance required to constitute grounds for termination. These are instances of TERMINATION and are not the subject of these notes.

RDO 2

What we are going to analyse here is not a termination but a waiver or, more accurately, a UNILATERAL WITHDRAWAL.

The European Business Organisation of the Sector RDO (Resort Development Organisation), being aware of the existence of real problems relating to age, physical condition, economic situation as a result of the current crisis or other situations of need as opposed to opportunism, is encouraging its affiliates to implement the so-called “exit routes” which, in an orderly manner and in the most part safeguarding the rights of all parties involved insofar as it may be possible not to seriously detriment the remaining parties’ rights (including the remaining owners of rotational enjoyment rights), allow the owners to “become released” from their rights in cases of urgent necessity by being replaced either in all or in part of their obligations as participants in the scheme.

Before trying to answer these questions, we must differentiate between several scenarios based on the nature of the right conferred:

  • Multi-Ownership in a strict sense. The possibility of using the term “multi-ownership” or any other term containing the word “ownership has since the appearance of the Spanish Act 42/1998 been eradicated in absolute terms outside the transitional rules. The Resolution we are going to examine refers to this specific case, and we will see whether its conclusions can also apply to other situations.
  • The rights –of a very diverse nature constituted before Act 42/1998, which existed before the enactment of the latter and have continued to preserve their nature and their duration under transitional rules without any other requirement than their public registration.
  • Rotational Enjoyment Rights, whether of a personal or of an in-rem nature, constituted under Spanish legislation after the aforementioned Act 42/1998 and under the Act currently in force.
  • Personal Rights (generally of an associative nature) constituted at any time under foreign legislation and permitted by the rules of international private law.

ABDICATIVE RELINQUISHMENT IN A MULTI-OWNERSHIP SCHEME.

renuncia multipropiedad

The Resolution of the General Directorate of Public Registries and Notaries (hereinafter referred to as DGRN) dated 21st October 2014 addresses directly the issue of unilateral abdicative relinquishment, i.e. without the consent of the person who sold the right or the remaining holders of rights over the same property or the Community of Owners or the company in charge of maintenance, thus intending to avoid payment of the annual fee and disregarding the possible detriment which may be thereby caused to the remaining owners, who still want to enjoy their right and do not wish to lose it.

One last clarification before studying the case to which the aforementioned Resolution of 28th October 2014 refers: we need to examine the effect of this decision of the public administrative body whose role is to regulate public land and companies registries and the role of public Notaries.

The decision of this Administration Body (which reports to the Ministry of Justice) is not a Court Judgement or a final resolution and it does not preclude the parties from resorting to court action to resolve their controversies. It simply relates to the possible ‘registrability’ with the Land Registry of the resulting ownership after the relinquishment has taken place in the event that such a relinquishment is rendered valid and enforceable. In any event, this Resolution of the DGRN can be finally appealed against at the courts of justice which, in that case, will have the last word.

The above notwithstanding, the value of the aforementioned Resolution should be acknowledged. For its high legal quality: They have “auctoritas”, their conclusions influence the basis of judicial decisions and it is well known that the facts, even if merely statistical, confirm that their decisions are not usually appealed in Court and, if they are, they are usually confirmed.

We will therefore examine its arguments. As mentioned, the resolution relates to the relinquishment of a “multi-ownership or community of multi-ownership” right which involves the joint acquisition by several persons of an aliquot share in the full ownership of one or several accommodation units, albeit referring to a specific week: the unit is not physically or legally divided but is acquired by several persons jointly (every acquisition normally refers to a 1/51 or 1/52 share of ownership of the full element) and, in accordance with the rules by which the relationships between the co-owners of the property are governed –which they accept upon purchasing-, every one of them may use the unit during a certain annual period, normally one week, which at the same time involves the obligation of all the owners to bear the maintenance costs, from utilities to the replacement of furniture and the cleaning and maintenance of the services required for a proper enjoyment thereof, by payment of the “annual maintenance fee”. In a multi-ownership system, the purchaser obtains full ownership, not for a specific period of time but indefinitely (ad perpetuam), and such a right can be transferred (sale, gift, inheritance, etc).

Legal systems of multi-ownership necessarily date back to before the enactment of Act 42/199, whereupon they became prohibited. However, those systems constituted and existing prior to that date would continue as before until their termination by virtue of any legal reason of agreement in order not to damage the acquired rights, although they were normally acquired for an indefinite duration or in perpetuity, for which purpose the aforementioned Act lays down the obligation to comply with certain adjective requirements (public registration). Indeed, given the year of purchase (always before 1998, without prejudice to those who bought their “week” from a former owner –whether the seller was the developer, the marketer or any third party), the current owners have naturally become older persons and have children who do not want the same holiday destinations or just do not want to use the product anymore.

In addition, when the owners reach a certain age they either have some physical inability to use and enjoy their week or simply, as a result of the economic crisis –which reduces to the minimum the possibilities of resale to a third party-, feel the need (and others want to take the opportunity) to get rid of their multi-ownership, even without any compensation, for the main or exclusive purpose of being released from payment of their share on a yearly basis.

It must be pointed out that, in most cases, the fees in this “multi-ownership” system are calculated by, and arise from, the decision of all the co-owners, who in their annual general meetings approve a budget which must include all that which is necessary for maintenance of the resort, its units and facilities, etc. And, naturally, such expenses must be covered from the income generated, fundamentally, by the fees paid by the co-owners. That is, it is not a company that imposes on everyone the price of the maintenance service, but a decision democratically made by all the co-owners through the exercise of their voting rights.

What happens, therefore, when an owner wants to, and in fact does, relinquish, abandon or abdicate their right with the intention to forget about any obligation? In other words, such a relinquishment being valid, who bears or must bear the detriment arising out of such a unilateral decision which is often made against the will of the remaining co-owners?

This is the question and the answer –in legal terms – to which the Resolution analysed in this article relates.

The Resolution rests on the basis of the legal validity of the abdicative relinquishment and abandonment power attributed to the holder of a right as a means to terminate a right, as well as the possibility of having such a unilateral relinquishment entered on the Land Registry where it relates to rights in rem. Such a relinquishment is contained in several articles of the Civil Code, which is cited in the Resolution itself, but there are limits to the exercise of a right which, as also mentioned therein, are fundamentally contained in articles 5 and 6 of the Civil Code. These limits are, fundamentally, as follows:

  • Not to be contrary to law or to public order.
  • Not to be detrimental to third parties.
  • The exercise of the right, as any other, must abide by the rules of good faith, and abuse of law is proscribed.

As literally stated in the resolution:

  • Therefore, the question is not so much whether or not an owner can relinquish their own right as, in this case, whether or not “it is possible unilaterally to dispose of title to an undivided share of ownership which entails an implicit temporary right of exclusive and exclusionary use of an apartment:
  • Which is part of a building in respect of which a ‘horizontal property’ (condominium) system has been established.
  • The building, in turn, is included in a real estate development subject to the regime of article 24 of the Horizontal Property Act.
  • Attached obligations are added to those indissolubly associated with the condominium and rotational enjoyment right and the apartment to which it relates as a private element of a building divided under a horizontal property regime.

It is therefore of interest at this point to determine what detriment, and to whom, is caused by the relinquishment and abandonment of this right and, therefore, by the termination of the obligations it entails, such as payment of the annual fee due by the abdicating multi-owner.

Despite the fact that this is a situation by which all rotational enjoyment schemes are currently affected (whatever the legal structure =system= under which they are operated), we must at this point focus on the subject of the Resolution, which only refers to the relinquishment of a “multi-ownership” right, without prejudice to analysing in this article the same question in respect of the remaining systems, at least the main ones.

In order to determine whether any detriment has been or may be caused to third parties, the first thing the Resolution does is identify the possible damaged parties. These are, prima facie, all the owners of the same apartment (formally divided into 52 shares), together with the remaining owners of the 52 shares in the other apartments held on a multi-ownership basis and all the owners of properties in the resort.

Therefore, the holders of the analysed multi-ownership right participate in three superimposed communities as follows:

  • The multi-ownership community in respect of an accommodation unit or in respect of all the units operated under such a system in the same resort, whose purpose is the maintenance of all the apartments operated on a multi-ownership basis and the communal areas and facilities appurtenant thereto and the provision of the services which allow its members to enjoy their week.
  • The community of owners created by virtue of the ‘horizontal division’ (ordinary community of horizontal property owners); and
  • Finally, albeit not always in the not-so-frequent case of the “real estate development”, the one sometimes commonly referred to as “supra-community”.

It is important to note at this point that these communities do not have a legal personality of their own. Therefore, it is the members of these communities who may be, and in effect are, prima facie, the parties directly affected and possibly damaged by one of the co-owners’ relinquishment and subsequent abandonment of their obligations.

REGISTROS

THE RESOLUTION OF THE DGRN

(Facts in dispute and legal considerations)

FACTS IN DISPUTE:

The spouses JMMJ and DNVC purchased from O.G., S.A., full ownership title to 1 share out of 52 in an apartment to be operated as an “apartment for tourist use included in a tourist resort”.  The remaining 51 shares in that apartment, therefore, had been or were in the process of being sold to as many persons. Additionally, as a faculty inherent in such ownership, each holder of a 1/52 share of the apartment was entitled to occupy it –as tourist accommodation– during one week each year.

In addition to paying the acquisition price of such a share, the purchasers of that ownership share in the apartment undertook –as did all the other co-owners– to maintain the apartment fit for use and occupation and to such end pay an annual “maintenance” fee, which included the provision of tourist services to the apartment and the resort. As the right was acquired in perpetuity, the inherent rights and obligations would also exist for the same indefinite period of time, whether the right was still held by the promoter, by the first purchaser or by anyone replacing the latter as owner by any title whatsoever, inheritance included.

All the co-owners maintained these services as a community, for which purpose a general meeting of owners (whom we will refer to as “multi-owners”) was called which prepared the budgets and approved them by majority. The expenses budgeted for and approved by the general meeting of owners were then distributed on a pro rata basis among all the multi-owners, obviously taking into account the kind of unit of which they were co-owners (e.g. its floor area, number of bedrooms or quality standards).

This was the annual fee which every owner had to pay to the community, and to stop paying it has been, in our judgement, the reason why the above-named spouses “unilaterally abandoned their ownership share”. That is, by giving up their ownership share in the apartment, they were released from the obligation to pay the annual fee.

FORMALITIES OF THE RELINQUISHMENT:

1.- The RELINQUISHING spouses signed a notarised statement which was authorised by the Notary in the exercise of his notarising role, thus sanctioning its legality. In this statement, the spouses purely, simply and unconditionally relinquished their ownership; i.e. they abdicated it. In a manner of speaking, they abandoned their ownership as “sovereigns” thereof and, therefore, needed not obtain anybody’s consent to do so.

2.- Not needing to obtain any third party’s consent to their abdicative relinquishment involved, in the relinquishers’ judgement, that they were thereby released from their obligations to the community of owners of the apartment, to the community of all the apartment owners on a multi-ownership basis and to all the owners of apartments, business premises, etc of the whole building (Horizontal Property Community and Supra-Community).

The public instrument executed by the aforementioned spouses is a more than sufficient means to relinquish ownership and its registration with the Land Registry is not mandatory, nor is the previous registration of ownership. But what the relinquishers certainly wanted was for their full relinquishment to be publicly noted –by having their right entered on the Land Registry–, and to such end they filed the public instrument with the Land Registry of Alcoy.

3.- Like the Notary, the Registrar must for the sole purpose of authorising the registration determine whether the act is legal and can therefore be entered on the Register. This was denied by the Registrar because the relinquishment of one’s own right may not be accepted (in summary) if it is detrimental to third parties, unless the latter give their consent or, at least, are served notice of the relinquishment so that they can oppose it or take whatever legal action they may deem appropriate.

LEGAL GROUNDS OF THE DGRN’S RESOLUTION.

The Resolution admits the legal precepts contained in the Land Registrar’s report in respect of: (i) the admissibility of the abdicative relinquishment and abandonment as a means of termination of the rights; (ii) that the limits of the relinquishment are good faith and the prohibition of abuse of law; (iii) the specific content of ownership rights in buildings divided horizontally and in real estate developments; (iv) the co-owners’ and community members’ right to challenge any agreements they may consider prejudicial; (v) the analogous application of civil partnership regulations in the event of termination as a result of a partner’s relinquishment, which is demanded to be done in good faith and notified to the remaining partners; (vi) similarly, the analogous application of the rules of the Code of Commerce whereby the partners of a partnership or limited partnership may oppose the dissolution requested by one only partner acting in bad faith; (vii) Rules and Regulations of Companies Registry which demand that consent must be obtained from all the co participants and, in relation to the registration of one member’s separation in an economic interest group where there is a fair reason, this must be notified to the remaining members; (viii) the requirement that fifteen days elapse without any opposition and, where there is opposition, that the decision be made by the courts; and (ix) the provisions of the Economic Interest Groups Act, which lay down the right of every member to separate from the Group where there is a fair reason or where consent has been given by the remaining members, it being considered that the member’s will to separate –of which they shall serve three months’ notice- constitutes fair reason if the Group was constituted for an indefinite period of time.

In summary, the aforementioned Resolution establishes and supports that:

A.- Considering that the multi-ownership right or week relates to a triple community (the community of holders of title to multi-ownership rights, the horizontal community of the building and the supra-community of the real estate development), it is necessary to examine whether such a unilateral relinquishment by a multi-owner can be detrimental to the remaining multi-owners or to the remaining members of said three communities.

B.- It must be taken into account and determined whether the abandoned right is to become the property of the State (an issue in which jurists do not share the same criterion but which the DGRN does not agree with in this case) or it should accrue to, or be proportionally distributed among, the remaining “multi-owners”.

C.- Would such a “proportional accrual” of the abandoned rights to the remaining “multi-owners” create new obligations for the latter (and in fact it would) which may be detrimental to them without even being informed so that they can express their opposition?

D.- The DGRN confirms that such a relinquishment generates new obligations for the community members whose rights have accrued by reason of the relinquishment and considers that (literally) “The debts of the community –both the horizontal community and the sub-community of rotational enjoyment right holders– are, in fact, debts of the owners or co-holders, as the former have no legal personality (22.1 & .2 and 24 Horizontal Property Act).

E.- Right to challenge.- Considering that both the relinquishing community member and the remaining members to whom such a relinquishment may be prejudicial are not strictly, as aforesaid, unrelated third parties –as they are part of the same communities–, the relinquishing members must, if not obtain the remaining members’ consent, at least notify them of their relinquishment so that they can legally express their opposition.

In this sense, the Resolution states: “consequently, in accordance with article 1705 of the Civil Code, the relinquishment whose registration is being requested shall, at least – as a preliminary step which must be strictly observed for the entry to be made-, be communicated to the remaining owners or co-holders so that they can challenge it through the Courts and apply for appropriate cautionary measures if they consider that the relinquishment is not valid by reason of its being done in bad faith (and bad faith exists, as stated by article 1706, not only where the relinquishing person attempts to benefit from it but also where they attempt to transfer the cost, «which should be communal»);or, in any event, to whatever decisions they may see fit in defence of their own interests (relinquishment of ownership by other members as well, abandonment of the building or sale to a better manager by the remaining owners or sole owner, etc)…Indeed, this case, as opposed to the former, is not only a problem of assumption of personal liability for general expenses, but a mandatory transfer of the relinquishing member’s share to all the remaining members on the basis of their own coefficient.

On the other hand, by way of a conclusion, the Resolution states that:

  • Our legal system recognises the relinquishment right and, as mentioned in relation to article 1706 of the Code, good faith «only bans those forms of exercising it which show a total disregard for the interests of others» (co-participants). Therefore, if it is valid and effective and therefore meets all the requirements provided for by Law, no reason justifies the imposition of limitations which undermine it.
  • Moreover, relinquishment in cases like this («rectius», abandonment) is not only an expression of the owner’s freedom (as happens where there is a sole owner) and, therefore, of the disposal powers inherent in the concept of ownership, but also a faculty of the owner as a correlate of the civil and constitutional legal principle of not being perpetually bound, in this case, by the charges of an administration the management of which they do not control (as their ownership or co-ownership, at least in respect of the communal elements, is incorporated as a part into the wider «corpus» of an organization of a higher order which contains it).
  • The above is without prejudice to the relinquisher’s right, if they fail to obtain consent from the other owners or co-holders’ or if the latter oppose the relinquishment, to resort to the Courts in order to request (after the adoption, where applicable, of appropriate precautionary measures to enervate the unfavourable effects of article 38 of the Mortgage Act) that a Judgement be rendered declaring that the relinquishment is lawful and thereby obtain sufficient title for registration.

The consequence of the foregoing can be summarised as follows:

  • The right, in principle, can be relinquished.
  • The relinquishing party must inform those to whom the relinquishment may be detrimental; in principle, the remaining co-owners of the same unit.
  • In the event of opposition to the relinquishment, it will be the Courts’ responsibility to rule on its validity. Where there is no opposition, the relinquished right shall accrue to the remaining co-owners.

NEXT: Unilateral, abdicative relinquishment as regards other legal structures under which rights of rotational enjoyment of property for tourist use have historically been created

 _MG_7643

Francisco J. Lizarza

Lizarza Abogados

Marbella, January of 2015

 

 

RDO:THE EUROPEAN TIMESHARE INDUSTRY 2013 – Market Characteristics Report

201411141921_0002201411141943_0001PAGINA 3PAGINA 4PAGINA 5PAGINA 6PAGINA 7PAGINA 8
PAGINA 9PAGINA 10PAGINA 11PAGINA 12PAGINA 13PAGINA 14
DELIVERED BY RESORT DEVELOPMENT ORGANISATION (RDO)

THE MARKET RESEARCH GROUP -FERN BARROW – TALBOT CAMPUSPOOLE – DORSET BH12 5BB  – U.K.T- +44 (0)1202 961377 – e. mrg@bournemouth.ac.uk

 

 

LEGAL SITUATION IN SPAIN CONCERNING THE REPOSSESSION OF CLUB MEMBERSHIP CERTIFICATES DUE TO NON-PAYMENT OF MANAGEMENT FEES

“This follows the important and clarifying Judgement (no. 412/2013) handed down by Section no. 5th of Málaga’s Provincial Court which confirms the legality of applying the process commonly albeit inaccurately known as  “repossession weeks”. 

THE CLUB

One of the most often cited virtues of the Club-Trustee System, which is the most common legal formula in Spain for timeshare, relates to the possibility of a “repossession”, i.e. of cancelling a member’s right and its inherent entitlement to enjoy a timeshare unit, if they stop paying the management fees.

It must be noted that payment of management fees by the Club members is an essential element for the success and subsistence of any timeshare resort, as the services and facilities will otherwise deteriorate gradually and so will the rights of the members who do honour their obligations. It is therefore vital for the Club or the Resort that its members pay their annual management fees and that a speedy legal process be in place to enforce such payments or to cancel the defaulting member’s rights in the event of non-payment, so that new members who will comply with their obligations can be given access.

This article is intended to offer (I) a quick summary of the legal grounds of the aforementioned Judgement, but we also consider it advisable to provide (II) a very brief historical-legislative account of the positions adopted in the past in relation to the legality in Spain of the Club-Trustee System as a whole.

======================== < < I > > =========================

LEGAL GROUNDS OF THE “REPOSSESSION WEEKS” PROCESS ACCORDING TO JUDGEMENT 412/2013, HANDED DOWN BY SECTION 5 OF MÁLAGA’S PROVINCIAL COURT IN JULY 2012

This Judgement resolved an appeal against a Judgement  previously rendered by the First Instance Court that heard the case summarised below:

In 1995 (therefore before the Spanish Act 42/1998 of December 15th), rotational enjoyment rights had been transferred to consumers which vested in the latter the status of member of a timeshare club (controlled by a trustee). The new members enjoyed their Club Membership without any problems or incidents and, therefore, their rights of occupation in the tourist resort, until they stopped paying their management fees in 2007 and tried to sell their right.

Such a non-payment resulted in the commencement of a repossession process in respect of the member/certificate/week which concluded with the cancellation and absolute forfeiture of the defaulting members’ rights.

The dispossessed members filed a claim against the Club, not to request that they be reinstated as club members, but to be reimbursed for the proportional part of the price which corresponded to the period of time remaining until the termination of the Club, deducting only the proportional part corresponding to the time already enjoyed.

Their request was based on that, after the coming into force of Act 42/1998 of December 15th, its rules were applicable to all systems operated in Spain, particularly Article 13 which provided that the Judge may upon termination of the contract rule that part of the price be reimbursed, even where the opposite had been agreed, for the price of the period of time which the member had not enjoyed within the system.

The Judgement takes the following factors into account:

  •  The Club system existed before Act 42/1998.
  • The system had been adapted to Act 42/1998 without any transformation of its legal  nature, i.e. merely by publishing its Constitution, Articles of Association and Deed of  Trust at the Land Registry.
  • The Members were aware of the Rules of the Club –including the possibility of  terminating the membership purchase agreement by reason of a member’s   failure to pay their management fees– or, at least, they could have consulted them as the Rules had been published with the Land Registry, which is a public registry of public access.
  • Adaptation by publishing the pre-existing system merely obligates the system to comply with Articles 8 to 12 of Act 42/1998, which referred only to the rules for promotion and transfer of timeshare rights as from January 4th, 1999 (i.e. providing new purchasers with information on the product, cooling-off period, prohibition of advanced payments, minimum content on the contract, right of withdrawal, purchase loans, etc).

I think it is very interesting to look at the literal wording of some of the legal considerations of this Judgement, namely:  Regarding the Deed of Adaptation by Publication of the pre-existing system:

“Secondly, as opposed to the appellant’s statements, it has been proved that the said Deed is registered with the Land Registry…Therefore, as the transitional rules preserve the pre-existing multi-ownership system in its entirety and the Deed of Adaptation reflects that the Club is governed by the Rules contained in the Bylaws –which is legitimate– , it is the Bylaws of the Club –incorporated into the said Deed and recorded in the records of the Proceeding– that provide the guidelines as to the rules applicable to the case in question, as established in the appealed Judgement. That is, “non-payment of fees by the members gives rise to cancellation of the rights without any entitlement to any refund whatsoever”.

“In this sense, it has been sufficiently proved that the plaintiffs failed to honour their obligation to pay the maintenance fees due for the services rendered; and such an attitude, as provided for by the legal regulation and the rules contained in the Bylaws of the sued entity, authorises the owner to terminate the contract, as the member’s obligation to pay the maintenance fees arising out of the services provided by the Club has an essential nature, non-compliance of such an obligation constituting sufficient legal grounds to demand that the contract be terminated”.

“And the transitional regulations of the Act, in relation to the scope and meaning of the statutory adaptation they demand, are not intended to transform the pre-existing systems but merely to make such systems and the operation thereof public, the rights already acquired being fully respected”.

“It being proved that the plaintiffs did not pay 2007’s annual fee offering excuses such as their advanced age or negotiations to sell their right to a third party (which, albeit respectable situations, did not relieve them of their obligations to the owner of the property), and it being proved that the plaintiffs were aware –or could have been aware as the rules were available to them–  of the internal rules and regulations and that, before the claim was filed, the plaintiffs were formally called upon by the defendant to pay the outstanding fees and the response of the former was to express their intention to terminate the contract and to take court action to claim that the sum to which they considered themselves entitled be reimbursed without even lodging the amount of the outstanding fees, the Court, as the lower court Judge has done previously, must accept the validity of the cancellation of their rights at the request of the defendant –termination of contract– as well as the forfeiture of the proportional part of the price corresponding to the period of time remaining until the natural termination”.

“And application to the case of the current Section 13 of the special Act cannot be sustained, nor can the alleged inapplicability of the Bylaws as, in addition to the express acceptance of the submission thereto which is literally reflected in the wording of the contract attached to the claim itself, it must be noted that the Bylaws have governed the social life of the Club since its creation and, consequently, during the whole time the plaintiffs enjoyed their right of holiday enjoyment to their full satisfaction without ever questioning their existence or their validity; and they have become adapted to the new regulations after the execution of the aforementioned Public Deed”.

As a personal conclusion from the paragraphs literally reproduced above, I would comment as follows:

1.- The Judgement regards as an “essential element” of the lifetime of the system that the members honour their obligation to pay the management fees.

Sometimes we kill a forest to save one tree. Applying this to the case we are studying, it is true that many timeshare resorts do have great difficulty and their very existence is jeopardised as a result of some members’ non-payment, and if this problem is not solved promptly, it will affect all members and the system will become unsustainable, which means that those who do comply may lose their rights. Therefore, as proclaimed by the Judgement, it is essential to ensure that the members pay or, where applicable, that an effective process  is in place which does not go on for years to terminate their right or force them to pay.

2.- The Club-Trustee system as such was completely lawful before the coming into force of Act 42/1998 of December 15th; after its coming into force on January 4th, 1999, where the pre-existing systems became adapted to the said Act by publication (and even, in my view, in the case of those created after the coming into force of said Act); and, without a doubt, under the current law (Act 4/2012 of July 6th) by application of the Rome I Regulation.

3.- The process of termination of contract due to non-payment of management fees is and has been legal at all times.

4.- What matters is that, when the consumer makes the decision to buy, they must be provided with accurate and comprehensive information on the relevant legal system. 5.- In addition, it is of utmost importance to use the new mechanism provided for by Act 4/2012 of July 6th of incorporating into a public deed any Club-Trustee system or any other kind of “non-Spanish” system created under a foreign law, even a system of new creation, in order for it to be duly registered at the Land Registry so that third parties can obtain information on the system as this is a public registry.

Such a Deed –the execution of which is not mandatory but merely voluntary – is, essentially, very similar to the former deed of adaptation-publication for a pre-existing system, with the benefits which the aforementioned Judgement proclaims for the latter.

6.- Finally, the timeshare legal system or scheme, while lawful in its multiple varieties, must always be accompanied by strict compliance with the general consumer protection laws or those specific for timeshare, such as pre-contractual information, ban on deposits, cooling-off period, right of withdrawal and termination, ancillary contracts, etc.

On a final note: A Judgement does not by itself constitute case law, as the criterion must be repeatedly applied by the courts.

======================== < < II > > =========================

BRIEF HISTORICAL ACCOUNT OF THE LEGAL ASPECTS OF THE “CLUB TRUSTEE” SYSTEM IN SPAIN

Having established the foregoing, it is important to stress the full “legality” of the Club-Trustee System in Spain, both now and in the past, although it would be useful to make certain considerations as to the three “historical” periods and the current legal regulations on which its legality and viability in Spain are based.

FIRST PERIOD:  BEGINNING OF TIMESHARE IN SPAIN UNTIL JANUARY 4th, 1999.

Timeshare made a strong appearance in Spain over thirty years ago, mainly –albeit not exclusively– based on two legal “systems”: (i) The system known as Club-Trustee, subject to Anglo-Saxon Law (at this moment that of the Isle of Man, Channel Islands, England, Scotland, etc), and (ii) the legal system or regime based on the Spanish laws on “multi-ownership” or communities of real property owners, which became –improperly– known abroad as “Escritura System”.

During this period, there were different opinions as to the goodness or advisability of one system or the other, but there did not seem to be any relevant discrepancy as to the capability of the Club-Trustee System of being legally operated in Spain.  We will omit to make any further considerations regarding the “Spanish” multi-ownership / escritura system at this time.

SECOND PERIOD: AS FROM JANUARY 4th, 1999 UNTIL 17th MARCH 2012

The Spanish Act 42/1998 of December 15th, which came into force on January 4th, 1999, did proclaim that it was absolutely mandatory from that moment onwards to operate in Spain with a new “right-in-rem” system called aprovechamiento por turno (rotational enjoyment), which had a “personal-leasehold right” variant as the only admitted exception.

There were important legal authors back then (i.e. J.M. Hernández Antolín) who proclaimed that such a “mandatory nature” was contrary to 1980’s Rome Convention on Contractual Obligations, and ANETC (currently a part of RDO as its Spanish Chapter)  raised the relevant objections to the drafters of the project, who despite being aware of the fact that such a mandatory nature may come into conflict with, and be contrary to, the Convention, chose to maintain this rule which excluded other systems, the Club-Trustee System among them.

We obviously consider that application of 1980’s Rome Convention, as a higher-ranking regulation than the said Act 42/1998, prevails, and that the legal systems of personal or merely mandatory rights which were newly established during that period –i.e. after the coming into force of Act 42/1998– were absolutely lawful.

However, the Spanish Act 42/1998 itself did recognise and give express validity to the pre-existing systems prior to its coming into force (particularly the Club-Trustee System), although it imposed the requirement of ADAPTING to the new Spanish Act.

The misleading –owing to its inaccuracy– word adaptation contemplated two different ways in which it could be complied with:

1)      An adaptation involving the “transformation” of the pre-existing Club-Trustee or other system into the new “rotational enjoyment” right, which was quite unsuccessful; or

2)      An adaptation whereby, without any transformation whatsoever,  the pre-existing legal system (i.e. “Club-Trustee) was incorporated into a public instrument in order for it to be lodged with the Land Registry only for the purpose of making it formally public; that is, anybody could if they so wished check at the Land Registry the rules –the original wording of which remained unaltered– of the system or club.

Thus, this formal acknowledgement by Act 42/1998 of the pre-existing systems to its coming into force, together with the club member’s knowledge of its rules –be it because they were familiar with the rules for any reason (e.g. when they entered into their contract) or because these had been lodged with the Land Registry and were therefore of public access–, has been the basis, in our opinion, upon which the Judgement to which this article refers proclaimed the validity of the “week repossession process”.

THIRD PERIOD: AS FROM THE 17th MARCH 2012, when Decree 8/2012 of 16th March came into force and later Act 4/2012 of July 6th whereby Directive 122/2008/EC was transposed into Spanish Law, the intended exclusivity of the “system of rotational enjoyment of real property” was abolished as such rules acknowledge all the systems of a personal, mandatory or merely contractual nature subject to NON-Spanish law (of an EU country or any other country) based on the provisions of the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (ROME I), which in these cases replaces 1980’s Rome Convention.

Francisco J Lizarza                                                                                                                   Spanish Lawyer                                                                                                                          Marbella,  February 2014.

CONDO HOTEL / CONDOTEL: INTRODUCTION; ITS COMERCIAL AND LEGAL BEGINNINGS (I).

 INTRODUCTION:

The term “condo-hotel” is a combination of the words “condominium” and “hotel”. The current tendency to shorten expressions as much as possible has resulted in the use of synonyms such as “condhotel”, “condotel” and “contel” (the latter especially in American English).

Obviously, first of all we need to know what the term refers to and, as we are in the Internet era, and despite the fact that its legal reliability can be put in question,  the famous Wikipedia defines it <quite rightly in my opinion> as “a building, which is legally a condominium but which is operated as a hotel, offering short term rentals, and which maintains a Front Desk”.

This definition is nothing short of an explanation of the two words whose combination has created the term “condo-hotel”. On the one hand there is the condominium, i.e. a building or group of buildings held under joint ownership, with legally independent elements (apartments) in addition to communal elements, which is intended to be operated as a hotel for short stays and offers the tourist-hotel services which we commonly and simplistically associate with the “reception desk” of a tourist establishment.

After this short introduction, it seems appropriate to split this article into several sections which will be published in this blog in several instalments as per the following index:

 I.- THE COMERCIAL AND LEGAL BEGINNINGS OF CONDOTELS.

 II.- LEGAL STRUCTURE IN SPAIN: (i) Ownership and  (ii) Operation.

 III.- THE CLIENT: Investor and/or Consumer?

IV.- TAXATION. NOTES.

V.- THE FUTURE: TRENDS.

 THE COMERCIAL AND LEGAL BEGINNINGS OF CONDOTELS (I)

 It is really quite difficult to trace the birth of condotels back to a specific date. A brief search on the Internet seems to indicate that the first of this kind of establishments “was created in Miami Beach, Florida, in the 1980s”, as described in a number of websites as:

http://es.investmentpropertiesmexico.com/node/1480  http://www.condohotelcenter.com/ask-expert/history-of-condo-hotels.htm.

The above statement appears to be valid as far as the United States is concerned, as hotels existed earlier in Europe which were operated under the same or a similar system at that time, and even long before then.

In looking at the history of condo-hotels in Spain, I must refer to the Third Edition (I do not know whether condo-hotels were covered in the previous editions) of Fuentes Lojo’s Suma de la Propiedad por Apartamentos, published in 1978 and in which, referred to as “Apartahoteles”, the legal structure of the current “condo-hotels” was studied in depth, with specific examples of establishments already operated in Spain at the time and whose fundamental aspects in terms of their legal structure have experienced little change.

It is pointed out at the beginning of Chapter XV-II of this voluminous work that the concept of “apartahotel” seemed to be very common at the time in Spain and abroad, such a concept is therein defined (hence its coincidence with the current concept commonly known as condo-hotel) as “a resort which does not only comprise a building divided into more or less apartments, but a combination of the latter with various facilities and services which form a unitary whole”.

APARTHOTEL MELIÁ CASTILLA

Revista Hogares Modernos

Revista Hogares Modernos 1968

The author of the aforementioned work starts by quoting issue no. 20 of the magazine Hogares Modernos, published on 20th January 1968, which included an extract of the aparthotel project at Calle Capitán Haya in Madrid known as “Hotel Meliá Castilla”, analysing its technical characteristics which, I dare say, continue to be valid at the present date.

But what is relevant for the purposes of this article is the author’s summary and analysis of its legal characteristics which, in essence, continue to be valid at present, at least with regard to its strict regulation in terms of civil law.

Apathotel (condo-hotel) Meliá Castilla in Madid

Apathotel (condo-hotel) Meliá Castilla in Madid

Therefore, in actuality it is a condominium, i.e. a building with independent private elements (apartments and business premises) which involve a certain degree of participation – expressed as a percentage – in the communal elements and areas. Its fundamental characteristic is that the private elements (studio-type apartments, apartments with more than one room and even with a kitchenette) do not have the status of a residential dwelling but, according to tourism regulations, are legally classified as accommodation units which fall within one of the various kinds of hotel establishment.

The Statutes of the Community of Property Owners ‘Meliá-Castilla’, which are inherent in any building subject to a ‘horizontal division’, contain the mandatory rules of the Ley de Propiedad Horizontal or L.P.H. (fundamentally designed for application to residential dwellings) but, at the same time, as a community of purpose (destination community), contain rules to enable these hotel apartments to be used for dwelling purposes or for ‘rental’ purposes by the Administration company. A dual use which, as we will see, is not possible at present.

Indeed, it is stated in Article 1 of these rules that the apartments and business premises have been built and sold under the administration (we would now say operation or management) of the Private Company Aparthotel, which in addition is thereby appointed Secretary of the Community and may only be removed from the said office by the passing of a unanimous resolution, as was then required for approval of any amendment to the Constitutional Deed of the Community.

CHAIN APARTMENTS FOR RENT.

Failing to disclose the whole name of the tourist development – as he merely calls it ‘S Chain’– the author of the aforesaid work goes on to list the rules by which the ‘operation’ is to be governed.

This is the fundamental characteristic of this ‘system’, in which the purpose of the underlying community of property owners of the buildings divided horizontally (condominium) is strictly that envisaged by the current Ley de Propiedad Horizontal or L.P.H. (Horizontal Property Act) but, in addition, as a specific characteristic which sets it apart from the remaining “aparthotel systems then being used”, the owners accept a set of pre-established ‘operation’ rules, apparently of a merely contractual nature (adhesion rules), whereby the said owners assign their apartment to the S Chain for the latter to rent it out.

Therefore, the fundamental and differentiating characteristic here is that the purchasers of the apartments assign them for ‘rental’ to third parties and the apartments are managed as a unit of operation on the basis of the prices set by the administrator considering several parameters such as market prices, tourist movements, occupation level, etc.

In this Aparthotel Chain, the owners share in the net proceeds thereby obtained regardless of whether the apartments owned by them have been rented out for a longer or a shorter period or have not been rented out at all (deducting the time during which the owner of the apartment has used it).

The net proceeds equate to the resulting net income, which will be distributed among the owners in proportion to the purchase price of their apartment. Consequently, reputable Swiss or English auditors of accounts will be appointed in order to ensure a proper control and to safeguard the owners’ interests.

As mentioned, the rules of operation do not regulate the community of property owners or form part of the statutes of the community of property owners. The community of property owners envisaged by the Ley de Propiedad Horizontal is governed by the relevant provisions in force and, therefore, all the owners have to contribute to the maintenance of the community and of the building in proportion to the coefficient assigned to their private element in the Constitutional Deed of the Community.

It is, in conclusion, another ‘legal structure’ according to Spanish Law which is intended – as the previous structures – to reconcile the ownership of a private element within a community of numerous members with the communal “mercantile” operation of the accommodation units of which the building is fundamentally comprised.

CADENA EUROTEL ESPAÑOLA – SPANISH EUROTEL CHAINS

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This Chain’s business was to promote, build and finally operate all the buildings bearing the name of Eurotel, which would be managed under the sole direction of Eurotel Española.

It amazes that this Chain already had a sort of “internal exchange” system in the sixties/seventies whereby the purchase of an apartment in a certain Eurotel building (which was called a ‘Eurotel Unit’) gave the purchaser the status of a ‘Eurotelman’, which gave them the right to:

     (I)  The operation of their ‘Eurotel Unit’ on a hotel basis,

     (ii)  As a consequence of the above, enjoy the benefits arising out of such an operation; and

     (iii)  The right to use, as if it were an internal exchange and ‘on a preferential basis’ (i.e. at no charge), not only the unit purchased by them but also any of the existing units in:

a)      The Spanish Eurotel Chain; or

b)      The International Organisation Eurotel.

EUROTELES

This concept is so amazingly contemporary right now that its Rules of Use did provide the following:

  • Art. 1.- “The Spanish Eurotel Chain is the group of existing and future hotel buildings in Spain which upon starting to be operated become integrated into the said Chain for a common purpose” (community of purpose)
  • “The use and enjoyment of the independent Units and business premises shall be in accordance with their intended hotel use”
  • “The owners are also entitled to share in the profits arising out of the exclusive operation of the Units and to enjoy a reduced price at each Eurotel…”

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  • Art. 2.- Eurotelman Cards.- By becoming part of the Eurotel Chain, the owner receives a card – white in colour, numbered – reflecting their personal circumstances and the details of their Unit, which vests in them the status of Eurotelman and is the only document which entitles its holder to accommodation with such a status. Does it not remind us of the Membership Certificate?

Other cards will also be issued in their name to the persons appointed by the owner (whom we would today call a ‘beneficiary’) up to a maximum of two cards per usable bed…The status of <<beneficiary>> can be given to any person appointed by the Eurotelman.

The latter mention of “any Eurotelman”, i.e. an appeal to the pride and satisfaction of being a ‘Eurotelman’, is a modern and extraordinarily current psychological tactic to promote customers’ loyalty and which would probably only need to include ‘Eurotelwoman’ nowadays – or be replaced by another term applicable to both genders.

  • Art. 3… Additionally, the cards exempt them (the beneficiary) from immediate payment of the amounts owed, which will be paid off annually…

THE SPECIAL CASE OF EUROTEL GOLF PUNTA ROJA.

Hotel Punta Roja

It is stated in the Statutes of the Community, among other things, that:

  • It is a travellers’ hotel.
  • Given its very nature as a <<travellers’ hotel>>, each of the apartments which are part of it, and their annexes, are intended to be operated as a hotel.
  • The use of each apartment may be assigned by O.O.E., S.A. (the management company) both to the Eurotelman member of the international chain and to persons unrelated to it at times when its owner will not be using it as a result of failing to make their annual reservation in the form detailed in the Rules of the Eurotel Chain.

Such a special case must, in my opinion, refer to the strict use of the apartment as a hotel unit, therefore excluding the use thereof for residential purposes or to fulfil its owner’s need of a dwelling – even on a temporary basis or as a holiday residence.

Such an exclusion of use for residential purposes is nowadays in Spain one of the legally demandable characteristics of the so-called condo-hotels.

The aforementioned precedents (and there were many more in Spain and in the rest of Europe) were, and are, important, and they have in relation to certain aspects become outdated, but even though they contain ‘for these purposes’ the archaic name aparthotel, they actually are what nowadays is being called a ‘condo-hotel’.

One final note on the current meaning in Spain, at least from a tourist-legal point of view, of the terms aparthotel or hotel-apartment, which are not in any way synonyms of the term ‘condo-hotel’ as they only refer to one kind or type of hotel ‘accommodation unit’ which, depending on the tourism laws of the relevant region or ‘Autonomous Community’ of Spain, may be called ‘hotel-apartment’, ‘aparthotel’, etc, but is normally only a hotel subcategory.

This word does not at present refer to ‘ownership’ or to the rights of the owner as such or to a dual form of marketing ownership and operation, but to something more simple: the ‘physical’ characteristics of the units and the tourist establishment of which they are a part, and the inherent services which must be provided in it.

It should not at all be denied, but acknowledged, that the concept which revolves around the very successful term ‘condo-hotel’ – or ‘condotel’ – must be linked to the improved, more current commercial formula whose beginnings date back to the early eighties in the United States and which today, with the necessary variations imposed by each country’s legislation, is well-deservedly leading this constantly evolving market.

Lizarza Abogados, November 2013

Next instalment: CONDO-HOTEL – LEGAL STRUCTURE IN SPAIN:(I) Ownership & (ii) Operation.

LOYALTY PROGRAMMES, DISCOUNT CLUBS AND TIMESHARE: “COINCIDENCES AND DIFFERENCES”.

My loyalty is ...to holidays!

My loyalty is …to          my  holidays!

If there is something that has characterised the “vacation industry” or “new holiday products” from the outset over forty years ago it is its constant, rapid evolution, from the static multi-ownership system and club membership rights, with fixed periods and accommodation units, to flexible periods and units or both, points clubs, destination clubs and discount clubs, fractional systems, etc, which has led to even more flexible systems, and it does not seem like such a constant evolution is going to stop in the near future.

Directive 2008/122/EC aimed to extend its regulations generally to all timeshare formulas, “long-term holiday products” (e.g. discount clubs), exchange, etc.

In almost every branch of the economy and very specially in those relating to the services sector and, within it, the hotel and tourist accommodation industry in general, the evolution and strength of the so-called “loyalty programmes” is truly remarkable. As its name indicates, a loyalty programme aims to make the customer loyal to the brand and turn them into regular users of it.

The idea or principle behind the loyalty programmes is simple; i.e. to recruit a new client and not just sell them one only product or service, but to make them feel somehow related to the company or brand in order that they repeatedly use their products or services. The loyalty programmes have been fundamentally based on offering advantages and discounts to the loyal customer which are not offered to the non-loyal ones. And these programmes have been so successful – virtually of universal application in all sectors of the economic activity – that the advantages or discounts included or offered at no charge have many times led some companies to establish a price or consideration to be included in the programme or to obtain additional advantages within it. We have seen this in programmes offered by hydrocarbon suppliers, airlines, etc.

And what happens with the vacation industry and, specifically, the hotel and tourist accommodation industry?, how are loyalty programmes and timeshare different? and, more importantly, how are they different from long-term holiday products, whose own legal definition refers to discounts and advantages in relation to the accommodation unit?

I believe that the answer is not an easy one as this is not specifically regulated on an European level or a Spanish level. Loyalty programmes are a spontaneous creation of economic operators under our legal system’s general principles of right to freedom of contract and free will, which refer to what we could call free “design” of the product or service and its  marketing with the limits laid down by legal regulations; in this case, for example’s sake, the Spanish Act 4/2012 on timeshare, long-term holiday products, etc, the General Consumer Act, the laws governing distance sale and sales outside the establishment, the Data Protection Act, etc.

Therefore, in default of a specific legal regulation governing loyalty programmes, we would have to study which other legal rules do substantively limit or delimitate its content, even if negatively.

 The Spanish Act 4/2012, almost literally following the provisions of Directive 2008/122/EC, defines the rights arising out of timeshare and long-term holiday products and at the same time describes that which neither of them is, specifying also that multiannual reservations of a hotel room are not timeshare insomuch as they are not binding contracts on the consumer but non-binding reservations; in other words, a simple reservation which can be easily cancelled and in which no price is payable until such time as occupation of the unit has taken place.

 Timeshare rights are obviously defined by the acquisition for a certain price (deferred or otherwise) of a right to occupy during an annual period a tourist accommodation unit which may be predetermined or determinable by application of objective rules but is perfectly identified, and always for more than one year. In both cases, the main component is the possibility of occupying a tourist accommodation, but in no event does a loyalty programme, which essentially consists of discounts or advantages in respect of a tourist accommodation unit, appear to feature such characteristics, i.e. binding on the consumer, definition or preliminary determination of the unit and acquisition for an economic consideration, as we will see below.

 A different thing, however, is to compare a “loyalty programme” and a “long-term holiday product”, which on the face of it seem to blend into each other but whose common characteristics and differences are more clearly delimited from a legal point of view.

Directive 2008/122/EC and Section 4 of Act 4/2012 define long-term holiday product contracts as “those contracts with a duration of more than one year by virtue of which the consumer acquires, for valuable consideration, essentially  the right to obtain discounts or other advantages relating to the accommodation unit, alone or in combination with travels or other services”. Also, the preamble to this Act (not included in its provisions but relevant as an indication of the legislator’s intentions and as an interpretation criterion) states that such a right is obtained for a consideration and it includes discount vacation clubs and similar products. It does not cover loyalty programmes whereby discounts are offered on future stays in establishments of a hotel chain, discounts offered during a period shorter than one year or one-off discounts. It also fails to include those contracts whose main purpose is not to offer discounts or rebates.

 On the other hand, the “negative” definition of loyalty programme contained in Directive 2008/122/EC or Act 4/2012 compares the latter to long-term holiday products and reads as follows: “For the purposes of this Directive, long-term holiday product contracts shall not be understood to encompass the standard loyalty programmes which offer discounts on future stays in the hotels of a hotel chain, as affiliation to the latter system is not obtained for valuable consideration and the main goal of the price paid by the consumer is not to obtain discounts or other advantages in the unit”.

The foregoing leads us to delimitate the essential elements or characteristics of a “long-term holiday product” (discount clubs and the like) and, in contrast with it, what from a legal point of view is not and may not be a loyalty programme whose essential purpose is the future occupation of hotel units or tourist accommodation units in general:

1.- Both essentially involve “discounts or advantages”.

2.- It refers to the future occupation of tourist accommodation,

3.- Which entails the provision of services inherent in the hotel or tourism industry.

4.- It involves a duration longer than one year.

5.- The long-term holiday product is onerous, i.e. it is sold for valuable consideration (price), while the loyalty programme is “gratuitous”.

It is important to stress that contracts in Spanish Law are “what they are, not what they are called”; in other words, they are defined by their own legal nature, not by the name the parties may choose to give it. That is, if a right is objectively a “long-term holiday product” (namely, it features the characteristics or requirements listed above), it will be nothing but a long-term holiday product even if one or both parties have decided to call it something else.

If a contract to adhere to a so-called “loyalty programme” is entered into and such a contract involves the offering or granting of discounts or advantages in relation to occupation of tourist accommodation for more than one year – for a price or consideration – then such a product will be a “long-term holiday contract”, as such is its nature and, therefore, the commercialisation rules  contained in Act 4/2012 need to be observed, including the pre-contractual information and, cooling off period, bang of deposits and especially, , the fact that the price must be split into equal amounts each year of validity and the purchaser may withdraw from the contract upon termination of each yearly period (without having to offer any reason to do so).

I am not sure my  loyalty is toh....."our" holidays

I am not sure my loyalty is to…… “our” holidays

F. J. Lizarza

September 2013