«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”. 

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.

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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 15^th, 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 4^th, 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 15^th; after its coming into force on January 4^th, 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 6^th) 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 6^th 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.

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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 17^th 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 17^th MARCH 2012, when Decree 8/2012 of 16^th 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.