Twitter Logo Youtube Circle Icon LinkedIn Icon

The Legal 500 Hall of Fame Icon The Legal 500 Hall of Fame highlights individuals who have received constant praise by their clients for continued excellence. The Hall of Fame highlights, to clients, the law firm partners who are at the pinnacle of the profession. In Europe, Middle East and Africa, the criteria for entry is to have been recognised by The Legal 500 as one of the elite leading lawyers for seven consecutive years. These partners are highlighted below and throughout the editorial.
Click here for more details

Italy > Legal Developments > Law firm and leading lawyer rankings

Editorial

TIMESHARE AND TRUST

TIMESHARE AND TRUST

Timeshare is a legal device deriving from commercial practice and characterized by a complex structure, due to the fact that it cannot be qualified as a single specific right, but rather as a bundle of rights with varying attributes and content (some of which are typical of real property law system and others of contract law system).

Italian legislature, notwithstanding both EU directives (No. 94/47/EC and 08/122/EU) and the emerging need to positively regulate timeshare as an independent legal device, showed very little ability in innovating and understanding the issues of new commercial realities. It also showed a distinct lack of awareness towards the consequences legislative choices could cause on an economic and social level. Indeed, the Italian implementation of EU guidelines raised many issues: it has proved to be both inconsistent with the main principles of the Italian legal system and inadequate in meeting market expectations. The result is a confused, inorganic regulation, which seriously lacks clarity. What remains inadequately addressed, is the problem of timeshare's legal nature, along with the coordination between the new legal form of timeshare and the general provisions on consumers' protection, especially if we consider the need for more vigorous purchasers’ protection against the risk of fraud and failure of the counter-party.

The rules laid down in Articles 69-81 of the Consumer Code (amended with Legislative Decree No. 79/2011) are undoubtedly insufficient to adjust the various ways in which timeshare interest has been created in commercial practice, and are not able to regulate the broad range of products and services offered on the market nowadays. These insufficiencies occur both in the first version of the Consumer Code – through which the means of protection set out in the EU directives were implemented, in addition to the means of protection already in place in the Italian real property law system (with reference to the transfer of real-estate property rights) – and in the amendments resulting from the implementation of the latest EU directive (which seems to accommodate the needs and characteristics of the Anglo-Saxon system, but fails to take into account the peculiarities of the Italian system).

The current version of Article 69, paragraph 1, letter a) of the Consumer Code describes the timeshare contract, in very general and simple terms, as "any contract lasting more than one year, in which a consumer acquires, for consideration, the right to use one or more accommodations overnight for more than one period of use". There is no explicit enunciation of the many different types of timeshares outlined by the practice.

Both the operator attempting to apply the law (who appears increasingly disoriented), and the consumer are hindered by all the side effects of such a contradictory and ineffective discipline.

Timeshare and Trust

Over the years, many different forms of practical implementation of this convenient commercial practice have established themselves in Italy. These forms can be easily classified in three broad categories: the so-called “multiproprietà immobiliare”, “multiproprietà azionaria” and “multiproprietà alberghiera”. It should be noted, however, that in recent years timeshare has been going through many significant changes, meaning that new and different forms have come to exist alongside the more traditional ones.

The use of trust is particularly relevant. The implementation of trust in Italy has been possible since the introduction of this Anglo-Saxon legal devise to our legal system (thanks to the Hague Convention). Said legal device allows for double titles for a property - a fiduciary one and an effective one. This form of timeshare is very popular not only in Common Law, which has always been more flexible in relation to the ownership structure, but also in two particular countries with a strong tradition of civil law, namely Spain and Portugal, due to the big benefits and versatility it offers to timeshare owners.

The fundamental characteristic of timeshare trust is the distinction it makes between the real property and the rights to use the accommodation, which results in a triangular relationship established between the three parties involved in the operation. First of all, the "Settlor", the original real estate’s owner, who hands over all rights to the property to the Trustee, entering into a Deed of Trust with him. He has the primary responsibility for shaping the development of the timeshare scheme, making the decisions which will establish the characteristics of the accommodation and the way in which it will be run. The “Trustee”, who becomes the legal owner of the title for the accommodation and will also be responsible for the sale of “occupancy rights” on instruction from the Settlor, and, by the issue of Ownership Certificates to third party purchasers, the so-called “Beneficiaries” which represent the third side of the triangle.

The "Deed of Trust" regulates the rights and obligations of the parties, whilst providing a timeshare program according to which the Trustee will have to subdivide the property into fractions of time, to be sold to the Beneficiaries conferring them rights to use the accommodation for a designated period each year (as opposed to owning the accommodation itself). These “occupancy rights” usually have a few decades duration (except for the right to renew the contract after a renegotiation of contractual terms), and their nature and content is defined in the timeshare contract. The Beneficiaries thus assume a contractual relationship with the Settlor (who acts as “Developer” of the entire operation), and at the same time acquire rights of claim (“diritti di credito”) against the Trustee.

The Trust format is very convenient not only for its flexibility, but also for its safety, as the primary role of the Trustee is to protect the Beneficiaries’ rights. The Trustee takes control of these rights throughout the duration of the project, fully protecting the Purchasers from anything which might adversely affect the enjoyment of their rights and preventing them from any speculative action. The Trustee is also responsible for the management of the entire project, by ensuring compliance to the rules of the system and that the legal structure is maintained; by the administration of the process involved in selling, transferring or upgrading ownership to third parties; by the constant verification of the quality standard of the accommodation; by the management of the maintenance fees. Generally, the Trustee also acts as Escrow Agent during the purchasing process, collecting monies from the purchasers, which are therefore protected from misappropriation until such time that all the criteria as laid out in the Deed of Trust have been fulfilled. Only at this stage, is the Trustee able to provide owners with the Certificate confirming the rights to use in the timeshare contract and to release the money to the Settlor. Beneficiaries can take advantage of a real "joint management" of the property, with the possibility of participating in it (there are examples of varying levels of participation in commercial practice, from absolute control with voting rights, to a very limited right to express simple suggestions). Beneficiaries may also appoint a “Protector”, who shall monitor the compliance of Trustee’s activity to their collective interest, as well as file direct action against the Trustee in case of maladministration.

Moreover, in order to protect occupancy rights from any demise of the Settlor, the Trustee receives and records confirmation that he has a legal title to the property, and that he has obtained all relevant planning permissions and building licenses, as well as confirmation that there are no mortgages or other encumbrances on the property.As the legal title to the accommodation is not held by the Settlor, but by the Trustee, this system ensures the maximum protection of the legitimate rights of the purchaser in case of insolvency on behalf of the Settlor: this is an application of the “safe hands” principle, which negates any risk of financial failure affecting the beneficiaries’ rights. It must be added that by definition, the Trust form avoids the possibility of a conflict of interest, since the Trustee protects the property on behalf of the Beneficiaries, acting in accordance with the provisions set out in the Deed of Trust for their benefit.

It is evident that the appeal of this particular form of timeshare rests in the high protection of consumers’ interest and in the great flexibility it provides, certainly more appropriate to the needs of commercial practice than the traditional rigid forms of multi-ownership (the so-called “brick and mortar” products)  which prevail in the Italina legal system, where each co-owner has a full, autonomous property right, documented in a deed and registered at the local property registry. In addition, the release of Ownership Certificates is less expensive and faster than the civil law mechanism for transferring rights via Notary. Since Beneficiaries are mere users, they will not be subjected to cadastral or property controls, nor to the payment of taxes on real estate. Not least, it is very convenient that Beneficiaries may transfer their rights according to the general scheme of credit transfer, either by means of a deed among living parties or by succession due to death.

The “Club-Trust” structure is very popular. In this case, the Developer places ownership of the real estate and its improvements in a trust for the benefit of the Club Members (those who paid all the Membership Fees as set out in the Club’s bylaws). The role of the Trustee is exercised by the Club itself. The purchasers receive a Certificate of Membership in the Club which entitles them to use a unit for a designated period each year and allows them to use the available recreational amenities.

Concluding remarks

It should be stressed that resistance to this particular form of timeshare remains strong in Italy. First of all, the implementation in the Italian legal system of the so-called “internal trusts” is still under discussion. They have no connection to other systems, neither with regards to the subjects, nor with the location of the property, nor with the applicable law. Indeed Italian law – despite recognizing the institution of trust – does not provide an explicit regulation of it. Thus, it must be ensured that every settled Trust refers to an appropriate foreign law which provides exhaustive and complete regulation of the particular method chosen by the Settlor (such as that of the “Club-Trust”).

In addition, the fact that the owner of the accommodation, which is the object of the timeshare contract, is just one singular subject (that is the Trustee) leads Italian doctrine to the conclusion that we are dealing with an institution that differs from traditional multi-ownership: it could be more properly related to a lease, or to an atypical contract, but it does not, however, contain the technical elements of civil law multi-ownership.

The Trust form, on the other hand, could allow a solution for the unsolved problem with regard to the legal nature of the rights of those who have purchased the timeshare. The main component of the Trust, which consists of the separation between formal and substantial ownership, though not in principle known and accepted in our legal system, could be extended to the timeshare structure without altering the traditional concept of property right.

Ultimately, a possible approach would be a careful, case-by-case evaluation of timeshare trust’s implementation in the specific situation, in order to avoid distortions of existing Italian institutions.

Interview with...

Law firm partners and practice heads explain how their firms are adapting to clients' changing needs

International Law Firm Networks

International comparative guides

Giving the in-house community greater insight to the law and regulations in different jurisdictions.

Select Practice Area

GC Powerlist -
Italy Teams

  • Italy Teams GC Powerlist

    Recognising in-house innovation, quality and excellence, the GC Powerlist: Teams identifies an array of the most influential and innovative in-house teams working in the country.

    GC Powerlist: Italy Teams

    Interactive PDF

International Law Firm Networks