The Concept

Fractional means “being a part / fraction of a whole ”. So “fractional ownership” should mean “part ownership” and, in the context of real property, “part ownership of the property”. Where a group of three friends buy and take transfer of undivided one-third shares in one conventional or sectional property, for example a holiday home they intend to use and share, they can each be said to have “fractional ownership” of that property. In these circumstances one presumes that they will work out what they now consider to be a fair system for sharing the use of the property, for example taking it in turns to use the holiday home at each year-end and during school holidays, and agree that they will share the expenses of and income derived from the property according to a particular arrangement.

“…it will ensure that new entrants are bound by the sharing and contribution arrangements..”

The Arrangement

But this type of arrangement needs to be flexible enough to allow participants to exit and enter the arrangement without upsetting its operation. So rather than taking transfer of undivided shares in the property individually, one expects that the friends will arrange for a company, close corporation or the trustees of a trust to take transfer of the whole property. When the first of the friends wants to realise his investment, he will sell his shares, member’s interest or beneficial rights to a new participant; the property will remain fully vested in the “holding entity”. First this will drive down the legal and revenue costs associated with trades of participants’ interests.

Secondly it will ensure that new entrants are bound by the sharing and contribution arrangements which can be set out in detail in the founding statement, articles of association or trust deed. Another difficulty in the arrangement where each of eh participants takes registered ownership of a one-third undivided share is that banks will only lend money if they can get all the shares in the property mortgaged to secure the debt. So it is not practically possible for individual participants to make separate mortgage finance arrangements.

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Fractional Ownership Arrangements

An unlimited variety of arrangements may be marketed under the banner of “fractional ownership”. The property may be developed or may yet to be developed with the funds to be invested. The only feature common to all of these developments is that the promoters plan to have many people purchase a direct or indirect use right in the property, often via shareblock companies and with our without timesharing and rental pool arrangements.

“An unlimited variety of arrangements may be marketed under the banner of “fractional ownership”

The Sectional Titles Act also provides that a joint owner of a sectional title unit may take out a separate title to his or her “fraction” of the unit. So our three friends described above could apply their arrangement to a unit in a seaside block and each be issued their own title deed to their “fractional ownership” rights to the the unit. But, of course, they would be hamstrung by the difficulties described above.

This article is published under the Creative Commons Attribution license.