Timeshare - In Perpetuity Contracts

Given that the legal structures of different products may vary, there may be questions around how the law treats the underlying product – for example, it may be that a timeshare or LTHP is in fact a tenancy agreement, an unincorporated association, a purpose trust, or a purely contractual arrangement. In each case, the law may treat the timeshare or LTHP product differently.

Governing Law and Jurisdiction

European law places significant limitations on the governing law and jurisdiction that businesses can apply to consumer agreements such as timeshare.

In relation to governing law, under the Rome I Regulation, parties can expressly choose which law applies to the contract for contracts concluded on or after 17 December 2009. However, in consumer contracts, as the consumer is considered the weaker party, choice is limited. A choice of law term cannot generally deprive consumers of the protection afforded to them by mandatory provisions of the law of the country where the consumer has their 'habitual residence' (that is, where they live most of the time). For example, where a Spanish company sells timeshares to UK consumers on holiday in Spain, where that company pursues or directs business activity in/to the UK, it is arguable that the contract cannot deprive consumers of the mandatory consumer protection rights they have under UK law. If no choice of law is made by the parties, the consumer contract will be governed by the law of the country where the consumer lives most of the time, provided the business pursues commercial or professional activities in that country or directs such activities to that country. A choice of law term will be assessable for fairness under the UTCCRs.

Note that, for contracts concluded after 1 April 1991 but before 17 December 2009, the Rome Convention will determine governing law. Broadly speaking, under the Convention, the parties to a consumer contract have freedom of choice as to governing law, but that choice should not deprive a consumer of the mandatory legal protection of his country of habitual residence. Where no choice is made, the governing law shall be that of the consumer's country of habitual residence (instead of the country with which the contract is most 'closely connected' for non-consumer contracts).[1]

In relation to jurisdiction, the Brussels Regulation allows the consumer to bring proceedings before the courts of the EU member state where he lives and to be sued only in those courts when specific conditions are satisfied. Articles 15(1)(c) and 16 of the Regulation provide that a consumer may sue a business with whom he has concluded a contract in his national courts, and be sued only in those courts, even if the business is domiciled in another EU Member State. This is subject to the condition that the business pursues commercial activities in the consumer's home state or directs such activities to that state (that is, objectively speaking, the business envisages doing business and concluding contracts with consumers in that state) and the contract at issue falls within the scope of such activities.[2] This is likely be the case where a business is selling timeshare to EU consumers.

Where a contractual term purports to apply the law of a country outside the UK, UCTA will also apply a test of reasonableness to that contract term where:

  • in forming that contract, the consumer was habitually resident in the UK and the essential steps necessary for making that contract were taken there (whether by the consumer or by someone else on their behalf), and/or
  • if it would appear to the court that the term has been imposed wholly or mainly for the purpose of evading UCTA.[3]

Therefore, where, for example, a Spanish company concludes a contract with a UK-based consumer, if the purpose of a foreign governing law term is mainly to deprive the consumer of his UK law rights, UCTA may still apply to the contract.[4]

In any event, where contractual terms stipulating foreign governing law and jurisdiction over consumers purport to be exclusive, there is also significant potential for unfairness under the UTCCRs.[5] The effect of such a term is that the consumer will be hindered from exercising their legal rights in their local courts where disputes arise. This may be the case even where governing law or jurisdiction is confined to the UK, for example, where a consumer based in England is bound by Scottish governing law and jurisdiction. Consumers must be free to exercise their legal rights and remedies without unlawful obstacles. The UTCCRs apply notwithstanding any contract term that purports to apply the law of a non-member state, if the agreement has a close connection with a member state.[6]

In summary, governing law and jurisdiction clauses and their purported effects should be treated with great caution by businesses intending to rely on them and consumers who may be able to argue that such terms are unenforceable. It is our view that businesses would be wise to treat (a) the law of the consumer’s country of residence as applicable and (b) that country’s courts as having jurisdiction over the agreement.

Key 'exit issues' and the legal requirements on timeshare businesses

In-perpetuity agreements and long-term agreements

An agreement 'in perpetuity' is one that does not have a specified end-date and is therefore capable of continuing indefinitely, or alternatively contains a term that expressly provides for this effect.

Other agreements we have seen are stated to last for a specified number of years (for example 80 years) or until a specified future date (for example, 1 June 2050). We have also seen contracts that allow for an extension – for example, a timeshare right may last until 1 June 2050 and then, if a minimum proportion of owners in a timeshare 'club' agree (for example at least 75% of them), will continue for another 80 years.

As a general starting point, there is no clear rule under UK contract law that prevents a contract from continuing in perpetuity, or for any particular length of time, if that is actually what the parties have agreed.

However, it does not appear to be the modern approach of the courts to treat contracts of indefinite duration as being perpetual in nature. Using the twin techniques of construction and implication, the courts may cut down perpetual contacts and find instead that they are contracts for indefinite periods, albeit terminable upon notice being given. For example, the Court of Appeal has held that a contract for the supply of lamp oil as needed was terminable on notice because it might be the case that no oil was needed at all at a particular time.[7]

A significant question is whether a court would agree that a consumer may withdraw from a timeshare agreement that does not expressly provide for this eventuality:

  • If, as a matter of construction, the parties have intentionally and expressly set up a contract to last in perpetuity, or for a very long period, then a court may be unwilling to imply a term that permits one of the parties to terminate the contract on notice. However, in such a situation there is likely to be a robust argument (in particular given the nature of timeshare) that a perpetuity clause is unfair (see paragraph 3.16). For example, in the absence of adequate pre-contract explanation from businesses (as required by the CPRs), consumers may not fully understand the serious implications of what they are agreeing to.
  • Where the contract is silent on duration, a court may well imply a term allowing termination on notice (unless there is clearly no basis for such an implication given the circumstances and other express contractual terms).[8]

Regardless of whether or not the parties have made a positive decision to make the agreement perpetual or long-term, the relevant term may still be considered unfair under the UTCCRs. For example, where consumers take on obligations that will last very far into the future, it may be difficult for them to assess when they enter into the agreement what the whole-life costs and benefits will be; also, their circumstances may change in unforeseen ways, rendering continued use of the product / service burdensome.

It may also be the case that the consumer is already elderly when they enter into the agreement, making it potentially unfair for the consumer to be bound to such a lengthy term. Furthermore, the court is likely to have regard to such factors as: whether the consumer has already paid a substantial sum for their timeshare, whether the business that drew up the contract has exploited consumers' behavioural biases, or even mis-sold the contract, and all of the other terms and circumstances of the contract which may lead to the conclusion that the consumer, if properly advised, would not have agreed to the perpetuity / long-term clause if given the choice.

In summary, it is our view that there may be scope for in-perpetuity and long-term clauses to be challenged for unfairness under the UTCCRs, particularly where the end-date is open-ended or where the agreement is likely to expire after the consumer's own death. In our view, recommendation of or reliance on unfair terms may also be an unfair commercial practice under the CPRs.

Restrictions on which owners can leave

Some timeshare schemes, either as a contractual right or at the developer's or owner committee's discretion, may allow owners to exit, but only in very limited, narrow circumstances. The key question is whether a court would allow the consumer to exit the contract in a wider range of circumstances and if the relevant contractual terms create a significant imbalance between parties' rights and obligations under the contract, to the detriment of consumers.

It is our view that these sorts of restrictions may be open to challenge under the UTCCRs not least because, when agreeing to potentially long-term contracts such as timeshare, consumers tend to overestimate how often, or for how long, they will derive benefit from that product / agreement. Unforeseen circumstances may also make continued use of the product impractical or unaffordable.[9] For example, a court is likely to consider it relevant that, over time, people are highly likely to eventually face circumstances such as illness, injury, loss of livelihood, financial hardship or old age, which makes travelling to the property impractical or even impossible (for instance some people are no longer able to travel or obtain insurance due to ill health). There are therefore likely to be other circumstances in which a consumer ought to be able to exit the contract, that are not reflected in terms which restrict exit to very specific circumstances.

Further, consumers ought not to be prevented from exiting the contract (and suing for damages, if relevant) where the business commits a fundamental breach of the contract. Terms which restrict consumers' termination rights in these circumstances are likely to be considered unfair under the UTCCRs and not enforceable against the consumer.

Where a contract term is 'unfair' under the UTCCRs because it unfairly restricts the circumstances in which the consumer can exit the contract, then businesses that purport to rely on it (making consumers continue to pay management fees for instance) may commit an aggressive, misleading or otherwise unfair commercial practice under the CPRs.[10]

Where a business has signed a consumer up to a significantly long-term or perpetual agreement with no clear termination provision, failure to have in place at least a discretionary exit policy may, in some circumstances, be considered unfair under the CPRs, as an aggressive and/or generally unfair commercial practice. In the context of timeshare, given the age base of consumers and the often significantly long length of agreements, we would consider it potentially unfair for businesses[11] not to give proper consideration to reasonable exit requests where a change in circumstances makes it impossible or impractical for the consumer to continue to enjoy their timeshare.

A contractual term will also be assessable for unfairness under the UTCCRs where it gives businesses the right to dissolve the contract on a discretionary basis, where the same facility is not granted to the consumer.[12]

In summary, it is our view that narrow restrictions on which owners can leave timeshare may be open to challenge under the UTCCRs and CPRs.

Restrictions on how owners can leave

Some timeshare schemes, either as a contractual right or at the developer's or owner committee's discretion, allow owners to exit, but only if specific conditions are met (for example, if the timeshare is sold through a particular resale company of the business's choice or if the owner uses a notary).

It is our view that terms that restrict how owners can resell or dispose of their timeshare have significant potential for unfairness under the UTCCRs and may therefore not be binding on the consumer.

 In considering whether such a term is unfair, a court is likely to have regard to whether the term:

  • requires the owner to sell their rights through a single resale company. Businesses may, of course, recommend a particular service provider, but insisting that one provider is used may put the consumer at a considerable disadvantage and limit the likelihood of disposal
  • requires the owner to sell / transfer their rights only to a narrow pool of potential buyers, for example only to other existing owners and/or family members and/or the developer. Given the current state of market, this may put consumers at considerable disadvantage

In the situation where restrictions are not expressly written in the contract or any associated club / resort constitution but have been introduced as the business’s standard policy when dealing with owners' requests to exit (for example, where this is done over the telephone), the UTCCRs may still apply to those oral policy terms.[13]

Further, the business's practices may be considered 'aggressive' under the CPRs, in that the business exploits their position of power over the consumer to pressure them into selling through a particular party or to a particular type of buyer.[14] In these circumstances the consumer may be pressured to take a decision to sell on unattractive terms or on conditions that they would not otherwise have agreed to.

Finally, the business's commercial practice may also be considered generally unfair under the CPRs if it contravenes the requirements of professional diligence and materially distorts the behaviour of the average consumer.[15] This could be the case where, contrary to the principle of good faith, the business's unduly restrictive discretionary exit policy (or contractual term to that effect) pressures consumers on perpetual or long-term agreements into staying or appreciably impairs the consumer's freedom of choice as to whether, or on what terms, to dispose of their timeshare.

In summary, it is our view that restrictions on how owners can leave timeshare are readily open to challenge under the UTCCRs and CPRs.

Inheritance

What happens to a timeshare upon death?

As we discussed in Section 2, timeshare may take different legal forms. In broad terms, timeshare may be either deeded (where the consumer owns a legal interest in the property, for example a leasehold interest) or a contractual right to use, without any legal title to the property.

Upon death, we understand a deeded leasehold interest is considered to be personal property, and as such, will form part of the deceased's estate.

However, the position for contractual timeshare rights is not so straightforward. The starting point of any analysis here is the common law position that contractual liabilities may not necessarily terminate on death.

In considering whether a timeshare agreement expires on the death of the consumer, a court is likely to consider whether it is in some way a 'personal contract', which will be subject to the implied condition that the contract ends on the death of the party due to perform it.[16] The classic example of such a contract is where an artist is contracted to paint a portrait, but then dies before it is started. In such a case the artist's estate is unlikely to be bound to complete the commission. It is arguable that a timeshare, because it is a contract to use a particular resort to suit the personal tastes of that consumer, is also a personal contract and the death of that consumer may lead to the end of the contract. However, there is no decided case on this and consideration will be given to the express terms and circumstances attending the conclusion of the contract. There is academic opinion to suggest that, in relation to a contract to go on holiday, the death of the traveller may frustrate the contract.[17]

Where a contract does remain in force after death, the contractual rights and obligations of the deceased pass to their estate. In these circumstances, it

falls to the executor of the will or administrator of the estate (hereafter, we call both 'personal representatives' or 'PRs') to perform the contract on behalf of the estate (they are not personally liable, though).[18] We will return to this at paragraph 3.51.

Will beneficiaries be liable for the timeshare upon the death of the owner?

The important point to note here is that the responsibility for a timeshare (or to fulfil the terms of the contract) does not pass automatically from the deceased to the beneficiaries of the will or heirs to the estate (hereafter, 'beneficiaries').

As stated above, a deeded leasehold interest is considered to be personal property, and as such, will form part of the deceased estate. It can therefore be inherited, should the beneficiary elect to accept the gift and its associated obligations. In relation to contractual right to use timeshares, however, the position is more complicated.

The benefit of a contract is a ‘chose in action’ and, as such, may also be inherited. However, there is the common law 'rule against assigning contractual obligations'. Here, the law is clear that the burden of a contract cannot be assigned.[19] The courts will simply hold that this cannot be done.

The rule against assigning contractual obligations is sometimes confused with the rule that the burden of the contract may not be transferred without the consent of the other party. They are, in fact, different rules. At law, assignment is the term used to describe the transfer of a right. There can be no 'assignment' of obligations / burdens. The transfer of contractual obligations is actually a 'novation'. Rather than transfer obligations, a novation replaces the old contract between the outgoing party and the remaining party with an identical new one between the new, incoming party and the remaining party. A novation is usually affected by preparing and executing a formal novation agreement but can in fact be made without writing (that is, by the conduct of the parties).

However, whilst contractual obligations cannot be assigned in a strict legal sense, one must also consider the contractual principle of 'mutual benefit and burden', whereby one cannot take the benefit of a contract without assuming responsibility for a connected burdensome obligation. Therefore, as a matter of legal principle, it is arguable that, should a consumer choose to take the benefit of a right to use timeshare (that is, they start to use it), they will not be able to evade the obligation to pay for it.

In summary, in the light of the rule against assigning contractual obligations, we do not see how the timeshare agreement can both survive after the death of the original party and transfer its obligations to the deceased's beneficiaries, without a new agreement at the point the beneficiary elects to accept it from the PRs and the business agrees to accept the new party as a suitable member of the scheme or club. If there is no new agreement, assuming the beneficiary has not chosen to start enjoying the benefit of the timeshare, the existing agreement would be unlikely to bind the beneficiary, since the person who had the right to use the timeshare is deceased (subject to the terms of the contract, which will generally be assessable for fairness under the UTCCRs). In this case (and if no other party could be found to assume responsibility) it may be that it would continue and remain the responsibility of the PRs, in the deceased's estate.

It is our view that, in relation to contracts, parties cannot contract to burden third parties and pass the burden of a contract onto third parties (subject to the principle of mutual benefit and burden). Fulfilment of the contract may only become a beneficiary's responsibility if they agree to accept the gift or inheritance of the timeshare (and its obligations) or if they take on the benefit of the timeshare (for example they use the weeks or points). In such a situation it seems likely that the beneficiary will be taken to have accepted the obligation to pay management fees. However, in the light of this analysis, it is our view that the burden of a contract cannot be transferred without the creation of a new timeshare contract.[20] This will be important when determining the rights of the new owner.

Beneficiaries and the right to 'disclaim' an inheritance

Under UK law, we understand no person can be compelled to take a gift under a will or to inherit property from an estate where there is no valid will. It is always open to a person to 'disclaim' a gift or property – in other words, to refuse it.

 

However, a beneficiary cannot accept part of a single gift and refuse the rest. For example, if a bequest is for 'all my property in Malta', and that comprises a holiday home and a timeshare apartment, then it appears that the beneficiary must take both or neither.[21] If, on the other hand, the will is constructed in such a way that the two properties are bequeathed as separate gifts, then the beneficiary can accept one and reject the other.[22] In the event of disputes, the courts would ultimately decide on the correct interpretation of the will or the application of the rules of intestacy.

 

A developer that tried to force a beneficiary to accept the bequest of a timeshare or misled them to believe that they had no choice but to accept it, or who downplayed the financial liabilities that come with a timeshare, would likely be breaching consumer law (for example, the CPRs).

The CPRs requirement not to omit material information

When a beneficiary is considering whether or not to accept the inheritance of a timeshare, they may have dealings with the timeshare company (solicited or unsolicited), for example to find out more about the product and its rights and obligations (to inform their decision whether to accept).

In these circumstances, the CPRs are highly relevant. Under the CPRs, businesses are prohibited from engaging in unfair commercial practices and this includes any act, omission, course of conduct or representation that is directly connected with the promotion, sale or supply of a product to or from consumers.

In the circumstances at paragraph 3.45, a timeshare business would likely be breaching the CPRs if it:

  • provided the beneficiary with misleading information, and/or
  • omitted or hid the material information that the beneficiary would need to take an informed decision, and/or
  •  provided the beneficiary with information in an unclear or untimely manner

in each case, where the act or omission causes, or is likely to cause, the average consumer to take a decision that they would not have taken otherwise (CPRs regulations 5 and 6 breaches).[23]

In the context of timeshare, the CMA considers that relevant material information is likely to include (but is not limited to) clear and comprehensive information about

  • responsibility for ongoing management fees, their frequency, how they are calculated and the likelihood of future increases
  • the requirement for membership of any connected corporation, club or association and the rights and obligations of membership
  • the nature of the interest that the consumer would be acquiring and any conditions upon how they would be able to use the timeshare
  • how the consumer would be able to divest themselves of the timeshare and any conditions or practical restrictions that may hinder their ability to do so.
 

[1] However, these provisions will not apply where a service is being provided exclusively in a country that is not the consumer's habitual residence.  

[2] See Peter Pammer v Reederei Karl Schlüter GmbH & Co. KG (C-585/08) and Hotel Alpenhof GesmbH v Oliver Heller (C-144/09). 

[3] UCTA, section 27(2). 

[4] Note that the provisions in UCTA relating to contractual liability to consumers do not extend to contracts relating to the creation, transfer or termination of interests in land (but will still apply where the consumer’s right to use timeshare arises from, for example, a club membership),  

[5] UTCCRs, Schedule 2, paragraph 1(q) 

[6] UTCCRs, regulation 9. 

[7] Crediton Gas Co v Crediton Urban Council [1928] Ch 447. 

[8] See Staffordshire AHA v South Staffordshire Water Works [1978] 1 W.L.R. 1387. 

[9] See, in particular, paragraphs 164, 171, 174 and 175 of the Court’s judgment in Office of Fair-Trading v Ashbourne Management Services Ltd and others [2011] EWHC 1237 (Ch) at www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/Ch/2011/1237.html&q...

[10] Office of Fair-Trading v Ashbourne Management Services Ltd and others [2011] EWHC 1237 (Ch).  

[11] We recognise that there may be situations where a consumer's inability to exit timeshare stems from a refusal by the owner committee in an owner-run resort. However, this does not mean that consumers lose their statutory protection in these circumstances. Where owner committees are acting in accordance with rules and conditions placed upon them by developers or management companies (or where those parties sit on or influence the decisions of the owner committee), then consumer protection law will still be applicable. It is also arguable that the owners sitting on the committee are in fact acting for business purposes themselves (that is, running the resort), or, are acting on behalf of the developer (and are therefore a 'trader' for the purposes of consumer protection legislation)

 

[12] UTCCRs, Schedule 2, paragraph 1(f). 

[13] See Unfair Terms Directive, recital 11. 

[14] See CPRs, regulation 7. 

[15] CPRs, regulation 3(3). 

[16] See Hall v Wright (1858) E.B. & E.746, 793. 

[17] G.H. Treitel, Frustration and Force Majeure, Sweet & Maxwell, 1994.  

[18] Wentworth v Cock (1839) 10 A. & E. 42.  

[19] Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993] UKHL 4.  

[20] In which case the 14-day statutory right of withdrawal provided by the Timeshare Regulations will be available to the consumer.  

[21] Similarly, a beneficiary who was bequeathed two weeks' use of a timeshare would not be able to accept one week but disclaim the other – they must take both or neither.   

[22] Guthrie v Walrond (1883) 22 Ch D 573.  

[23] Further, if the timeshare business engaged in aggressive practices or failed to show professional diligence, there might be regulation 7 and 3 breaches, respectively