REGISTRATION OF A FRACTIONAL SCHEME – THE PRACTICALITIES
Clients are first directed to our client memo on the general principles regarding fractional ownership of real estate in the Turks and Caicos Islands on our website (www.misickstanbrook.tc/fractional-ownership-TCI/).
So, you have read that and you have a property that you would like to submit for fractional registration: what happens next?
1. Application for Registration of your Scheme
An application for registration of a fractional interest scheme with respect to a particular villa or strata lot is submitted to the Land Registry on a statutory form, Form FR1, under the Fractional Ownership Regulations 2014.
The application form itself is quite straightforward but it requires the applicant to set out the usage rights that are proposed for each owner of a fractional interest. This may be as simple or as complex as you like: it might specify that the proprietor of fractional interest F1 would be entitled to exclusive use of the property from April 1 – May 31 of each year, the proprietor of fraction interest F2 to the use of the property for the period June 1 – July 31 of each year and so on. Alternatively, it might give each of the fractional interest proprietors (no more than 12 allowed), the right to the exclusive use of the property during different parts of each year on a rotational basis so that (for instance) no one proprietor always has the Christmas period.
2. On Registration
When the fractional scheme is registered, the Land Registrar will open a new register for that fractional interest. At the outset, the owner of the real estate will be the owner of each fractional interest. On registration, the fractional corporation comes into existence by operation of law and the fractional corporation will be registered as proprietor of the parcel.
To illustrate, suppose Julius Caesar is the owner of a villa registered as parcel 100. He files an application for registration of a fractional interest scheme with respect to the villa so as to create (say) eight fractional interests. As soon as the fractional scheme is registered, the land register for parcel 100 will be changed so as to show that, instead of Julius Caesar, the proprietor will now be the fractional corporation for that scheme which will be called something like “The Proprietors, Fractional Interest Scheme Number [__]”. It will be noted on the register that the parcel is subject to a fractional scheme.
There will then be opened eight new land registers, namely parcels 100/F1, F2, F3 and so on. The registered proprietor of each of those fractional parcels will be Julius Caesar and, because he owns all of the fractional parcels, Julius Caesar will control the fractional corporation.
In the same example, if Julius Caesar was submitting a condominium unit (strata lot) and not a villa for fractional registration, then he would be the owner originally of (say) parcel 100/K20 (the strata lot parcel). On registration of the strata plan, the fractional corporation would become the owner of parcel 100/K20 and Julius Caesar would become the parcels 100/K20/F1, 100/K20/F2, and so on.
3. Fractional Bylaws
As soon as is practicable after registration of the fractional scheme, the fractional corporation must adopt fractional bylaws and will register these bylaws with the Land Registrar. The fractional bylaws regulate the control, management, administration, use and enjoyment of the fractional parcel and of the fractional interests contained in the scheme and the expenses in relation to the parcel and the scheme. Because, at the outset, the applicant for fractional registration (the developer) will be the owner of all of the fractional interests, he will have 100% control of the fractional corporation and can, therefore, control the terms of the bylaws that are adopted.
4. Contents of Bylaws
The fractional bylaws will set out:-
The rights of the fractional proprietors to use the property (i.e. the use regime);
a. The rights of the fractional proprietors to use the property (i.e. the use regime);
b. Their respective rights and obligations to each other in that regard and with respect to costs and expenses; and
c. Any other matter that the corporation (effectively the developer in the first instance) deems appropriate.
The bylaws must include:-
i. rules and procedures for remedying a failure to comply with the requirement to pay a fractional contribution (see duties of the fractional corporation below);
ii. rules regarding the use of the property by persons other than fractional proprietors;
iii. rules for the use of the property for transient accommodation during periods of non-use by the fractional proprietor;
iv. rules dealing with the procedure if there is a destruction or extensive damage to the property;
v. provisions for the appointment of an executive committee;
vi. provisions for the appointment of a fractional manager;
vii. provisions regarding the keeping of records and accounts;
viii. details of the voting rights of fractional proprietors;
ix. particulars regarding the calling of meetings; and
x. the percentage of fractional interest that is required to pass any resolution.
5. Duties and Powers of Fractional Corporation
If a fractional interest scheme relates to a strata lot (condominium unit), the fractional corporation is for all purposes of the Strata Titles Ordinance deemed to be the proprietor of the strata lot and is required to comply with the strata bylaws affecting that condominium unit.
If the fractional scheme does not relate to a strata lot, the fractional corporation is deemed to be the proprietor of the fractional parcel itself and in that regard is obliged:-
a. To keep the property insured;
b. To apply insurance monies received by it in rebuilding so far as it is lawful to do so.
c. The fractional corporation shall also:-
i. keep the property in repair;
ii. comply with notices or orders of any competent authority or any relevant HOA regarding the property;
iii. pay all taxes on the property;
iv. establish a fund for the control, management and administration of the property for payment of insurance and discharge of any other financial obligations on the property;
v. levy contributions on the fractional proprietors, to satisfy those expenses, pro rata in accordance with their respective fractional interests.
6. Descriptive Statement
Within 14 days after registration of a fractional scheme, the developer must file with Land Registrar and publish in the Gazette a descriptive statement of the scheme, in a statutory form, including such matters as:-
- The name and address of the developer
- The name and location of the scheme
- An explanation of the form of ownership that is offered
- A general description of the scheme including the number of fractional interests that is to be part of the scheme and the usage rights that are attached to those interests
- Survey plan
- A statement of any easements benefiting the fractional parcel
- A statement of where the bylaws can be inspected and obtained
- A statement of other charges that may be applicable under the Strata Titles Ordinance (if the fractional parcel is a condominium) and for the running of the fractional corporation
- Proposed purchase price for each fractional interest
- Estimated financial contribution from each fractional proprietor to the fractional corporation
- Details of insurance coverage
- Details of any encumbrances affecting the fractional parcel
- Details of any unusual or material circumstances, features and characteristics of the property.
It should be noted here that if the descriptive statement is not filed within 14 days of registration of the fractional scheme, the registration of the scheme is void.
7. Effect of no Descriptive Statement
It is possible to commence the offering for sale of fractional interests before registration of the fractional scheme and before the filing of a descriptive statement, but that is unwise because, in these circumstances, a buyer has an automatic statutory right of cancellation before closing.
Moreover, if there is a material and substantial departure from the descriptive statement a purchaser may cancel his contract before completion and in those circumstances is entitled to the return of any monies paid by him with interest at 6%.
8. Promotional Material
There are strict provisions regarding promotional material and in particular regarding any misrepresentation in any promotional material with significant criminal sanctions for such misrepresentation.
9. Selling a Fractional Interest
Selling a fractional interest is, in many respects like selling any other piece of real estate. There is a contract, a down payment, and a closing date at which there is a transfer of the fractional interest against receipt against the balance of the purchase price.
In the sales contract, the purchase of a fractional interest has a mandatory right to cancel the contract without any penalty or obligation within 7 days after signing the contract. Moreover, if the developer enters into a sales contract without having filed a descriptive statement or if there is a material and substantial departure from a filed descriptive statement, the purchaser may cancel before completion, as described above.
Because a descriptive statement cannot be filed until after registration of the fractional scheme, these provisions effectively mean that any contract signed before registration of the fractional scheme can be canceled at the instance of the purchaser
10. Fractional Manager
On registration of the fractional scheme, the fractional corporation must appoint a fractional manager who will perform all the functions of the fractional corporation as his agent. Usually, the fractional manager will be either the developer or some affiliate of the developer and that affiliate will charge for its services in acting as fractional manager.
11. So, what documents do you need?
You want to set up and market a fractional scheme and you need to know what documents you are going to need in that respect. You will need the following:-
- An application for registration in the statutory form (Form FR1);
- A descriptive statement in the statutory form (Form FR3);
- The use regime;
- Fractional bylaws;
- A contract for the sale of the fractional interests, incorporating the various requirements of the Ordinance.
Misick & Stanbrook will be happy to assist in the preparation and drafting of all the required documents.
The above is not intended to be a full and thorough description of the law: these are imprecise guidelines only. They ought not to be relied upon in the absence of detailed written advice from your Misick & Stanbrook professional on your particular development and circumstances. This memorandum refers to the laws of the Turks and Caicos Islands only: to the extent that the laws of any other country may have a bearing on your proposed development or scheme, you ought to take expert advice in that country.
Misick & Stanbrook