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Trust deeds and sharing agreements - Part 1 |
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What issues need to be covered in a Trust Deed or sharing agreement? Most of these points apply to all assets: property, boats, cars, aircraft, horses, mobile homes etc. |
| What needs to be covered in a Trust Deed or flexible/fractional rental licencing agreement? |
| Who
owns what? (joint ownership only)
top A "trust deed" is a document under seal (i.e. witnessed by a third party) which sets out the "beneficial interests" in ownership. That means it explains who is entitled to the benefit of ownership, even if "legal title" rests with different people. However, the sharing documents offered on this website are drawn so as to be both trust deeds, where needed, and sharing agreements, setting out the arrangements you have made. These agreements will be confidential between the sharers. Even a sharing agreement concerning real property does not have to be registered or shown to any other person. The sharing agreement will include a statement of who has contributed what money so far and who will contribute in the future and for what purposes and what times. We would certainly advise you to keep money matters simple: if there are three sharers, each paying a third of the purchase cost, then they always pay a third of all the other costs. It is wise to allow for the possibility that one or more sharers may fail to pay their part of the costs (or in the case of a joint mortgage, be unable to pay their mortgage contributions). You could state that if this happens, and the other sharers have to make up the money, the shares of ownership change pro rata. You will need accurate records to keep track of payments of all costs throughout the lifetime of the sharing agreement. Ideally you will keep a logbook with the asset in which every sharer enters all use (days occupied/used, mileage, hours flown) together with all costs, both fixed and variable. Disaster scenarios and exit strategy (joint ownership only)?top If one sharer wants to leave the sharing agreement and sell his part of the asset, then by law, he can force the sale of the asset and take the appropriate part of the proceeds. The sharing agreement can ensure that this happens in a controlled manner. It should make provision not only for an agreed way to unwind the sharing arrangement but also for things you hope will never happen too, such as:
Other money matters include:
Some assets may occasionally be used under more stressful circumstances than others, for example, if the car is taken to a track-day, a boat is raced, or an aircraft used for aerobatics. This may result in higher fuel and consumables costs and greater general wear and tear. If this is likely occur, mileage or flying hours can be notionally increased under these conditions. So, for example, one mile on a race track could be considered equivalent to two miles on a normal road. Or one hour aerobatic flying could be considered equivalent to two hours of normal flying. You need to work out between yourselves what is acceptable, without over complicating calculations. The one to two ratio for track-day car racing is quite commonly applied. For co-ownership, you can set up a joint bank account from which the costs are paid. You may agree to make different payments into that joint bank account. These factors mean that accurate and open records must be kept so that when you end the sharing agreement, you can see exactly how the asset's value should be split. What if the asset is damaged or stolen whilst in use? top The simplest course is to agree that the sharer responsible for the asset when it was damaged or stolen, regardless of fault, is responsible for correcting this. If this could require an insurance claim, then all sharers (or the sharer appointed to manage the assets finances) should be consulted first. If an insurance claim causes future insurance premiums for the shared asset to increase, then the sharer responsible for the asset when it was damaged or stolen also pays this additional cost. You need to think through the likely and worst case scenarios here and ensure that the predicted costs are acceptable to you and all your potential partners. The biggest arguments occur if damage caused by the previous user is not reported and the next user inadvertently causes the asset serious damage. This is virtually impossible to cover in any contract, and is another reason why you have to spend time ensuring that your fellow sharers are like-minded and that you trust them. What happens to my no claims bonus if there is a claim? top This is particularly relevant to automotive vehicles and motor homes. The insurance will be taken out in one sharer's name. Generally the insurers will base their price on the history and no claims bonuses of the policyholder and all the other sharers/users, but exactly how varies greatly from insurer to insurer. . If an insurance claim is made, this will reduce the no claims bonus discount on the shared car, but it should not affect the no claims bonus discounts on the sharers' other cars. However when all the sharers renew the policies on their other cars, they should mention this claim, regardless of whether they were using or driving the car at the time, or whose fault it was. Their premiums may be affected depending upon whether they were driving when the damage was caused, and whether they were at fault. Are there minimum qualifications for sharers? top You can stipulate a minimum qualification for sharers. This is particularly appropriate for aircraft owners who are liable for any loss or damage caused by their aircraft without proof of negligence and may be appropriate for cars, boat, mobile homes and other specialist equipment. You may wish to stipulate that sharers:
Fractional ownership is not a collective investment scheme. Under the provisions of The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, collective investment schemes are regulated by the FSA. The definition of a collective investment scheme is fairly complex but according to the Financial Services Authority Handbook: "Broadly speaking, a collective investment scheme is any arrangement where:
The Financial Services Authority Handbook clarifies this further: "The purpose of the 'day-to-day control' test is to try to draw an important distinction about the nature of the investment that each investor is making. If the substance is that each investor is investing in a property whose management will be under his control, the arrangements should not be regarded as a collective investment scheme. On the other hand, if the substance is that each investor is getting rights under a scheme that provides for someone else to manage the property, the arrangements would be regarded as a collective investment scheme. Day-to-day control is not defined and so must be given its ordinary meaning. In our view, this means you have the power, from day-to-day, to decide how the property is managed. You can delegate actual management so long as you still have day-to-day control over it." Furthermore the FSA handbook also makes it clear that a private limited company owning one or more properties is by definition not a CIS. If you are in any doubt as whether your proposed fractional ownership scheme could become a collective investment scheme, you are advised to contact the FSA immediately. There are strict penalties for selling unauthorised collective investment schemes or for breaking the rules on how they should be promoted. |
| Version 2.1 November 2007 |
