Covers “who owns what”, exit strategies, allocation of costs, what if the asset is damaged, no claims bonuses and Collective Investment Schemes.
This is the first of four sections that cover all aspects of sharing
- Part 1 – Ownership, exit strategy and costs
- Part 2 – Use of the asset
- Part 3 – Fittings, handover and condition reports
- Part 4 – Meetings and disputes
Who owns what? (joint ownership only)
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)
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.
- Is there a minimum time after purchase before the asset can be sold under any circumstances?
- How long after one sharer has indicated they want to sell their share will it be before the asset is put up for sale?
- Do the other parties have first refusal?
- What if one sharer’s circumstances change?
- What if one sharer can’t pay either the running costs or the joint mortgage?
- What if one sharer dies or goes bankrupt?
- Do the sharers have the right to veto a new member?
- How is the asset valued?
Then if a sale looks imminent:
- Whether to sell?
- How to sell?
- At what prices or under what formula do you sell?
- How long after the asset is put up for sale will it be before the asset is sold at any price?
- Whether and how to find a new sharer?
- Whether one (or more) sharer(s) has the opportunity to buy the other out?
- How to apportion sale proceeds?
- What account, if any, to take for the inconvenience and personal expense caused by one party to the others?
- How to cover the loss on sale?
What are the costs and how are they paid?
Other money matters include:
- initial purchase costs (such as legal fees, valuation fees, surveys, taxes, licences)
- any initial upgrading costs (such as one-off alterations and improvements needed immediately)
- costs relating to handover from one sharer to another (such as cleaning)
- monthly and annual running costs (such as utilities, insurance, staff, tax, fees, garaging/mooring/hangaring fees, fuel, condition reports, breakdown/recovery, maintenance)
- long term maintenance costs (such as servicing)
- legal costs (such as wills, amendments to the documentation)
- critical illness protection and/or mortgage payment protection and life assurance, if you are taking out a joint mortgage
Costs are usually split into fixed and variable costs. Fixed costs care paid by all sharers equally in a fractional ownership or joint ownership agreement or paid by the owner in a fractional rental licence. Some variable costs are based on actual use and are paid by the individual sharer according to their usage: for example, per mile for cars and mobile homes, per flying hour for aircraft, per day for property, per “outing” for jewellery. Some variable costs are paid as required by the individual sharer, for example fuel. You need to consider this split carefully; if one sharer uses the asset much more than the others, some costs will raise considerably and this will cause resentment if they are part of the “fixed” costs.
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?
One 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.
Alternatively, you may decide that generally “there but for the grace of God go I” and that if it hadn’t happened to one owner it would have happened to the next, and agree to split the cost of all damage. This is common too.
Finally you could agree that if the owner who was responsible for the asset when it was damaged or stolen was at fault they pay. If they weren’t at fault, the cost is split. However this isn’t clear cut and may result in argument. We suggest that syndicates that like this idea, agree that the person responsible pays: if something happens which is clearly not their fault, the other owners can always agree to chip in on an ad hoc basis, but there is no contractual obligation to do this.
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?
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?
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:
- have minimum qualifications
- make certain checks before using the asset
- have certain training before using the asset
- have medical checks
- operate the asset within specific asset related guidelines
Is fractional ownership the same as a collective investment scheme?
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 Financial Services Authority (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 purpose or effect of which is to enable those taking part (either by owning the property, or part of it, or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property;
- where persons taking part do not have day-to-day control over the management of the property; and
- where either the contributions and profits or income are pooled, or the property is managed as a whole by or on behalf of the operator of the scheme, or both.”
The first and last bullet points do apply to many fractional ownership schemes, but provided that the owners are in day-to-day control of the management of the property, then the arrangement cannot be considered a collective investment scheme and does not need to be authorised by the FSA.
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.