Fractional means 'being a part or 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 agreeing that they will share the expenses of and income derived from the property according to a particular arrangement.

These arrangements need to be flexible

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'. Firstly, 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 the 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.

The most frequent marketing use of the term 'fractional ownership' is for arrangements such as are described above, where the real property is registered in the name of a holding entity rather than in the names of the participants. Strictly speaking it is not the ownership rights in the property which are 'fractionalised', but the member’s interests, the shares or the rights of beneficiaries. Registered ownership is no longer held in fractions or undivided shares.

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 or without timesharing and rental pool arrangements.

Applications of 'fractional ownership' in sectional title schemes

Fractional ownership, in its proper sense, is fundamental to sectional title. But the concept is usually limited to the 'common property', which includes all parts of the land and building other than the 'sections'. All the common property is owned in undivided shares by the owners of sections, so each owner has 'fractional ownership' rights in all the common property in the scheme.

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 unit. But, of course, they would be hamstrung by the difficulties described above.

The third and most interesting application of shared rights in a sectional title scheme is the relatively new concept known as 'fractionalised future development rights'. The Sectional Titles Act allows a developer who has reserved the right to extend the scheme by the addition of further sections at a later stage to alienate a portion of that right. In practice this means that in a case where a developer has, for example, reserved the right to build a further ten double-storey houses on the common property he can sell and transfer the rights to build each one of those houses to a different person. And each of the buyers can mortgage their fractionalised development rights before the relevant building is started. In effect, the ability to fractionalise a future development right has given rise to a new development methodology.

There are two obvious possibilities for the developer. He can sell the fractionalised future development rights in terms of agreements that provide either:

1. That he will erect the additional buildings at the purchasers' cost.

2. That the purchasers will be entitled to take over and build the additional sections using architects and/or builders specified by the developer.

Both options allow the developer to access the 'land value' of the future development right on or at any time after opening the register for the first phase of the development. The first option also gives the developer the ability to obtain 'progress payments' from the purchasers’ bankers as the construction of the sections progresses, make further profits from the building operations and pass on to the purchasers the cost of the mortgage finance required.

Prof. Graham Paddock is a sectional title expert. Paddocks is a specialist sectional title firm that provides various products and services to the South African sectional title industry. Visit www.paddocks.co.za or call 021 674 7818.