What Happens to a Timeshare Upon Death?
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.
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.
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).
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. 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 effected 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. 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.
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.
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.
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.
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
The Timeshare Regulations
As stated above, where a beneficiary elects to accept the timeshare and the rights and obligations relating to it, we would consider that this would require the formation of a new contract (which should generally be confirmed by a formal written agreement). Strictly speaking, this novation should replace the old contract between the outgoing party and the continuing party with an identical new one between the incoming party and the continuing party.
If a novation takes place, a new timeshare contract has been formed between the parties, and so the rights and obligations of the Timeshare Regulations (and, critically, the consumer's right of withdrawal) are likely to apply.
In summary, inheritors of timeshares may choose whether or not to accept them. A business that forces or pressures an inheritor to accept the timeshare, or misleads them into thinking that they have no choice in the matter, would likely be in breach of the CPRs.
The Timeshare Regulations will likely apply to the new contract where the inheritor accepts a right to use timeshare.
Probate / Administration of Estates
The personal representative's responsibility.
As stated above, contractual liabilities relating to the timeshare (for example payment of ongoing management fees) may not end with the death of the owner and, should the agreement survive the death of the owner, the personal representatives (PRs) may be liable to perform the contract. This does not mean that the PR would be personally liable (for example they do not have to pay management fees out of their own assets), but rather that they must see to the contract's obligations from the deceased's estate.
Debtors of an estate have priority over beneficiaries. The PRs must therefore ensure that the estate's debts are paid before distributing its assets to beneficiaries, and breaching this duty may make them personally liable.
We understand future or contingent liabilities are treated the same as accrued ones,so the PRs must ensure that, where a contractual entitlement can be proved, provision is made for the future liabilities.
If the assets of the estate are insufficient to cover all its liabilities, this may render the estate insolvent. If there is any doubt about whether an estate will be solvent (that is, whether the assets of the estate will be enough to cover its liabilities), we understand the PRs should follow the statutory order of payment in the Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999).
Each category of debts (for example, costs of bankruptcy and preferential debts) should be paid in full before any of the lower categories are paid. If the debts in a category can be paid partly but not in full, those debts abate (reduce) in equal proportions.
Secured creditors (that is, a creditor who has the benefit of a security interest over some or all of the debtor's assets) will be satisfied first. Following this, bankruptcy and funeral expenses will be paid, followed by preferential debts (for example debts due to HM Revenue and Customs).
Once these categories have been paid in full, payment will be made to ordinary unsecured debtors, which, in most circumstances, will include the timeshare business.
It may therefore be that an unsecured debt owed to a timeshare business forms part of the 'shortfall' and is not completely satisfied since there are no assets left to pay the debtor and no-one else is responsible to pay the debts. Of course, this would also mean that there are no assets left to distribute to beneficiaries.
Estate-binding Clauses in Timeshare Contracts
Some timeshare contracts may contain estate-binding clauses (however, such a term will be subject to an assessment for unfairness.
If no beneficiary wants the timeshare, the PRs may, subject to obtaining a court directions order, need to ensure that provision is made from the estate to meet current and future liabilities - liabilities that, with timeshares, may last far into the future or even, supposedly, forever.
A PR faced with this situation would presumably attempt to sell or give away the timeshare. However, if the attempt is unsuccessful, there may be difficulties settling the estate (and distributing the assets).
Due to the significant potential for unfairness and uncertainty that this situation creates, PRs would, in practice, be well-advised to make an application to a court for directions (and then act in accordance with them).
This may result in an order for a sensible cap on future liability, or a ruling that the relevant term is not fair, and therefore not binding on the consumer's estate in any event.
For example, if the future liability is quite speculative, the court may give directions requiring no, or little, retention in relation to them,especially given that the business can try to resell or let the vacant weeks. PRs may also take out insurance to protect them against, for example, a claim that the estate has been incorrectly or prematurely distributed.
Finally, there is also the statutory procedure by which PRs may protect against personal liability to creditors in relation to unknown liabilities (for example, where the PRs have had no notice of the deceased's timeshare and/or associated future liabilities).
Section 27 of the Trustee Act 1925 gives protection to PRs who give notice of the intention to distribute a deceased's estate. The notice requires anyone who has a claim against the estate to provide details within two months from the date of the notice. The notice is published in the London Gazette and in a newspaper local to any land in the estate that forms part of the distribution.
In order to benefit from the protection provided by section 27, a PR should also conduct a HM Land Registry search and make local land and bankruptcy searches.
This does not appear to be a satisfactory way to secure the end of liability under a timeshare agreement and, we suspect, few non-professional PRs would know how to proceed without obtaining legal advice; they would also incur costs applying to court for directions. This is also a reason why we think that a court, faced with a term that appears to have this effect on a consumer's estate, would be likely to rule that it is unfair.
Where PRs have any doubts about the correct distribution of estate assets, it is generally considered best practice for them to seek independent legal advice and apply to court for directions before acting.
Does Consumer Law Provide Any Protection?
Whilst there is no decided case on this issue, the CMA's view is that there is a strong argument that, in the context of purely contractual arrangements (for example, right to use agreements or club memberships), timeshares are personal contracts, and as such, may end on the consumer's death.
It is also our view that estate-binding terms are open to challenge under the UTCCRs and therefore potentially unenforceable. Under the UTCCRs, the unfairness of a contractual term shall be assessed taking into account the nature of the product and all the circumstances attending the conclusion of that contract.
Each case will therefore turn on its facts and the CMA cannot say for certain that a court would find a particular term to be unfair.
Further, it is our view that a timeshare business may be engaging in a prohibited aggressive commercial practice (under the CPRs) where they apply pressure on PRs to deplete the estate in the way described above, or require the PRs to have to go to court to unburden an estate and settle purported outstanding debts.
Contractual terms with this effect would also have significant potential for unfairness under the UTCCRs.
In the light of this, unless the consumer expressly requests otherwise, we consider it fair for businesses to agree with consumers that the agreement ends on the death of the consumer.
In summary, it is possible that right to use timeshares may be regarded as 'personal contracts' and so will end on the consumer's death. Regardless of this, estate-binding terms are open to challenge under the UTCCRs and a business that applied pressure on PRs could be in breach of the CPRs.
If you are worried about timeshare inheritance , give us a call . One of our qualified estate planning representatives will be happy to help.