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Sharing A Holiday Home? Beware The Deadlock Danger!

Are you thinking of buying a holiday home jointly with another family or families? Joint ownership has its appeal, but no matter how good relations between you all may be at the start, bear in mind the potential for dispute down the line.

So if for example you follow the common route of holding the holiday home in a company with the shares and directorships allocated between you and the other stakeholders, make sure that the first thing you do is to put in place a comprehensive shareholders’ agreement.

A typical dispute, and the danger

The danger of not doing so is illustrated in a recent High Court case, where a company had, for 53 years, owned a valuable beachfront property in Plettenberg Bay. During all of that time it was used by the shareholders and their families for their beach holidays (one family living permanently in one of the “shacks” erected on the property over the years).

The problem was that the members’ holdings in the company bore no direct relationship to their use of the property – leading, not unexpectedly, to unhappiness on the part of those members who considered themselves short-changed by the arrangement. After much fruitless discussion over possibly restructuring the company, the members resolved in general meeting to call for offers for the property. All the offers received were well below market value (which fell from R60m in 2010 to R40m in 2011), and whilst some members wanted to sell the property at best and divide the proceeds, others preferred to await a recovery in the property market before selling.

Unable to reach agreement with the others on how to resolve the impasse, members holding 35% of the shares applied to court for the winding up of the company.

Winding up a solvent company – when can it be done?

Of course you wouldn’t normally wind up a solvent company, but our law allows it in cases of –

  • Management deadlock,
  • Deadlock in shareholder voting power, or
  • Where “it is otherwise just and equitable”.

The minorities come second

The minority shareholders were however unable to convince the Court either that there was any actual deadlock or that it would be “just and equitable” in the particular circumstances of this case for a winding up order to be granted. So they are left with their options in terms of the articles of association to sell their minority shareholdings – and as it is never going to be easy to sell a minority interest in a shared property for full value – that will always be second prize for sellers.

Avoid the wrangling and the risk – have a full agreement drawn up at the start!

© DotNews, 2005-2012. This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

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