October 2009 Developments - 22

International Law Regulation of Timeshare Products in Mexico n Mexico, sales and marketing activities with respect to timeshare products are regulated by general civil and commercial law, and more specifically by the Federal Consumer Protection Law (Ley Federal del Consumidor; the “Profeco Law”). Financed transactions are also regulated by the recently enacted Truth in Lending Act (Ley para la Transparencia y Ordenamiento de los Servicios Financieros; “TILA”) and their implementing regulations. Recent revisions and amendments to these bodies of law have had a significant impact on how developers, operators, and sellers of timeshare interests (indistinctly, the “Timeshare Entities”) do business in Mexico. As our practice and involvement in the Mexican timeshare industry continues to grow, we have noted that a substantial number of Timeshare Entities have failed—often unwittingly—to comply with these recent changes and are uncertain as to how to adapt to the ones to come. In this article, we provide a summary of the applicable legal framework, with an emphasis on the Profeco Law, Official Mexican Norm 029-SCFI-1998 for the Commercialization of Timeshares (the “Timeshare Norm”); the proposed revision to the Timeshare Norm (PROYNOM-029-SCFI-2007, the “Draft Norm”); the TILA and the TILA General Provisions for Contracts of Adhesion, Marketing, Statements, and Receipts issued by Commercial Entities (the “TILA Regulations”). In addition, this article highlights the need for fractional interest regulations and provides some insight on the resources available to developers of fractional products under the current legal framework. Letvia Arza-Goderich, Mauricio Leon de la Barra, and Scott A. Preston I ”Timeshare” under the Profeco Law The Profeco Law, enacted on December 24, 1992, defines and regulates timeshare as “a service, regardless of 22 the name or form given to the legal transaction, which consists in placing at the disposal of one or more persons the use, enjoyment and other agreed rights over a certain property or part of the same, in a variable unit within a determined class, for pre-agreed periods, against payment of a certain amount, without transferring, in case of real property, ownership over the same.”1 This definition views timeshare as a service that allows the purchaser to access, use, and enjoy a vacation unit for agreed time intervals—expressly ruling out the acquisition of any real estate interests in such unit. The Mexican definition of timeshare, which contemplates only “rightto-use” timeshare activity, contrasts with the definition of timeshare in most U.S. jurisdictions, which generally subject both “deeded” and “right-to-use” timeshare product to their timeshare laws and regulations. For purposes of illustration, the California Vacation Ownership and Time-share Act of 2004 defines “timeshare estates” as “the right to occupy a time-share property, coupled with a freehold estate or an estate for years with a future interest in a time-share property or a specified portion thereof.” The California Act also includes a definition of “timeshare use” as “the right to occupy a timeshare property, which is neither coupled with a freehold interest, nor coupled with an estate for years with a future interest, in a time-share property.” Thus, California regulates as “time-share” both “deeded” and “right-to-use” timeshare products. The different definition of “timeshare” under the Profeco Law, however, may have been conducive to the development of the timeshare industry in Mexico for several reasons. First, the Mexican Constitution and Foreign Investment Law prohibit nonMexicans from acquiring direct ownership of residential real property located within the Restricted Zone, which is the area located fifty (50) kilometers from the Mexican shores or within one hundred (100) kilometers from Mexican borders. Consequently, non-Mexicans, who intend to purchase and own residential real property within such area, may only do so as beneficiaries of a trust or fideicomiso.2 In a nutshell, a Mexican trust is similar to a U.S. trust, with one significant difference: under Mexican law, only Mexican financial institutions may act as trustees. Thus, in its most simple form, a trust can be explained as a fiduciary agreement under which the grantor (i.e., the non-Mexican) who intends to acquire residential real property located within the Restricted Zone, acting in good faith, transfers to a Mexican financial institution legal title (i.e., not ownership) to certain property located within the Restricted Zone in order to accomplish a specific purpose (to receive or grant to a third party, as beneficiary of the trust, the use and enjoyment of the trust assets). By excluding ownership of an interest in real property from the definition of timeshare, non-Mexicans may purchase and own a timeshare interest directly and without the need of a trust, which significantly simplifies, expedites, and minimizes the expense of timeshare-related transactions. Secondly, by failing to convey an interest in real property, the timeshare product is freed from the complex coownership regulations which would otherwise be applicable. Most state Civil Codes in Mexico3 provide that coownership exists when two or more persons are owners of an undivided interest in certain property, and each co-owner (a) is not be obligated to keep the property undivided, if it is capable of being divided; or (b) if indivisible, is entitled to force the sale of the entire property and divide the proceeds among the co-owners. The above, together with other applicable regulations, creates a challenge when dealing with Developments • October 2009

October 2009 Developments

Table of Contents for the Digital Edition of October 2009 Developments

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