Timeshare and cancellation of fixed term agreements
Following complaints by consumers that they were trapped into contracts that they could no longer afford, the National Consumer Commission launched an investigation into the timeshare industry, calling upon players to clarify business models and motivate why contracts with timeshare owners should not have to comply with the Consumer Protection Act (CPA).
The biggest problems faced by the industry in respect of the CPA are the provisions of section 14, which limit the duration of fixed term agreements to 24 months (unless certain circumstances can be shown) and give consumers the right to cancel the agreement on 20 business days’ notice.
This would undermine the timeshare business model significantly. The fact that the many holiday timeshare contracts cannot be cancelled and exist for perpetuity has been a bone of contention. Consumers are obliged to continue paying subscriptions, even when they cannot afford them. In addition, complaints have arisen because consumers cannot derive benefit from them because the schemes are oversubscribed. The focus on the timeshare industry is no surprise given that it is a major source of consumer complaints due to the fact that consumers cannot get out once they have bought in and often do not understand the limitations of the service.
According to the timeshare industry, members of the schemes have acquired property for which they pay levies. According to the Commission, however, people buy points but they are not assured that they will be able to get accommodation because the points do not entitle a buyer to a specific establishment. They enter a pool for accommodation when it is available. The Commission's head of enforcement and investigation said that there had been so many complaints about holiday contracts in the timeshare industry that it had decided to launch a large scale investigation.
Complaints included customers not being able to cancel contracts, which they could no longer afford, and unavailability of accommodation.
The CPA contains some very specific provisions about fixed term agreements. Specifically, it provides that:
- Consumers can cancel any fixed term agreement for any reason, by giving 20 business days’ notice; and
- Fixed term agreements are limited to 24 months after which they can no longer automatically renew for the entire period just because the consumer did not inform the supplier of his or her intention not to renew.
The above two principles only apply:
- In respect of agreements that are meant to endure until a specific date. The termination date will either be indicated in the agreement (ie ”this agreement will terminate on 1 September 2013”) or the termination date will be discernible from the agreement (ie ”this agreement will terminate one year after the date on which it was signed”); and
- Agreements between natural and juristic persons. If the agreement is between two businesses, the consumer does not have these rights and the supplier is free to impose different terms.
According to the CPA, suppliers can no longer stop consumers from cancelling a fixed term agreement, and, save for a reasonable cancellation penalty, that right cannot be limited. This reasonable cancellation penalty must be in relation to ”any goods supplied, services provided, or discounts granted to the consumer in contemplation of the agreement enduring for its fixed term, if any”.
In determining whether a cancellation penalty applies, the following factors can be taken into account:
- The value of the transaction up to cancellation.
- The duration of the agreement.
- The nature of the goods or services.
The supplier cannot charge a cancellation penalty that has ”the effect of negating the consumer’s right to cancel a fixed term agreement”. This means that the cancellation penalty cannot be equal to the remaining payments that the consumer would have made.
Apart from cancelling on 20 business days’ notice, the consumer can cancel the agreement ”upon the expiry of its fixed term, without penalty or charge”. In addition, suppliers are required to remind consumers (between 80 and 40 days before the termination date) of the ”impending expiry date” and inform them of their right to terminate. If the consumer fails to choose between terminating or renewing the agreement, the agreement continues on a month-to-month basis.
In a move to accommodate these concerns one of the larger players in the timeshare market has made public its intention to offer shorter contracts.