September 2009 Developments - 28

Legal lder timeshare projects that were created prior to the entrance of the brands into the timeshare industry may struggle or fail for a number of reasons, including the project falling into disrepair or the original developer failing to properly market and sell interests in the project. Many times, an enterprising new developer may attempt to take over the project or a lender may foreclose on the project and become a successor developer. In these situations, the new/successor developer (referred to as the “Developer”) may decide that the best course of action is to terminate the project, buy out all of the existing timeshare owners, and start over. Terminating a timeshare project, however, can be difﬁcult, particularly when there is the issue of hundreds if not thousands of existing timeshare owners that the Developer must handle. Some of these owners the Developer may not be able to locate, others may not be responsive to the Developer, and still others may refuse to sell their timeshare interests back to the Developer—even though the project is struggling or has failed. When the Developer terminates a timeshare project, the Developer’s objective is to purchase all of the timeshare interests at the project and obtain insurable title to such interests. Here is a summary of the steps necessary to terminate a failed or struggling single site timeshare project. Steven J. Newman, Esq. A Guide to Terminating Failed or Struggling Single-Site Projects O discussed in Step 3 below; and (2) control enough votes to unilaterally terminate the timeshare regime. The key provisions to review are the amendment and termination requirements in the timeshare declaration, as well as the state’s nonproﬁt corporation act, timeshare act, and, if applicable, condominium or common interest ownership acts.1 If the voting requirements (under state law and the project documents) for termination and/or amendment require 100% of the total votes of the owners association, then it will not be feasible for the Developer to obtain control of the owners association. If such voting requirements are only at 70% or 80%, then it is more likely that the Developer can gain control of the owners association and terminate the project. the Developer will most likely need to amend the termination provisions in the timeshare declaration because, in many instances, the timeshare declaration and state law do not thoroughly address how a project is terminated and what happens after termination. This amendment should include the following provisions: (1) upon termination, title to the timeshare interests shall vest in the owners association as trustee for the beneﬁt of its members; (2) the owners association shall have the authority to terminate the project documents and sell the entire property, usually to the Developer; (3) each remaining timeshare owner shall be paid an amount equal to the fair market value of the timeshare interests as of the date of termination of the timeshare program; and (4) a “Termination Agreement” shall be recorded terminating the timeshare regime and setting forth the minimum terms of the sale of the timeshare interests. Step 2: Obtaining Control of the Association: Buy-Back Program. If a Developer determines that it is feasible to obtain enough votes to terminate a timeshare regime, then it must launch a buy-back program. This program may be as simple as offering to pay existing owners an amount that is higher than the current value of their timeshare interest, which often has a depressed value. However, some Developers have offered additional incentives, such as offering “trades” into ownership in a multi-site program that would offer more beneﬁts at a lower annual cost. Under such an incentive program, owners are required to “quitclaim” their timeshare to the Developer and to release the Developer from all liability. The owners are then issued an ownership certiﬁcate in the new program. No additional costs are charged to the owners under this approach. Step 4: Appraisal and Determination of Purchase Price. The purchase price for the timeshare interests should equal the fair market value of the timeshare interests as of the date of termination of the timeshare program. Unless otherwise required by state law, the purchase price does not need to be based on the current market value of the property and building(s) in which the timeshare project is located. This is a critical distinction. The Developer should obtain an appraisal from someone who is experienced in appraising timeshares and fully understands this distinction. This appraisal may also be used in the quiet title action discussed in Step 7. Step 1: Obtaining Control of the Association—Reviewing State Law and Governing Documents to Determine Whether Termination is Feasible. A Developer wishing to terminate a timeshare project must ﬁrst look at state law and the governing documents of the timeshare regime to determine whether the Developer can purchase a sufﬁcient number of timeshare interests that will enable the Developer to: (1) unilaterally amend the project documents, if necessary, to include the termination language 28 Step 3: Amending the Declaration to Clearly Address Termination. Once the Developer has obtained the requisite number of votes to terminate the project and amend the project documents, Step 5: Voting on Amendment to Timeshare Declaration and Termination Agreement. Even though the Developer may have the votes necessary to unilaterally approve the amendment to the timeshare Developments • September 2009

September 2009 Developments

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