"In Perpetuity" Doesn't Mean Forever

From TimeSharing Today, September 2011. By George Leposky

In 1982, when my wife, Rosalie, and I bought our timeshare at La Costa Beach Club in Pompano Beach, Florida, the salesman told us that owning our deeded unit-week would be similar to owning our house. "It's yours in perpetuity," he said. "You can use it, rent it, or exchange it for a week somewhere else, and eventually you can will it to your heirs."

That wasn't totally accurate, I discovered years later.

Buried deep in La Costa's Declaration of Condominium, Chapter XXI explains that "on January 1, 2022, the purchasers of Parcels submitted to Interval Estates shall become tenants in common [i.e., owners of an undivided interest in the entire property]."

Chapter XXI also specifies that in November of 2021, the owners' association's board of directors must call a meeting of all unit-week owners to decide the resort's fate. If a majority of the owners agrees, interval ownership can continue at La Costa for 10 more years.

Every decade thereafter, another such vote must be taken, until retention of interval ownership fails to command a majority. When that happens, in 2021 or any subsequent decade, the documents authorize the board of directors to "take necessary steps to discontinue the program of interval estates" and gives the board and every unit-week owner the right to file suit for partition in "a court of competent jurisdiction in Broward County, Florida." Then the court presumably would direct and oversee the sale of the property and distribution of the proceeds among the owners.

These provisions raise some interesting questions. For instance, La Costa hasn't mustered a majority for its annual meeting in most years since Rosalie and I have been owners. What will happen if it can't do so in November of 2021? Does failure of a majority to vote trigger the termination process, even if a majority of those present or represented by proxies want to maintain the interval estates for another decade?

A Fragmentation Time Bomb

Another concern is what the late timeshare attorney Tom Eastman described as "a fragmentation time bomb." The longer La Costa's program of interval estates survives, the more complex its termination may become.

Rosalie and I expect to be around for the 2021 vote, when we will be 78 years old. With luck, we'll make it to 2031 or even 2041. If we outlive La Costa's interval arrangement, we won't be able to bequeath our timeshare to our heirs.

If La Costa's interval arrangement outlives us, however, ownership of our week and the power to decide its fate will pass to our two children. But what if we had five children, and left our timeshare to all of them or the twelve grandchildren?

Eastman noted in a 1987 article in Vacation Industry Review, Interval International's trade publication, that "fragmented titles must be brought into manageable proportion" at the time of a timeshare's termination. Many association boards will find this a difficult task.

"How does one obtain the required number of signatures on a deed?" Eastman wondered. "Indeed, how does one even find the proper signatories when, in many instances, the original owners will have died with the interest being further splintered through inheritance under intestacy laws?"

Eastman suggested that developers of a new resort could solve this problem by vesting the power of sale in the board of directors, eliminating the need for a majority vote of owners or for individual owners to sign a deed. At existing resorts, he said, the owners' association would have to amend their condominium documents to establish a workable procedure, even though "the mechanics of getting the necessary votes from widely scattered, and often disinterested, owners may seem almost insurmountable."

Laws Vary Widely

Harry E. McCoy II, a partner in the Salt Lake City office of Ballard Spahr Andrews & Ingersoll, LLP and an expert in timeshare law, emphasizes that state laws vary widely in their approach to timeshare termination. Some, including Florida, have a timeshare act in which the legislature expressly approved the concept of an interval estate with a specified termination date.

By contrast, Idaho, Wyoming, and a number of other states don't recognize intervals as a form of real property. "There," McCoy explains, "you create a terminable estate that has an ending based on the last to die of the living issue of some public figure (for example, the current president of the United States,) plus 21 years, or you provide for a specific termination date or vote to extend. If you don't do it, you've violated the rule against perpetuities. The estate you created is void from the beginning. It merely waits for someone to challenge and invalidate it."

State laws also vary in the percentage of owners who must agree to a termination, whether at a time predetermined in the resort's documents, or earlier due to a catastrophe or progressive disrepair. Arkansas, Colorado, and Idaho are among the so-called "100 percent states" where all owners must agree.

"In a 100 percent state," McCoy says, "the only option we've identified is to file a petition with the court, indicate your attempts to get the votes you need, and put out evidence as to why the project is obsolete. You have to prove by a preponderance of the evidence that it's in the best interest of everyone to sell the property and distribute the proceeds. Then the court can create a termination of the regime and give notice to members.

"We're working now to bring a petition in the local Chancery Court to have a project terminated legally. It's truly obsolete. The fire marshal closed it recently for virtually unrepairable violations of the fire code."

Trusteeship as a Solution

In the 1980s, Eastman was writing timeshare-resort documents that transferred title on the termination date from a resort's individual owners to a trustee, "with each individual owner being accorded a beneficial interest in the trust assets… Only the trustee's signature is required to sell or otherwise dispose of the property."

The trusteeship approach, still relatively uncommon in the U.S., is the norm in Mexico, where foreigners have been precluded from direct ownership of real estate in coastal resort areas. The first of the Royal Resorts, Club Internacional de Cancun, could become the world's first timeshare resort to go through a termination process that was scheduled at its inception. Established in 1979, it has a 30-year trust that expires in 2009, when the trustee is supposed to sell the property and split the proceeds among the owners.

"There is some talk of figuring a way to get the owners to agree to extend the timeshare," reports Thomas J. Davis, Jr., current legal counsel for the Royal Resorts (and Interval International's founding secretary-treasurer in 1976.)

Trusteeship doesn't solve the problem of locating all the owners at termination time. "That's a complex detail that you have to deal with, but nothing to stop you from moving forward," Davis says. "People who have abandoned their timeshares and can't be located can be served by publication. If they don't respond, you can get a default judgment and put their money in escrow. Then the attorneys and the courts will figure out a way to deal with it. It could be escheated to the state, or split among the people who can be found."

What's In Your Resort's Documents?

Only a small minority of timeshare buyers actually read their resort's condominium documents and public offering statement when purchasing a timeshare, or before the purchase becomes final at the end of the rescission period. Unless you're among that minority, you may not even have known about timeshare termination until you started reading this article. If you're still reading, I must have aroused your interest, so you'll probably want to see what your own resort's documents say about its termination. Where will you find that information?

"Early in the public offering statement is a description of the nature of the real estate or legal interest being sold," McCoy advises. "It should include a cross-reference to the relevant section of the declaration of condominium, and that should include the details of termination. Another place to look is in the definitions, which most timeshare documents contain.

"You're looking for information on the ownership and use of units committed to interval ownership - what weeks are being sold, what interest you get in the unit, and when a change in that interest occurs." Your deed also may bear the date on which your interval interest becomes a tenancy in common.

Even if you own a non-deeded right-to-use club membership, or an undivided-interest tenancy in common in a vacation club or a points-based system, the documents you received at the point of purchase still should contain a termination date.

Why Not Forever?

If you look and can't find the termination date, you may not be looking in the right place - unless you bought in the industry's infancy, when some timeshares were created without a termination date. That could be a cause for concern.

According to Davis, who drafted many resorts' documents in the industry's early days, including a termination date benefits both the developer and the owners. He tells the story of one developer who couldn't afford an attorney and drafted his own documents, creating a non-deeded right-to-use interest that ended in infinity. "He had tax problems," Davis recalls. "To depreciate the resort, he had to divide his basis by infinity. This did not give him a good result."

Likewise, Davis says, without termination provisions, consumers trying to shut down and sell a decrepit old resort "would have to get every one of the owners - or their heirs - to agree. Meanwhile, the place may be falling down, and everybody wants out but Charlie. 'I like coming here,' he insists. 'The place has character.' A termination date in the documents is an exit strategy. It gives the owners a way out without having to worry that Charlie doesn't want to sell his week."

Why Should You Care?

All good things must end sometime - even La Costa Beach Club's interval estates. Part of the resort dates from 1949, when it began life as a motel. Additional units were added in 1964, and at the time of the property's conversion to timeshare use in 1982.

When La Costa's first termination vote takes place in 2021, the structures on the property will range in age from 39 to 72 years. That's a long time to withstand strong sun, salt spray, a sea breeze, and vacationers in bathing suits dripping water and tracking in sand. The directors and general manager are trying diligently to maintain the resort within the constraints of current cash flow, without special assessments, a strategy that already has caused some slippage in repair schedules.

Maybe by 2021, the highest and best use for La Costa will be a sale to someone who will redevelop its underlying beachfront real estate, which by then may be more valuable as vacant land than as the site of the existing resort. Under those circumstances, even though the timeshare week Rosalie and I bought wasn't sold to us as an investment, it may turn out to have been a good one.

What can you expect when your timeshare terminates at the end of your resort's presumed useful life? If you're in the market for additional timeshares, this is one more question to ask the salesman - and one more reason to read the resort's documents before you make a firm commitment to buy, or before the rescission period (during which you can cancel your purchase) has expired.