By: Letvia M. Arza-Goderich, Partner, Preston Arza LLP
Lawyers who are fortunate to practice in the resilient vacation ownership industry frequently face the challenge of assisting clients with projects in varied locations, within and beyond the borders of the U.S. Indeed, the vacation ownership industry has a significant presence which keeps many of us busy in the international arena. We have seen the industry develop various products and modalities, in response to market demand and trends, and as a consequence of its own growth. Thus, while the core industry principle remains that a timeshare owner shall have the right to occupy a vacation lodging unit in a resort for a certain interval (usually a period of seven consecutive days), either annually or every other year, there are many variations on that theme. Vacation ownership plans have use calendars with fixed, floating and/or rotating weeks. Timeshare interests can be deeded or “right-to-use,” points-based, single-site or multiple-site, vacation membership clubs, and so forth.
One common thread that applies across the board with respect to project documents for any product modality and in any jurisdiction is the need to balance the interests of the developer and protection of the vacation ownership consumer. In jurisdictions where the vacation ownership industry is regulated, applicable law will drive and guide the form and contents of project documents. However, whether or not the project is located in a regulated jurisdiction, a solid set of project documents provides a favorable edge to the developer in the competitive realm of vacation ownership.
The Case for The Best Possible Project Documents
Reputable developers must counter the adverse public perception generated by the high-pressure and deceptive sales practices of some unsavory players. Industry associations, particularly the American Resort Development Association (ARDA), provide an essential service in the all-important areas of consumer awareness and education, on the one hand, and sensitizing regulating agencies to the delicate balance between consumer protection and the healthy growth of the industry, on the other. ARDA’s education program during its annual convention (ARDA World) provides a rich opportunity for developers to grasp the importance of a solid set of project documents, and to learn what such documents should include. At a minimum, project documents should include a timeshare instrument (as applicable or required), a purchase agreement, rules and regulations (including a reservation system and use rights, rules and restrictions), financing documents (including a promissory note), and related exchange program documents (generally provided by the exchange company).
Even if the resort is located in a jurisdiction outside the U.S., in our experience (in Mexico, the Caribbean and Central America), the commercial success of a vacation ownership project depends largely on its ability to attract purchasers from the U.S. This apparent reality should inform the process of securing a solid set of project documents that address the key issues affecting the various timeshare products. Such an observation is made from the perspective of a potential need to register the project in order to conduct sales/marketing activities in one or more U.S. jurisdictions, but also in the broader context of gaining the confidence of the purchaser.
The Timeshare Instrument
In many U.S. jurisdictions, especially those states with a proliferation of vacation industry projects, the industry must comply with applicable laws and regulations. Typically, such regulations will contemplate a “timeshare instrument,” generally defined as the document(s) that create the rights and govern the operation of a timeshare plan. A timeshare instrument often consists of a declaration dedicating vacation lodging accommodations or units to a timeshare plan, and establishing the duration of the timeshare plan, the respective rights and obligations of the timeshare owners, the developer, the managing entity, the owners’ association (or other mechanism for representation of the timeshare owners), how assessments or maintenance fees are calculated and collected, whether such assessments include reserves, use rules and restrictions (including the reservation system), and terms and conditions of the exchange program. Many jurisdictions require that the timeshare instrument be recorded in the public records of the county where the timeshare property is located.
The timeshare industry has a significant presence in the international arena. In Mexico, where the vacation ownership industry has experienced considerable growth, timeshare is considered a “vacation lodging service” and not a real estate interest. Furthermore, the applicable legal norm and regulations require that the developer establish its ownership or lease rights over the resort property, and the dedication of the units in which intervals will be sold to the provision of timeshare services. Such dedication can occur by means of a unilateral declaration formalized in a public instrument before a civil-law notario, or by contributing the vacation lodging units to a fideicomiso (trust), for the benefit of the purchasers of the vacation ownership interests. Other jurisdictions that have emulated the Mexican model include the Dominican Republic, which requires the dedication of the timeshare units by a unilateral declaration of dedication in order to obtain the blessing of the authorities for the project’s sale and marketing activities. Thus, in these jurisdictions, the “timeshare instrument” comes in the form of a “unilateral declaration of dedication.”
The Purchase Agreement and Related Rules
The form of purchase agreement should set forth all terms and conditions for the acquisition of the timeshare interest in language that the purchaser can understand. This document should provide the duration of the timeshare interest, whether the use rights are annual or biennial, a description of the unit type and size and season, the right of rescission and how long the purchaser has to exercise it, the nature of the timeshare interest (whether deeded or “right of use”, vacation club and/or points-based), the purchase price, the terms of payment, whether financing is provided by seller and the terms thereof, a description of the use rights and restrictions, including the reservation rules and system (incorporating by reference the rules and regulations), obligations for assessments or maintenance fees, obligations for ad valorem or real estate taxes (as applicable), arrangements for the management of the project and payment of the management fee, the warranty of developer that there are sufficient accommodations to support the use rights in the timeshare plan, any restrictions on transfer rights (i.e., seller/developer’s right of first refusal), affiliation with an exchange program and the terms and cost thereof, what constitutes default of the agreement and the remedies for such default. The rules and regulations should be easy to follow, include the reservation rules and system, and provide guidelines on the use of the unit and the project, what is and not permitted.
Project documents should be coherent and consistent. Furthermore, a bullet-point summary of the key terms included in the documents is helpful to the purchaser, and also to the salesperson who must explain the plan before closing the sale. Such a summary can also serve as a checklist in order to walk the purchaser through the key terms and obtain an acknowledgement that the purchaser understands the timeshare interest.
Timeshare makes it possible for many to enjoy vacations at resorts that they might not otherwise have the means to afford. Well-prepared project documents can be a vehicle to ensure that the consumer’s expectations are based on knowledge of the vacation product being acquired, including its limitations, particularly with respect to the resale market. Project documents should reflect that vacation ownership can provide great enjoyment if owners understand their rights and how to enhance their enjoyment, including the flexibility that exchange programs bring. Investing in a solid set of project documents can be a developer’s vote of confidence in its own success.
About the Author
Letvia M. Arza-Goderich, Partner, Preston Arza LLP
Letvia concentrates her practice in international hospitality, vacation ownership and real estate projects. Her recent experience includes vacation ownership, vacation clubs and fractional projects; hotel management and related agreements.
Originally from Cuba, she is multilingual and experienced in common law and civil law, handling matters in the U.S., Latin America and the Caribbean. She is licensed to practice in California, the District of Columbia and Puerto Rico. Her firm maintains offices in West Hollywood, California and San Juan, Puerto Rico.
She serves as a Chairman’s League Member of the American Resort Development Association (ARDA) and in the programming committees of the CHRIS-HOLA conferences; is a past chairman of the U.S.-Mexico Chamber of Commerce, California Regional Chapter, and served in the Chamber’s bi-national board.
Letvia graduated from the University of Louisville (B.A. 1972), Georgetown University School of Foreign Service (M.A. 1976), and Georgetown University Law Center (J.D. 1980).