If you're one of the hundreds of thousands of Americans who have bought vacation time-shares since the mid-1970s, you ought to be aware of a legal development that could affect your investment seriously.
In a landmark ruling involving a Florida Keys resort, a federal judge has held that purchasers of "right-to-use" time-share units can be denied what they thought were their long-term, guaranteed property interests in the resort, if the developer goes belly-up financially.
Purchasers who have spent $5,000 to $6,000 to acquire the right to use units in a time-share resort for 30 years, in other words, can find their holdings virtually wiped out overnight in the event of a bankruptcy by the owner of the project.
This can occur, the federal judge ruled, despite the existence of tough-sounding state laws designed to protect consumers in the event of financial difficulty by a time-share developer.
The case that produced the ruling, which legal experts consider of major importance to the $1.5-billion-a-year time-share industry, involves a resort complex in Marathon, Fla., known as the "Latitude 24 Club."
Over 200 purchasers, many of them elderly or retired on fixed incomes, paid $2,500 to $5,000 or more to join the ill-fated time-share club in the Keys, beginning in the late 1970s. The club offered contracts giving buyers the "right to use" units in the resort for periods of one week or more every year during the coming three decades.
After the initial purchase price, no further costs would be levied against the purchasers, other than annual maintenance fees of $42 to $84 per week. The owners of the resort, operating under the name "Sombrero Reef Vacation Club," would be required to maintain the property to high standards and basically run the club for the time-share purchasers.
Club contracts and marketing documents emphasized consumer protections required under Florida state law. Among these were a "nondisturbance" clause expressly designed to insulate individual buyers from financial jeopardy should the developer go into bankruptcy, default or otherwise have to sell the resort.
Purchasers believed that even if the owner got into financial hot water, their long-term legal rights in the resort, under state law, would ensure that they would have a vacation place to come to, despite changes in ownership.
This "nondisturbance" clause was particularly important to the buyers because many lived in Northern or Midwestern states--as well as in Canada--and were counting on two or three weeks at Latitude 24 as their prepaid vacations for years to come.
Their vacation plans are in shambles now, however.
The developers of the resort filed for bankruptcy under Chapter 11, the federal reorganization statute. The developer then rejected the time-share purchasers' rights to continue using the resort under their contracts, and sought to sell the entire project to a new owner--minus the long-term time-share commitments.
The time-share owners, in effect, were asked to act like any other creditors in a bankruptcy: they were eventually to get a financial settlement of some sort but, in many cases, only a fraction of what they had invested.
Federal Bankruptcy Court Judge Joseph A. Gassen Jr. agreed with the resort owners and ruled against the time-share purchasers. He said that the "right-to-use" contract the consumers "bought" for 30 years was neither real estate nor a leasehold interest, either of which would have given the purchasers better protection under the federal bankruptcy law. Even the presence of protective language against developer defaults in the contract didn't change its status under federal law, the judge ruled. Federal law takes precedence in such a case over Florida state law, "nondisturbance" clause or no clause.
Gary Rotella, a Fort Lauderdale attorney representing 10 of the time-share-unit owners, says some of his clients "didn't even know" their contracts were embroiled in a bankruptcy action until they arrived at the resort and were barred from using the facilities.
One elderly Canadian couple that had paid $6,840 for their time-share unit flew all the way from Toronto, only to find their "right-to-use" time-share vacation at Latitude 24 gave them few rights. The doors were closed.
Unless a new appeal he is filing is successful, according to Rotella, the owners probably will get little more than $900 to $1,000 apiece back from their original investments, and they'll all lose out on 30 years of prepaid vacations. The payments won't be lump sum, either. They'll likely be stretched over several years.
The owners of the club, meanwhile, are permitted under federal law to sell the property to the highest bidder. They've got a $3.8 million contract on the club already--provided the rights of the existing time-share owners are extinguished before the new owner takes over.
The purchaser, by the way, wants to start a new time-share resort.
The upshot of the Latitude 24 Club case, according to legal experts, is that owners or purchasers of "right-to-use" time-share plans should be on guard against possible bankruptcy actions by resort owners in the current economy. So-called "interval" time-share plans, which involve actual ownership of shares of condominiums, aren't directly affected by the decision.