Timeshares - what to look out for

Geoff Hardy 102X154                 Timeshares originated in Europe after World War II, and were finessed in the UK and USA over the following decades.  Now they are an international phenomenon, and New Zealand has one of the highest rates of timeshare ownership in the world.

Their attraction lies in the fact that you can have exclusive access to a unit in your chosen holiday resort, for a limited period each year (usually a week), without having to purchase a holiday home that may remain unutilised for much of the year.

Someone else looks after the management and upkeep of the unit for you, and because you pool those expenses with all the other owners, it’s usually cheaper than managing your individual unit independently. Furthermore, you can trade your entitlement from year to year, either by hiring it out, or by swapping it with another timeshare owner, in return for accommodation in the same resort at another time of the year, or for accommodation in another resort entirely. Plus, your rights continue in existence for a very long time.

Of course, there are downsides as well, and timeshare investors generally aren’t familiar with them because timeshares are typically sold using high-pressure sales tactics that don’t focus on the negatives. Sometimes resorts that can’t operate economically as hotels are packaged up and sold as timeshares. Usually investors are lured to a glitzy on-site public promotion with promises of generous no-strings-attached rewards (a free stay in one of the timeshare resorts is a common example) in return for enduring the sophisticated sales pitch, which is a lot harder to resist than they anticipated.

No doubt there are a lot of genuinely interested participants and willing buyers as well. What they might not realise is the resort they are buying into will eventually lose its charm, or its attraction for them.

That has three consequences. First, despite their declining use of their entitlement, they remain liable for the annual levies which steadily increase with inflation for the duration of the timeshare (usually the life of the resort – 40 years is not uncommon).

Secondly, there may come a time when substantial repairs and maintenance are required (the roof starts leaking, for example, or the air conditioning plant fails), which will result in a corresponding levy increase. Thirdly, a unit in a resort which is no longer sought-after does not buy you much in terms of exchange rights at another resort, nor will it fetch much on the open market.

Because of these risks, the law provides certain rights and remedies. Although New Zealand does not have any Timeshare Act or equivalent statute, timeshares are regarded as securities and are therefore governed by the Securities Act 1978. This requires a prospectus to be registered and an investment statement to be distributed to potential purchasers (for what they are worth).

A statutory supervisor such as a firm of accountants must also be appointed to keep the promoters and managers honest and look after the interests of the timeshare owners. And if the Promoter is a member of the (voluntary) New Zealand Holiday Ownership Council, then their Code of Ethics and Code of Practice will provide some measure of comfort as well.

Apart from the prospectus and the investment statement, the other documentation the timeshare Promoter will prepare is the Holiday Interval Contract or Trust Deed that defines the owner’s rights and obligations, the Application/Purchase Contract pursuant to which the owner buys his/her entitlement, the Deed of Participation that sets out the rights and obligations of the statutory supervisors, and (generally) a management contract with the separate entity that manages the resort.

Given that a timeshare owner will typically invest upwards of $10,000 for his/her entitlement and pay upwards of $400 in annual levies (much more for the more luxurious resorts), what are the owner’s options if his/her circumstances change or he/she has lost interest in it?

The first is to sell the timeshare. It will either be an interest in land or a contractual entitlement, but either way it may have some value to someone looking for a bargain in the second-hand market. The seller can try Trade Me, or list the timeshare with a specialist broker (but don’t expect much by way of net return). The Promoter’s or Manager’s consent to the sale is usually required (automatic in the case of a solvent and responsible purchaser), and substitute deeds need to be prepared.

If a sale proves elusive, then a gift (either inter vivos or by will) to a deserving recipient who is willing to assume the ongoing obligations is more feasible. If you want to retain ownership but not utilise your entitlement in the meantime, then leasing it is another option. If you are merely tired of the original resort, you may be able to exchange your entitlement for an equivalent (or better, if you pay the difference) unit in another resort.

If there are no willing takers, surrendering your entitlement is a possibility. This writes off your initial investment (and the possibility of a return of capital at the end) but it relieves you of your obligations to pay ongoing levies. The Promoter or Manager will have a discretion whether to permit the surrender, but the more responsible ones will do so in deserving cases, and are unlikely to refuse if there is a waiting list of buyers.

There are two other options. One is defaulting on payment of your annual levies, and hoping the Promoter or Manager won’t seek damages from you.

The other is maintaining your payments in the hope that your timeshare will prove to be a good investment when the scheme is wound up. If the Trust Deed provides that the property will be sold on expiry of the scheme and the net proceeds distributed to the timeshare owners, your share (say, 1/51 weeks x 20 units) could exceed the annual levies from which you are not deriving any benefit in the meantime.

This may be a worthwhile gamble if the timeshare units comprise the whole of the resort (not just a part of it), and either the building is going to serve a useful purpose after its use as a resort is over, or the land (after demolition of the building) is likely to be a valuable development site.

Geoff Hardy is the proprietor and senior lawyer at Madison Hardy and a former partner at Simpson Grierson. He was an ADLS Councillor from 2006–2011 and Vice-President from 2009–2010, and has been the Convenor of ADLS’s CLE Committee
since 2010. 

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