RESORT LAW

Strategies for Timeshare Resorts to Combat Unfair and Deceptive Resale Practices

May 2011

By W. John Funk and Erik Newman*

At the 2011 annual American Resort Development Association (ARDA) Convention, there was a lot of discussion about emerging issues in the resale market. The ARDA Resort Owners' Coalition announced that it was introducing a new website that is designed to better educate timeshare owners better as to their options. The topic of unfair and deceptive resale practices will be the topic of a panel discussion at the upcoming New England ARDA meeting in June.

Timeshare resorts, no matter how desirable or well run, are facing difficult challenges in this lagging economy – and resale problems are only aggravating the situation. While the prospect of better times is ahead, it will take some time before consumer confidence rebounds. In the meantime, resorts have had to deal with collection problems and defaults resulting from unemployment, and consumers are understandably reluctant to spend what discretionary income they have on long term vacation products.

The most recent challenge has arrived in the form of so-called timeshare relief or rescue companies. In exchange for the payment of an exorbitant fee by owners ($3000 or higher), they offer to take timeshare intervals off the hands of owners who no longer want to use their intervals or pay maintenance fees – and then simply hold the intervals with no plan to use them or pay maintenance fees. Some are fraudulent, some are misguided, but many don’t even transfer the intervals or intentionally bankrupt the companies to make them judgment proof. Resorts don’t receive the maintenance income they require and have to incur costly foreclosure expenses to get the intervals back. Many of these so-called relief or rescue companies make false statements to owners to scare them to act and create a negative and inaccurate image of the timeshare industry.

For some timeshare owners, interval ownership is a life cycle product. After many years of use, they no longer desire to vacation at resorts and want to sell their intervals. In the current economy, the combination of life cycle changes and the distressed economy has increased the supply of intervals on the market. It can be difficult to find buyers at a fair price. Internet auction resources have resulted in many intervals being sold at substantially discounted prices. Some resale companies charge substantial upfront fees, but don’t obtain the promised results. These circumstances can sour an owner’s feelings towards his or her interval, and the owner then becomes easy prey for timeshare relief or rescue companies.

To combat this confluence of events, timeshare resorts must recognize that they can become the victims of fraudulent “relief” or “rescue” transactions. Resorts should adopt policies and procedures to require prior notice of a proposed transfer to identify parties who may be taking ownership of intervals and subsequently abandoning their ownership obligations. These policies and procedures should be designed to weed out the timeshare relief and rescue companies from legitimate transfers to bona fide purchasers. Simply threatening legal action against individual owners that engage such companies can be counter-productive and create an adversarial relationship.

Instead, resorts must recognize that the topic of resale is of great importance to owners. Owners that turn to timeshare relief or rescue companies are doing so out of desperation because they think they have no other alternatives. Boards of directors and managers need to identify practical and safe alternatives to fraudulent relief and rescue practices for their owners. Safe alternatives should be presented in conjunction with an owner education program to highlight the risks and potential legal liability of transferring a timeshare through a rescue or relief company. Ignoring the problem will only result in increased collection incidence and expense and create new opportunities for timeshare relief or rescue companies.

What are the options? Many sold out projects do not have the resources or volume to justify an onsite resale program - but some may, and it should be considered. There are companies that will place a broker at the resort. Other companies have professional brokers who specialize in selling timeshare intervals from their offsite offices. A third option is companies that provide advertising for intervals over the internet for a monthly fee. In each of these instances, the owners are likely to get higher value for their intervals than offering them for sale in internet auctions. Owners should be given specific options that have been vetted by their association or manager and encouraged to try them.

If an owner is not successful or has an urgent need to sell his or her interval, a resort may offer a take back program by which an owner can be relieved of its obligations by paying the resort a fee – such as the equivalent of two years’ worth of annual maintenance fees. The resort then can enter into an agreement with a legitimate resale company and sell the inventory back into the market. This is a winning solution for everyone interested (except the scammers) – the owner no longer owns the interval; the resort saves on repossession expense and gets upfront maintenance fees that can help maintain the resort while waiting for the interval to sell; the resale company is given clean inventory to sell; and the other resort owners do not end up covering lost assessments that may otherwise result from relief scams. Each resort can design its own program and control the amount of inventory to sell.

Resorts that employ these strategies will help ensure that their owners do not become victims of fraudulent practices and that the resorts are not put in jeopardy by the loss of maintenance revenue due to relief company tactics.

* W. John Funk is admitted in New Hampshire, Vermont and Massachusetts. Erik Newman is admitted in New Hampshire.

W. John Funk
You may contact
John Funk at 603-545-3607.

Erik Newman
You may contact
Erik Newman at 603-545-3638.

Related practice areas:
Resort Law
Real Estate Development