00186401

        An Indiana couple has struck back against Marriott and its profitable vacation club. Anthony and Beth Lenner filed a lawsuit against Marriott Vacation Club and others in Federal Court in Orlando last month under the RICO Act claiming Marriott tricked them into thinking that they were buying a timeshare interest in real estate. Instead, the plaintiffs only received a license to use real estate. The lawsuit alleges violations of both the RICO Act and the Florida Vacation and Timeshare Act.

             The complaint seeks unspecified damages and will seek class action certification. Plaintiffs seek to abolish the points program which, attorneys say is unique among timeshare companies. Actually, that is not the case. I have to admit that my wife and I like to travel and often take advantage of “unique offers”. Over the last few years, we have accepted invitations to visit a few vacation club properties for ridiculously low prices. The clubs offer us hotel reward points, rental cars and other gifts. In exchange, we agree to attend a “brief” presentation. In the last year we visited 2 different clubs, a Starwood in Hawaii and a Hilton in New York. We have visited others over the years, but the pitch is always the same. For nearly the cost of our house, we could acquire an interest in the beautiful resort/club. We would receive several hundred thousand points so use each year at the dozens of club locations in exotic locales around the world. Each location “costs” different amounts of points. So, our total room nights would be between 7 and 14 each year depending on 1) which club we buy, 2) where we use the points and 3) when we use the points.

             We would receive a deed. We would pay annual maintenance and taxes which would amount to about $250 per month in Hawaii and $350 per month in New York. And, best of all the pitch goes, we would be saving over $500,000 over our life time in vacation costs! But companies wanted our down payment that day or the deal was off. As an incentive, they offered several hundred thousand hotel reward points as well, meaning we would have over 4 weeks of travel in the first full year. Both companies would finance us for 12 months. Then, we could pay off the balance or refinance. The interest rate? 23.9%! What a deal!

             As a real estate attorney, there was so much that I could say to the sale people about these offers. But I didn’t. My wife and I just wanted our gifts and to return to our vacation. But these were high pressure sales jobs. Remarkably, I did well not to argue. Much of what I would have said will come out in the Marriott lawsuit:

  • There is no property interest to deed in the points program. There is not a legal description. While Marriott has created a trust and owners get some beneficial interest in the trust, that is not an interest in real estate. If this were an actual timeshare, the deed would be for a specific unit and a specific week, or a fractional interest in a unit. The trust ties to real estate, but the interest is a license interest.

 

  • Marriott, through a title company (who is also a defendant), provides title insurance to the buyers at the buyers’ cost. There is no insurable interest because there is no interest in real estate. I don’t believe that the vacation clubs that I visited offered me title insurance, which goes to show that Starwood and Hilton recognize that they aren’t really selling real estate.

 

  • Marriott implemented the points program as a means to quickly dispose of excess inventory which it acquired when the real estate marketed crashed. It took back thousands of units which were not being used. Their points program has now caused an over sale. Owners have great difficulty booking rooms less than 6 months in advance. If you “own property”, you should be able to show up and use it whenever you want. Starwood and Hilton and other like clubs use the program to finance construction of new properties. In fact, one resort we visited did not even offer us a “unit” in the resort we were visiting. They offered us pre-construction pricing in a resort that was still in planning stages in Mexico. In New York, we were offered a unit in the building we were staying in or one under conversion several blocks away. So, buyers buy interest in buildings that don’t exist. In theory, the closing can’t occur and the deed can’t be delivered until the building is completed. But the points are awarded upon payment. The buyer already has its license. In a true timeshare or other condominium, other than the down payment, no money is paid until completion.

 

  • Maintenance is used to pay the hotel’s operating cost. Yet, the owner rarely, if ever visits the “home resort/club” and is encouraged to use the points to explore the system. The owner is paying to maintain a building he/she doesn’t really have an ownership interest in. But my personal gripe here is with the sales pitch. The sales people pitch on the annual cost savings on vacation. But if you are spending $2,500 or so per year on maintenance, there is not any real savings on the cost of hotel room nights. That’s 10 nights of hotel at $250 per night. Plus, the six figures spent for the right to stay there. Sounds like a license to me.

 

  • What is going to happen when the Marriott/Starwood merger is complete? Will the programs combine seamlessly? Will they remain separate? Are the properties comparable? Do the point systems have parity?

 

            This is a case to watch. The other clubs using points systems should be watching closely. Some clubs have better systems in their programs than Marriott. However, as this case progresses, lawsuits against the other clubs could and should follow.

00185580        A borrower can not rely on the defense of unclean hands unless the borrower relies on the lender’s misconduct, according to the 4th DCA in a recent case, Wells Fargo Bank, N.A. v. Williamson, 4D 15-286 (Fla. 4th DCA, July 13, 2016). In the case, the defendant, Willimanson, made application for a mortgage loan from Wells Fargo’s predecessor, Washington Mutual to purchase a new home.   As successor to Washington Mutual, Wells Fargo filed for foreclosure after borrower defaulted on the loan. Borrower filed affirmative defenses which included Washington Mutual committed fraud and used unclean hands in securing the loan.

             The basis of borrower’s defense was that Washington Mutual’s consultant overstated the borrower’s assets, income and ownership in real estate, thus falsifying the loan application. Borrower concluded that Wells Fargo knew or should have known of Washington Mutual’s fraudulent behavior and if it didn’t, then Wells Fargo did not exercise care in its due diligence and should be made to assume the consequences.

             The trial court found that the loan consultant had acted alone in mis-stating the information on the loan application and borrower did not take part in the falsification. Wells Fargo knew of the conduct and acquiesced to it or failed to conduct due diligence, which is similar misconduct. Therefore, the trial court granted borrower’s motion to dismiss and granted judgment in favor of borrower.

             The appellate court reversed, finding that the borrower had time to review the loan documents, including the falsified application, was not coerced into signing the documents and actually received the loan terms that she wanted. She successfully paid the mortgage for 4 years. To establish a defense of unclean hands, a defendant must have relied on the plaintiff’s misconduct and prove harm was caused by the misconduct. None of these factors existed. Washington Mutual did not act with unclean hands. Therefore, the successor, Wells Fargo, could not be held to such a standard.

             It does appear, however, that had the standard been met, had Washington Mutual acted fraudulently, that behavior could have been imputed onto Wells Fargo. Lenders beware.

00179570

        When entering into a contract to purchase commercial real estate, experienced investors and developers generally understand that dozens of things could go wrong before the closing date that would prevent the closing from happening or could make the acquisition less than attractive, giving the buyer pause as to whether to close at all. As such, these buyers make certain that their contracts are well drafted and spell out all relevant provisions in detail. Their contracts contain explicit due diligence provisions and contingencies tailored for the specific transaction. All too often, I am faced with clients who are less sophisticated, anxious to make a deal and afraid they are going to “lose the property”. They push hard for me to back off important contract protections that could and will save them money and prevent litigation at a later date.

             Contingencies and due diligence are the 2 most important sections of any commercial real estate contract for a buyer. Taken together, these provisions can help the buyer determine whether the property is suitable for buyer’s intended use and whether the deal is feasible. They allow the buyer to assure that timing is adequate, that permits can be and will be obtained and that resources are in place. Therefore, it is critical that adequate time for due diligence be negotiated to allow the buyer to complete all tests, exams and evaluations. Contingencies might include approvals such as zoning, land use, site plan, environmental and financing. Other contingencies could be executed leases by a major tenant or sale of an existing property. Certainly, sellers will push back to shorten due diligence time periods and limit contingencies and the important thing for the buyer to remember and consider during this stage of negotiations is that the deal is not always such a “great deal”. If there is time to do inspections, it is possible to find that the property doesn’t suit the buyer’s needs. A zoning application can be denied, so if the contingency is waived or the time period is shortened, the buyer could be stuck with a piece of property it can’t use as intended so the property will have a lower value to the buyer.

             Buyers should work to protect their rights to the deposit. If a contingency fails and the contract is going to be terminated, the deposit should be returned to the buyer. But what if the buyer wants to continue with the transaction? Efforts should be made to extend the time period to satisfy the contingency rather than waive it and move forward. This can be accomplished by payment of extension fees that are smaller than the deposit. Often the extension fees are non-refundable but applicable to the purchase price leaving the deposit refundable in the event that the contingency ultimately fails. Sometimes, sellers insist upon the release of the deposit, making it non-refundable to the buyer. Buyer should then make every effort to have the deposit applicable to the purchase price at the time of closing and avoid payment of other extension fees. These principles hold true when buyer requests an extension of time of the due diligence period. Less is always more for the buyer.

             Of course there are dozens of other provisions in every contract which garner lots of attention in every transaction (and likely the subject of future posts). Buyers’ evaluation of a particular transaction should start long before contract execution and with the proper leg work, buyers will be in position to draft and negotiate due diligence and contingency provisions that work to their benefit.

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