Underwriting Manual: TX
19.24
Time-Sharing Ownership
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19.24.1
In General
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| “Time-sharing ownership” sometimes referred to as “internal ownership” is defined as “the exclusive right of occupancy of a described parcel of real estate for a recurring period of time”. Time-sharing ownership is essentially a vacation or resort concept. The exclusive right of occupancy may exist by virtue of an outright purchase of the fee simple title, a lease, or some other lesser interest, such as “right-to-use”, and sometimes called a “vacation license” or a “club membership”. |
| The time-sharing ownership is closely associated to the concept of the condominium regime; this, resulting in the emergence of a new property concept: “the time-sharing estate vacation condominium”. However, it needs to be noted that the time-sharing ownership concept is equally applicable to other noncondominium properties. |
| Because time-share projects may take several legal formats and affect the participants in different manners, with or without a condominium arrangement as an overlay. Texas law recognizes that a time-share interest is an interest in real property.See Chapter 227, Texas Property Code. |
See also Texas Bulletin TX2015004 – LEGISLATIVE UPDATE 2015 Relating to the Transfer or Termination of Certain Timeshare Interests
19.24.2
Time-Share Structures
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| · | The Fee Simple Time-Share In connection with a condominium regime, two approaches have developed in creating fee simple ownership of real property on a time-share basis. The Uniform Condominium Act as approved in 1977 at the National Conference of Commissioners on Uniform State Laws defined these two types of estates: |
| ¨ | Interval estate: [A] combination of (i) an estate for years in a unit, during the term of which title to a unit rotates among the time-share owners thereof, vesting in each of them in turn for periods established by a fixed recorded schedule, with the series thus established recurring regularly until the term expires, coupled with (ii) a vested undivided fee simple interest in the remainder in that unit, the magnitude of that interest having been established by the declaration or by the deed creating the interval estate. [Section 4-103] |
| ¨ | Time-span: [A] combination of (i) an undivided interest in a present estate in fee simple in a unit, the magnitude of that interest having been established by the declaration or by the deed conveying the time-span estate, coupled with (ii) the exclusive right to possession and occupancy of that unit during regularly recurring period designated by that deed or by a recorded document referred to therein. [Section 4-103] In both the interval estate and the time span estate a purchaser is also a tenant in common with all other purchasers of the common areas of the complex. In essence, the time span estate makes all unit owners tenants in common in fee simple absolute, with each tenant in common having title to the undivided interest specified in his deed. The undivided right to possession and use of the whole property in its entirety is the one unity among tenants in common. Therefore, to maintain the viability of time-sharing ownership, the time span method necessitates that a separate agreement delineating each unit owner’s specific period of occupancy be entered into by all co-tenant-purchasers. Each co-tenant also waives his right to seek partition. The time span estate is freely alienable, either inter vivos by deed or by testamentary transfer. The interval estate technique is conceptually more difficult that the time span method. Purchasers do not take title to each condominium unit as tenants in common; rather, the purchaser receives two separate and distinct vested interests in the unit. First, the interval estate owner acquires a defeasible fee in the form of an estate for years for the time period in each year during which he is entitled to occupancy. This defeasible fee will continue to vest in the owner for a period of years equal to the expected useful life of the building as a resort complex. For example, an interval estate owner may purchase a defeasible fee for the first two weeks in July for the next forty years. The owner’s fee, being defeasible, is subject to a shifting executory interest which passes the fee to the next owner upon commencement of a subsequent time period, such as the third week of July in the above example. The second interest acquired by the owner of an interval estate is a vested remainder as a tenant in common with other interval estate owners of the unit, upon the termination of the defeasible fee interest. This collective remainder interest was added to the defeasible fee arrangements in an attempt to eliminate any possible violation of the rule against perpetuities. At the remote date when the interval estate owners become tenants in common, they may if they choose, repeat the cycle for another period of years. The interval estate differs from the time span estate in that the right of occupancy and title of ownership coincide; the interval owner is the sole owner of the unit during his period of occupancy. Also, the right of occupancy arises by reason of the ownership interest, and not by reason of some contract or lease as under the time span estate. |
| · | Leasehold Time-Share Interest The leasehold time-share interest is created under a lease affecting a described parcel of real estate for a specific recurring period of time. The lessor retaining the reversion in fee simple. |
| · | Cooperative Time-Share Interest The time-share cooperative concept involves a cooperative corporation which owns or leases the real estate. The time-share owner buys shares of stock in the corporation; the number of shares varies according to the size of the unit, the length of the annual use period, or some other yardstick. Individual use periods are set forth in the proprietary lease. |
| · | Hybrid Time-Share Estate In a “hybrid time-share estate” the owner has an interest in a specific unit of real estate but does not have the right to occupy that unit, or any other unit, for a designated recurring period of time. The owner, instead, must reserve his time and space, each year, from the association or management entity. |
| · | Right-to-Use Time-Share Contracts The “right-to-use time-share contract” is also referred to as a “vacation license”, “vacation lease”, or “club membership”. In this type of arrangement, “contractual rights”, rather than conveyance of an interest in real property are involved. The most popular type of nonownership time-share is the vacation license. This form of time-sharing is widely used for vacation resort properties. The license grants the buyer the right to use a particular unit for a specified number of years. The vacation lease resembles the vacation license, but allows the buyer to sublet or transfer his rights thereunder. The lease may also designate a particular unit that will be available to the participant. The club membership time-share involves the purchase of a membership which enables the buyer to stay at the project for a specified period of time each year. The club, in turn, owns or leases a building or resort property for the benefit of its members. These arrangements are found in all shapes and formats, vary from state to state, and do not constitute insurable interests in real estate. This type of time-sharing arrangement cannot be insured. |
19.24.3
Legal Descriptions of Time-sharing Interests
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| The following points must be considered in connection with any legal description of a time-sharing interest: |
| · | The utilization of the proper legal descriptions when describing a condominium property, a leasehold estate, a cooperative apartment, or a noncondominium property. |
| · | That the legal description contained in the deed or lease designates the specific time-share period of occupancy. |
| · | That the declaration refers to the time-share periods of occupancy as “unit weeks”. |
| · | That in any time-span estate, the deed to each time-share buyer should convey an undivided ________ percent in fee simple of the parcel, together with the rights to the exclusive occupancy of the parcel for Unit Week No. ______ as defined in the declaration. |
| · | That in any interval estate, the deed to each time-share buyer should convey an estate for years terminating _________________ in Unit Week No. ________ as _________ percent of the parcel. |
| · | That in any leasehold time-share estate, the lease to each time-share buyer should lease Unit Week No. ____ as defined in the declaration for a term ending ___________ in the parcel. |
| · | That the unit week in the interval and leasehold conveyances should be further described as a separate estate from the other unit weeks in the same parcel, and it should be stated that each such estate is succeeded by the next in unending succession until the fixed termination date. |
| · | That the legal descriptions to be used in the title policies should follow as closely as possible the description contained in the deeds or leases. |
19.24.4
Federal and State Legislations Applicable to Time Share Interests
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| · | Federal |
| ¨ | Federal Securities Regulations (Securities regulations apply in situation where the venture is structured so that it may be classified as an “investment contract”.) |
| ¨ | Federal Trade Commission (Sales of land interests in interstate commerce.) |
| ¨ | The Holder in Due Course Trade Regulations Rule (This rule has been applied to right-to-use time-sharing property. The rule has not yet been applied to fee time-sharing property.) |
| ¨ | The Cooling-Off Period for Door-to-Door Sales Regulations |
| ¨ | Interstate Land Sales Act (The Act requires land developers to make full disclosure in connection with the sale of lease of certain undeveloped, subdivided land.) |
| ¨ | Federal Mail Fraud Statute |
| · | State State legislation covering time-sharing offerings and ownerships may be found in a number of areas including: |
| ¨ | Time-share state statutes. (Chapter 227, Texas Property Code) |
| ¨ | Subdivision laws. |
| ¨ | Condominium laws. |
| ¨ | Consumer protection laws. |
| ¨ | Blue sky laws. |
| NOTE: In varying degrees, state statutes have been patterned after two model time-sharing acts, the Model Real Estate Time-Share Act (MRETSA), developed by the National Conference of Commissioners on Uniform State Laws, and the RTC/NARELLO Model Act, drafted jointly by the Real Estate Timesharing Council of the American Land Development Association (RTC) and the National Association of Real Estate License Law Officials (NARELLO). Both model acts are designed to provide uniform time-sharing legislation. Approval from a Texas underwriter must be obtained prior to issuing any policy on a time-share interest. |
See also Texas Bulletin TX2013006 – LEGISLATIVE UPDATES 2013 Part I relating to the governance of timeshare owners' associations and exclude timeshare associations from sections of the Property Code designed for whole ownership or primary home property associations.