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| WHAT TYPE OF DOCUMENTATION IS NEEDED FOR A VACATION FRACTIONAL OWNERSHIP ARRANGEMENT? |
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© March 16, 2007 by D. Andrew Sirkin.
Any reproduction or use of this document or any part of its content
requires the written consent of the author. Mr. Sirkin is chief attorney for Paris Pied-à-Terre Fractional Ownership. Contact Mr. Sirkin at
dasirkin@earthlink.net, or visit www.andysirkin.com
Every fractional ownership group needs a document or group of documents detailing their rights (especially usage/rental, alteration, financing and resale) and obligations (especially cost allocation, dues structure, repair/replacement, and rules). The document or documents must be prepared in view of the fact that it/they will only be used if the owners disagree, and will only be useful if it can resolve the disagreement (more on this later).
Fractional ownership documents fall into two general categories: (i) those that are recorded in the chain of title to the co-owned property and thereby become binding on each subsequent owner without that owner’s signature, and (ii) those that are unrecorded and bind only those that sign them. The principle advantages of recorded documents, often called “Declarations” or “CC&Rs” (which stands for “Covenants, Conditions and Restrictions”), are that they reduce the risks of co-ownership (particularly the risk that there will be a co-owner that is not bound by the documents because he/she has not signed them), and facilitate collection in the event of non-payment of co-owner obligations. The principle disadvantages of recorded documents are that they may violate a local or private regulation, are more difficult to modify, and are generally not compatible with subsequent group financing. A common misconception is that co-owners obtain “separate deeds” only if there are recorded co- ownership documents. In fact, all fractional ownership arrangements involving direct ownership can have separate deeds, regardless of the type of documents used and whether the documents are recorded or unrecorded.
Most vacation fractional arrangements involve a combination of recorded and unrecorded documents, and it is difficult to make generalizations about what the documents are typically called or say what documents (as opposed to what content items) are needed. Some common names (aside from “Declaration” and “CC&Rs” mentioned above) are “User Agreement”, “Bylaws”, “Co-Ownership Agreement”, “Owner Agreement”, “Management Agreement”, and “Usage Rules”, but there is no pattern as to what is in a document with a particular name, or how the various necessary provisions are distributed among the documents when a project has multiple documents. The key is to make sure all the important content items are present, and to assess the extent to which a particular content item will be enforceable against current and future owners.
Some fractional ownership arrangements involve the creation of a legal entity such as a corporation, and the entity may be for-profit or nonprofit. Sometimes the entity actually owns the property and the co-owners own the entity (discussed more fully below), but in most cases the entity is formed just to manage and operate the property. When an entity is formed, a formation document, often called the “Articles” or the “Certificate”, will exist, and annual filing and tax reporting requirements may exist. The benefits of forming an entity for the management and operation of vacation fractional property is debatable, and the decision is often driven by group size.
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