Ask RedWeek / December, 2019

What is a sunset clause?

While reviewing the governing documents for our timeshare, we found mention of a "sunset provision" — what does that mean?

You're not the first person to ask this question. If you've had your timeshare for a very long time, a sunset provision is likely to be written into an association's governing documents. Sunset provisions are common in many "legacy" resorts (1960's through early 1990's). A sunset provision/clause means that there is an expiration date or a termination date, of the timeshare form of ownership.

When the timeshare concept was new, developers were unsure of how popular they would be, or for how long. The sunset clause was a safety net. That's also why it's sometimes referred to as, a "self-destruct" clause. Developers thought the sunset provision would act as a protection against the unknown. Most sunset provisions set a date in the future when the timeshare would terminate unless the owners voted to continue its operation.

As long as the required number of owners are still active, the status of the resort remains steady. However, all resorts need constant maintenance, repairs, and upgrades which are often costly. In the case of older resorts, the finances and/or the interest to do the work, may not exist. If the HOA finds itself in trouble (mismanagement, high levels of foreclosure, non-payment of fees), with a sunset provision, voters may vote against continuing to operate. They may also choose to not vote at all. Most clauses require a 51% vote in favor. But, it could be a 51% no vote as well, which in that case, would terminate the timeshare.

Controversy and Legislation

Sunset clauses have become increasingly controversial as more and more HOA boards come to grips with the fact that their association will automatically terminate in 2020 or 2025 unless they get a vote from membership to extend or terminate. Unfortunately, the voting requirements are almost impossible to achieve, since most HOA owners are not actively engaged in management issues. A 20% turnout for an annual election would be considered a great success at many resorts. Getting 50% or more for a sunset-clause vote would be a miracle. Older and retiring timeshare owners, in general, also have little interest in governance issues because their frame of reference, understandably, is very short term.

The American Resort Development Association's Owners' Resort Coalition, which represents developers and owners, is sponsoring legislation in several states to amend (and reduce) the voting requirements for major HOA votes. In Massachusetts, House Bill 3421 would create more achievable voting rules and install a process for managing the outcome of a termination vote. South Carolina lawmakers approved a similar bill, HB3754, during the 2019 legislative session.

Sunset-clause issues are also core components of the educational seminar agenda at Timeshare Board Members Association meetings, which are held twice a year, west coast and east, to engage board members on key management issues — such as maintaining reserve funds, insurance, and developing long-term strategic plans. As RedWeek has observed at several of these meetings, boards may need to hire management experts to maneuver their way through the thicket of fine print that defines the sunset clauses issues at their resorts. It's a bewildering issue to many, and not easily solved.

Responsibility as an Owner

Don't ignore the sunset provision. It's important to plan what to do before a sunset clause comes into effective. As an owner, make sure you understand the association documents. Ask questions: What happens to the owners — do they become tenants in common over the entire property of just their individual unit? Do the documents even address what's to happen? How do we handle replacements and capital improvements going forward? Will it be more difficult to keep employees or negotiate with vendors? What is the impact of termination on resales and new sales?

Should the resort not receive a quorum for the sunset clause, one alternative is the association may seek a limited power of attorney that grants the right to vote. The vote should feature only a few items and indicate the limited power of attorney can only be used to cast a yes vote for the motion.

We hope this answers your question. If you have other questions or concerns, don't hesitate to contact us.

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