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05 October 2006
Many people dream of owning their own cottage as a getaway during the summer. However, this dream is increasingly moving out of reach as the most desirable and accessible areas for a cottage are becoming prohibitively expensive. In addition, there is the time, trouble and expense of opening, closing and maintaining the cottage. As a result, there is an increasing market for shared ownership and use of resort accommodation that a person can still call home. One of the more popular ways to do this is the fractional-share condominium.
A fractional-share condominium is a condominium with a twist. In a regular condominium, a buyer acquires absolute ownership of a specified unit together with the right, in common with other owners, to use common facilities (eg, a club house, pool, access roads and utilities) and to benefit from security services. A condominium is established under the Condominium Act. A board of directors is elected to oversee the affairs of the condominium. The board appoints officers, who in turn usually retain a professional property management company to manage the affairs of the condominium.
The developer must comply with the safeguards imposed under condominium legislation for the benefit of prospective buyers. For example, the developer must produce an extensive disclosure statement about the proposed condominium, including a description of:
In addition, the developer must comply with consumer protection legislation on timeshares, which may limit the right of the developer to extend the closing date unilaterally. The buyer generally has a statutory right to have second thoughts and walk away from the purchase within 10 days of receiving the disclosure material.
In a fractional-share condominium the buyer acquires only a right to use the unit for a fraction of the year. In most fractional-share condominiums, two weeks of the year are set aside for maintenance and repair, leaving 50 weeks to be divided among the owners. For example, an owner of a 10% interest could have a right to occupy the unit for five weeks of the year. Exactly how the weeks are allocated is up to the developer. There may be a combination of fixed weeks (the same weeks every year) and floating weeks (weeks that are different every year). Often there are restrictions on the most desirable weeks of the year, so that a buyer may not be able to use the unit for more than one week in a row during peak season.
As with all condominiums, the board assesses and collects common expenses from each owner based on that owner's fractional interest in the particular condominium unit. This is set out in charts included in the condominium documents. In addition, a reserve fund must be established to cover future major repairs and replacements.
In addition, the following points apply to fractional-share condominiums:
In some developments the developer wants to retain control over the development even after the units have been sold. This may be in order to continue to have a source of profit, or to be able to entice a brand-hotel operator to take on the job. Control could be maintained in various ways, such as by leaving parts of the project or buildings in the control of the developer or other parties (through ownership or under a separate condominium). For example, the lobby, front desk, elevators and parking, as well as the fitness facility and pool, meeting rooms and mechanical and other service areas, may be owned outright by the developer or held in a separate condominium controlled by the developer.
The developer may also want to separate the components of the project into pieces to maximize value and facilitate development. For example, the restaurant may be free-standing and owned separately by the developer or another party. This suits the owner of a condominium unit or the lender, who may not want the risk of the restaurant at the resort. Conversely, a specialized restaurant lender or operator knows the restaurant business and wants to deal only with the restaurant. The restaurant could remain under the ownership of the developer and be leased to a restaurant operator. However, the restaurant would be tied to the project by reciprocal easements, licences, leases or contractual arrangements.
For further information on this topic please contact Edward Perlmutter at Blake Cassels & Graydon LLP by telephone (+1 416 863 2400) or by fax (+1 416 863 2653) or by email (email@example.com).
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Edward M Perlmutter