Diamond Resorts Wholeowners win and lose in court battle

POSTED: 04/3/13 12:00 PM

Mitigated increase in maintenance fees, but no ownership

St. Maarten – The court battle between Diamond Resorts and two of its whole-owners has yielded something for all parties. Most of all, the wholeowners are stratified that the court blocked Diamond’s attempt to charge them with outlandish maintenance fees, as this newspaper reported yesterday. On the other hand, Diamond scored points as well: the court allowed at least some increase in maintenance fees and it established that the wholeowners signed a lease- instead of a purchase-agreement.
In both cases, against Arthur Macdonald’s Durness LLC – represented by attorney Camiel Koster of Bergman Zwanikken Snow Essed – and against the Double J Private Fund Foundation – represented by attorney Vivian Choennie of Fox and Associates – the court sentenced parties to pay their own court fees.

At the heart of the dispute was a drive by Diamond Resorts – owner of the Royal Palm Beach Resort in Simpson Bay – to make wholeowners pay significantly more in maintenance fees. Durness and Double J both were paying $6,000 in annual maintenance fees and Diamond attempted to pop this to $46,678.
Diamond’s attorney Lucas Berman of Lexwell Attorneys submitted to the court that the company provides the Royal Palm Beach resort with staff, insurance, management, utilities, administration, housekeeping and other facilities like a swimming pool, a fitness room and security. “Wholeowners like Durness pay far too little compared to interval owners. Diamond recently discovered this after an audit,” the court ruling states.
Diamond claims that the $10 million deficit the company faces is caused by the whole-owners and that it is surviving on inter-company loans from Diamond Resorts International. Higher maintenance fees are necessary, Diamond told the court, otherwise bankruptcy is inevitable.
Both Durness and Double J asked the court to rule that they actually bought their apartments. Durness also asked the court to void an invoice of close to $5,000 for a so-called replacement reserve.

The court ruled that the agreement between the whole-owners and Diamond is a lease contract and not a purchase agreement. The court notes in the ruling that the contract uses different terms that point in different directions – from lease agreement, lessor and lessee, to outright purchase and purchase price.
“It was the intention of parties to grant the whole-owners the exclusive right of use of living accommodation for a long time (until the year 2988),” the ruling states. In the case of Durness, parties agreed to a price of $330,000. Double J paid $320,000.
The court ruled that the whole-owners signed a lease agreement.
The key point of the court cases revolved around the maintenance fees. Diamond’s prime argument was that the maintenance fees for both whole-owners had not been increased since 1992. The court ruled that the contracts do not forbid an increase in the maintenance fees in 2011 and that an increase is reasonable based on, amongst others, the rate of inflation.
The court dismissed a stipulation in the contract Durness signed with the previous owner of its apartment that the maintenance fee is not subject to change. “Diamond is not bound by that agreement,” the court ruled.
But the court also ruled that an increase of between 800 and 900 percent – as Diamond wanted – won’t do and that this is not reasonable.
“That Diamond is a non-profit organization with a zero balance policy and the position that Diamond’s bankruptcy is inevitable without an increase does not change this,” the court ruled. It remains incomprehensible why Durness would have to take any responsibility for Diamond’s management and its so-called zero balance policy. If Diamond’s current management is loss-making and therefore inadequate, the responsible directors and managers will have to deal with it and change their way of doing business. Why wholeowners like Durness and Double J would have to pay all costs for this eludes the court. It absolutely does not go without saying that business risks has to be passed on completely to tenants like Durness and Double J.”
The court also failed to understand why whole-owners should be treated the same way as interval-owners.

In the end, the court allowed a one-time adjustment of the maintenance fee for 2011 compared to the previous year of 30 percent – meaning that Durness and Double J will have to pay $7,800 instead of $6,000. During the next four years the court capped the increase at 4 percent.
Durness does not have to pay the replacement fee of close to $5,000. The court ruled that Diamond did not substantiate this charge. “The court is in the dark about what this replacement fee is and why Durness would have to pay for it.”
Diamond is studying the court rulings and keeps its options open for a possible appeal.

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