The court explains their reasoning on the issue of "Capital Costs" on pg. 67-81, para 255 to 304. While it is difficult to summarize 14 pages of their reasoning in this space, I would offer the following:
The concept that "capital costs" are the exclusively the responsibility of the lessor is overstated. It certainly is true in relation to "capital costs" as fixed, one-time
expenses incurred on the purchase of
land,
buildings,
construction, and furnishings needed to bring the #NAFR project to a commercially operable status. So Northmont cannot decide to build a new building and bill that to the lessee.
However once a project is established, capital costs can then be divided into two broad categories - capital repairs and capital improvements. Clearly from the VIA's the lessee is responsible for capital repairs to the existing structures as stated in:
OK, after reading this many times, I am finally starting to understand this court decision now, and it seems very flawed. I will try to briefly summarize my thoughts, please correct me if I am wrong on any of this.
1. We signed a "Lease" agreement. We are the Lessee (renter) and Fairmont was the Lessor (owner). As previously pointed out, Lessee and Lessor obligations are pretty well known and documented and set in law, see the GypsyOne post. I do not understand how they can be ignored.
2. The court ruled that we have a time share plan and the resort must be managed for the benefit of all lessees. This somehow re-defined our rights as lessees or renters. The result was that the court started referring to us, the renters, as the owners. This turned the situation upside down and caused much confusion. I found no where that the court address how our rights as lesses were changed or lost which was the common and plain interpretation of contract.
3. The court had no understanding of basic accounting principles in real estate. As an example in the decision:
[265] At best, JEKE’s counsel was only able to give their own opinions on what constituted a “capital cost” or not, submissions that were largely unhelpful. For example, JEKE’s counsel suggested, in argument, that replacement of a deck would be a “capital cost”, versus replacement of the floor of a deck which would be a “wear and tear” cost. This distinction is lost on me. I fail to see how the “replacement” in either event would not be covered under the general phrase of “replacement costs”, or the detailed reference to “repairs to the exterior” found in paragraph 9(i) of the JEKE VIAs.
A capital expense is defined as an expense that extends the life of the structure and must be depreciated, not just repairing something that is broke. Agreed that there are some grey areas in capital costs verses repairs, but there is little room for interpretation for the renovation project. I have never heard of capital expenses being divided up into two categories as mentioned above (repairs and improvements). The court was constantly confusing the refurbishment and replacement fund, arguing that this clause also gave them the right to charge capital expenses.
4. The court ignored standard common sense practices for the lessor, lessee relationship, instead saying that it "defies logic" that these practices were not addressed in the lease. Again, this confusion is a result of the lessees being called owners and the lessor is not attributed as the owner. As an example from the decision:
[277] It defies logic that the parties intended any uncertainty regarding who would pay to fix the Resort buildings and infrastructure when faced with maintenance issues of this magnitude. If JEKE is right, but the Lessor was unable or unwilling to pay and contribute to such expenses (assuming no express liability), then no one would pay to repair the resort, which would inevitably result in a decline in the Resort.
By existing lessor/lessee laws, the Lessor (owner) is required to provide infrastructure in a reasonable condition. Fairmont understood this which is why they went bankrupt. If the resort had been allowed to go bankrupt, the lessees would be much better off today, not stuck with bills that are bankrupting them.
5. Our lawyer did not bring in expert witnesses to explain the lessor, lessee relationship to the court. Our lawyer did not bring in expert witnesses to explain capital costs to the court. For points this important, it is hard to believe the lawyer would not have brought in experts in these fields. Did he bring any documentation at all? I do realize that it would be impractical if not impossible to bring in experts for every point, but these point was important for the court to understand.
But at the end of the day, I think if they had pursued it, it would not have altered the outcome. First, breaches of contract occur all the time. The court notes this on pg 109 when they say:
"A mere breach of contract does not terminate the contract."
"The failure in performance must substantially deprive the other party of what was bargained for. This concept is referred to as substantial nonperformance or as a requirement that a breach go to the “root” of the contract."
So did their failure to assist in forming the association result in you being deprived of your right to use the resort? I think it would be a stretch to suggest it did.
n addition, there is the concept of "timeliness" when asserting your rights. At law, when a breach has occurred, and a party does not assert their rights to enforce the contract, the court can rule that a "constructive waiver" of that provision of the contract has occurred. This frequently happens when the breach is well-known and has existed for a considerable period of time. And I find there is no indication in the legal record that anyone legally notified Northmont that they were in breach of contract prior to the court case.
As such, I think it is likely that the court would have ruled that it was not a material breach. So at best they direct Northmont to cure the breach by forming the association.
I think there were many requests to form the association when the renovation fee was levied, I know I did. After almost 5 years, still nothing. The association was suppose to help resolve these disputes, but instead we were forced to court. I think it safe to speculate this was a strategy, as it is nearly impossible for the average time share consumer to take a dispute to court against a large corporation, as proven in this case. The average consumer does not have the time, money, resources, energy to do so. It is not a stretch to suggest this is a material breach of contract as evidence that we HAVE been denied access to the resort for the last 4 years.
Again, much of the blame for breach of contract appears to rest with our lawyer as he did not follow up on the breaches of contract that can be easily proven. However, I am still having trouble accepting that if the court knew the law, how can they ignore it. Not having audited financial statements is huge since we have no idea where our money went and should have been ruled a fundamental breach.
Are there any real estate accountants that can contribute here. Correct me if I am wrong. Surely there must be some in this group that practice and can say with certainty what is correct on capital expenses and lessor/lessee relationships.
