The legal battle spanning from 2004 to 2011 involving Midsouth Golf, LLC and the Fairfield Harbour residential community in North Carolina illustrates what can happen to buyers who do not perform the due diligence to justify their optimistic projections. 

Midsouth Golf, LLC purchased the amenities associated with Fairfield Harbour in 1999, which includes two golf courses, with the expectation of making money operating the facilities and selling golf and social memberships to residents and members of the general public. It ended up obligating itself to maintain the two golf courses and associated amenities despite a greatly  diminished ability to collect amenity fees from the Fairfield Harbour property owners.

When Midsouth bought the Fairfield Harbour amenities, it was aware of a set of 1993 covenants which purported to obligate the timeshare owners to pay an amenity fee at a rate over five times that paid by the single family and condominium owners. However, pursuant to a 1998 settlement agreement, the predecessor owner of the amenities agreed that it would not charge timeshare owners amenity fees at a rate above that charged to other owners.

Proper due diligence would have likely uncovered the 1998 settlement, as well as the risk that  the 1993 covenants may not fall within the timeshare owners’ chain of title.  With this knowledge, Midsouth could have structured the acquisition to account for the associated risks, or at least walked away from the deal.  Instead, Midsouth trusted that the Fairfield Harbour amenities, and the crucial legal documents providing for amenity fees from property owners, were in good shape. It bought the amenities and started to make changes with the intent of increasing its profits, effectively doubling down on its bets.

Since the timeshare owners were using the amenities more than other owners, and because it had the 1993 covenants in hand, Midsouth determined it wanted to increase the assessments against the timeshare owners to reflect this heavier use. To accomplish this, Midsouth filed suit against the timeshare owners seeking to increase the assessments against them to the amount contemplated by the 1993 covenants.

The court, however, did not increase the fees. Instead, it held that the amenity fees were unenforceable against the timeshare owners because of flaws in the 1993 covenants.

Not surprisingly, many Fairfield Harbour owners stopped paying amenity fees after this decision. Midsouth closed the two golf courses due to insufficient funds.  Following a another trial, a North Carolina court determined that, despite the fact that property owners were not obligated to pay fees, Midsouth was obligated by the real property covenants to maintain the amenities. Midsouth had to pay damages to the property owners and reopen the golf courses and other amenities.