In an e-mail from an assistant manager at the hotel has told Bond20.Com "I am afraid no one has contacted us directly to inform us about this possiblity and let alone, never did we confirm that Reid´s Palace has accepted this offer." However, they have said that they would be "very interested and honored to be part of a James Bond film".
While this apparently throws some doubt on the whole use of Madeira Island as a filming location, it is possible that the rest of the reports are true. The element of the report about Reid's Palace could have been the only part created.
Moreover, as Bond 20 Forum user 'White Persian' points out, the words in the e-mail appear to have been carefully selected; "This guy seems to be choosing his words very carefully. He says Reid's hotel hasn't been contacted "directly", and that they did not "confirm" that they have accepted this offer [that nobody's made directly]. He could well be keeping things under his hat so as not to jeopardise the deal or to have an influx of rubberneckers annoying the guests."
Thanks to Nicolas and Jay for alerting us to the news.