The Interstate Land Sales Full Disclosure Act and Condominiums

by Alexa Drago on December 18, 2015

From the CBA Real Estate Law Section Fall-Winter Newsletter

The Interstate Land Sales Full Disclosure Act (the “Act”), codified at 15 U.S.C. §1701 et seq., regulates the sale of “lots” that are marketed and sold through interstate commerce. Under the Act, lots in a subdivision offered for sale must be registered with the Consumer Financial Protection Bureau (the “Bureau”) and a property report provided to contract purchasers unless one or more of a defined set of statutory or regulatory exemptions set forth in 15 U.S.C. §1702 apply (an “Exemption”). The consequence of failing to register or properly rely on an Exemption are steep for developers—in addition to the Bureau’s enforcement powers that include criminal and civil remedies, purchasers who were required to receive a property report but did not are given the option to rescind their purchase for a period of two years from the date of signing the purchase contract (even if the closing has already occurred).

During the so-called Great Recession, the Act received renewed legal (and even mainstream media) focus as contract purchasers, most notably of condominium units, utilized the Act’s right of rescission to terminate transactions for property that had dramatically diminished in value since their preconstruction purchase contracts had been signed. Indeed, while the Act has been in effect since 1968, it is believed that approximately one-half of all reported state and federal decisions and orders interpreting the Act have been issued just since 2007. Many of these cases were ultimately decided against the developers, in some cases requiring the developers to take back massive stocks of condominium units and/or declare bankruptcy.

These cases involved condominium projects that were both registered under the Act and those that sought to rely on one or more Exemptions. The most common Exemptions litigated in the condominium context, the “Improved Lot Exemption”, 15 U.S.C. §1702(a)(2), and the “99 Lot Exemption”, 15 U.S.C. §1702(b)(1), received interpretations that significantly limited prior guidance and interpretations on how these Exemptions could be used. See, e.g., Jankus v. Edge Investors, 2009 WL 961154 (S.D. Fla. Apr. 8, 2009). In other cases, where the developer had registered the condominium project, interpretations of the Act as applied to condominiums gave rise to sometimes surprising rescission victories for contract purchasers. See, e.g., Berkovich v. Vue-North Carolina, 2011 WL 5037124 (October 24, 2011 W.D.N.C.); Burns v. Duplin Land Development, Inc., 621 F. Supp. 2d 292 (E.D.N.C. 2009). In some cases, courts even expressly disagreed or disregarded the Act guidelines adopted by HUD (which guidelines were not, it should be noted, regulations promulgated under the Act). See, e.g., Nickell v. Beau View of Biloxi, L.L.C., 636 F.3d 752, 756-57 (5th Cir. 2011); Bodansky v. Fifth on Park Condo, LLC, 635 F.3d 75, 83-84 (2d Cir. 2011). While the cases cited above came most notably from other jurisdictions, Colorado courts decided their own fair share of cases interpreting the Act—especially in Colorado’s mountain resort communities that had experienced a pre-recession building boom.

Concern for the continued application of the Act to condominiums led to a bipartisan effort in Congress to exempt condominium unit sales from the Act’s scope. In a rare showing of bipartisan cooperation, both the United States House and the United States Senate unanimously approved H.R. 2600 to add a catch-all exemption for condominium unit sales not otherwise exempt from the registration requirements of the Act. This amendment took effect March 25, 2015 and applies to all condominium unit sales occurring on or after that date. One result is that a single condominium project may have sales that are subject to the Act’s requirements and others that are not.

The new Exemption for condominium unit sales is in addition to, and not a replacement for, the existing recognized Exemptions. This catch-all Exemption is intended to capture condominium unit sales not otherwise exempt and only exempts condominium unit sales from the registration requirements of the Act. Therefore, unless another full Exemption applies, the sale of condominium units remains subject to the Act’s antifraud provisions. Moreover, the Exemption does not trump any state condominium registration requirements that may apply (either in the state in which the project is located or in the states in which the project is marketed).

Joseph Lubinski practices in the Denver office of Ballard Spahr LLP. He can be contacted at lubinskij@ballardspahr.com

 

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