THE INTERSTATE LAND SALES FULL DISCLOSURE ACT:
DON’T LEARN THE HARD WAY

By Erin R. Barnett, Esq.

Can a buyer of a condo get out of a contract with a developer? A short five years ago, had you suggested to a Southern Nevada real estate developer that condominium buyers would resort to an obscure federal statute in order to back out of their purchases, you probably would have been told to take a look at the line of people banging on the developer’s door – all eager to pay well above the listing price for their piece of the nation’s hottest real estate market. Well, as everyone knows, the real estate market of 2008 is quite different, and over-extended buyers are now re-reading their contracts, trying to find loopholes that will get them out of their latest condo purchase. One avenue which may lead to such a loophole is an examination of whether the developer has strictly complied with the Interstate Land Sales Full Disclosure Act, found at 15 U.S.C. § 1701 et seq. (the “ILSFDA”).

The ILSFDA is a federal statute that requires developers to provide certain disclosures to the United States Department of Housing and Urban Development (“HUD”) before the sale of any “lots” in a “subdivision”; it is widely accepted that the scope of the ILSFDA includes the sale of a condominium unit. Unless a developer satisfies an exemption to the ILSFDA, as discussed below, a developer must file a “Statement of Record” with HUD that describes any new project to be developed. Once the project is approved, the developer may then sell individual units to buyers, each of whom must be furnished with a lengthy “Property Report” that describes the property to be built. In addition to these time-consuming and expensive disclosures, the ILSFDA gives all buyers the right to rescind on a purchase within seven days of signing a purchase agreement.

Because of the onerous requirements imposed upon developers by the ILSFDA, many developers attempt to fit into one of the numerous exemptions built into the Act, the most commonly utilized of which is the “Two Year” exemption. As discussed below, developers and their agents must ensure strict compliance with the requirements of this exemption, or risk significant penalties.

The “Two Year” Exemption

This exemption precludes the application of the ILSFDA to any contract that unconditionally binds the developer to complete construction of the condominium unit within two years after the contract is executed. As straight-forward as this exemption may seem, it has resulted in considerable litigation in Florida, a state that has seen its own condominium market swing from boom to bust. The “Two Year” exemption can prove problematic when a contract that purports to bind the developer to complete the project within two years of its execution nonetheless limits the remedies by which the buyer may seek to enforce the contract. Florida case law and HUD guidelines have been consistent in holding that a contract that denies a buyer the right to specific performance (i.e. a court order instructing the developer to complete construction of the development) will preclude an otherwise-compliant contract from satisfying the requirements of the exemption. Less clear is whether a contract that precludes a buyer from claiming special or consequential damages will have the same effect and remove a contract from coming under this exemption. Florida case law is unsettled on this point, and it is anybody’s guess as to how a Nevada court would rule on the topic. Given the current uncertainty, a developer may wish to avoid any limitation on damages until a Nevada court renders a decision on this issue.

Although the Two Year exemption does allow developers to avoid the hassle and expense of preparing a Statement of Record and Property Report, a developer taking advantage of this exemption must be prepared to complete construction of the project in question within the two-year time limit. A recent Florida case illustrated this point: upon a finding that the contract in question did satisfy the Two Year exemption and that the ILSFDA, in turn, did not apply, the developer was held liable to the buyer for breach of contract because it delivered the certificate of occupancy to the purchaser five days after the two-year time limit had expired. Conversely, Delaware authority holds that actual completion of a construction project within two years after the execution of the contract will not exempt the underlying contract from the ILSFDA if the contract does not contain language which explicitly binds the developer to complete the construction within that two-year period.

Penalties for Non-Compliance

The penalties for a developer who proceeds under the mistaken assumption that it has satisfied the terms of the Two Year exemption are harsh. A buyer who has not received a Property Report may rescind on its contract any time within two years of its execution, and the ILSFDA allows buyers to sue both developers and their agents for damages as a result of a sale made in violation of the Act. Further, the ILSFDA allows for fines of up to $10,000 and imprisonment for up to five years for a willful violation of its terms by a developer.

Conclusion

Compliance with the ILSFDA can be time-consuming and costly for developers, and taking advantage of an exemption to the Act is often a convenient choice. However, developers and their agents must ensure strict compliance with the terms of such exemptions, or else risk significant financial exposure. This is particularly true given current market conditions, as growing buyers’ remorse in Southern Nevada may serve as a catalyst to increased enforcement of the remedies available under the ILSFDA.