Oral argument was held last week in the D & T Properties vs. Marina Grande Associates appeal in Palm Beach County.  As I wrote on this blog some months ago, Florida real estate market watchers and condo lawyers have an intense interest in the outcome because the court is being asked to clarify under what circumstances amendments to condominium documents are deemed “material and adverse” to the buyer, thus enabling the buyer to cancel the contract.  While I was unable to attend the hearing, Paul Brinkmann of the South Florida Business Journal was there.

As Brinkmann reports, one of the judges on the appellate panel noted from the bench that if the lower court’s ruling were upheld, it would be akin to turning condo cases into “divorce cases.”  This apt analogy is based on the fact that the lower court actively examined the buyer’s financial situation in determining that an increase in the assessments that the buyer would be required to pay if it closed on the property was not good grounds for cancelling the contract because the buyer could well afford the increase.  In other words, as in divorce cases, the lower court’s approach entails scrutinizing the parties’ finances to determine the judicial result.

In my prior article, I focused on how prior opinions have construed the notion of “material and adverse,” and the manner in which those opinions might lend some guidance in predicting the outcome of the Marina Grande appeal, and how the Florida condominium statute will be interpreted.  But, the divorce analogy invoked by the appellate court raises another set of concerns.

First, from a judicial resources point of view, it would certainly be disadvantageous to turn condo contract cancellation cases into “divorce” proceedings between the buyer and developer.  Such an approach would mean longer and costlier cases for both sides, targeted at determining whether a given buyer could bear the burden of a given change to a condo.   And while the trial court in D & T Properties denied the buyer’s request to cancel the contract and recover its deposit monies, ultimately the “divorce” approach could also be unfavorable for developers in the long run.  In short, even relatively miniscule changes to the contract and condo documents could serve as valid bases for cancellation, if the buyer were able to demonstrate a personal financial situation where the change made the property unaffordable.  Such result would surely run counter to well-established principles of contract law, whereby only significant or material changes to a contract may give rise to a right of rescission in one of the parties.

Second, adopting the “divorce” approach would amount to a wholesale transformation in the way condo purchases are viewed.  By way of illustration, consider a 22-year-old case called Klinger v. Zaremba Florida Co., 502 So. 2d 1252 (Fla. 3d DCA 1986).  Klinger involved a phased project which originally called for a subdivision of townhomes to be built with a jogging path and outdoor track as recreational facilities.  After selling the townhomes, the developer altered the later stages of the project, replacing the jogging path and outdoor track with a second condominium subdivision.  Based on how the project was originally represented to the townhome buyers, the court found they possessed a right to rescind their purchase agreements, noting that they “had a substantial interest in the recreational facilities as amenities to the expensive condominium units which they purchased” (emphasis added).

The takeaway point of Klinger is clear: a purchaser of a condominium has a prior and independent interest in the common areas of a condominium, including the recreational facilities, regardless of that buyer’s individual situation.  That is to say, there was no need for the court to conduct an analysis of whether each individual buyer had an actual interest in using the jogging path or outdoor track before determining that all of the buyers had been harmed by their elimination — joggers and non-joggers alike.   Of course, this approach should not be surprising given that, as one leading treatise on Florida condo law puts it, “[t]he key characteristic that distinguishes the condominium from other forms of property ownership is that a unit owner also owns an undivided interest with other unit owners in the ‘common elements,’ which interest cannot be separated from the unit.”  William P. Sklar, “Concept of Condominium Ownership,” Florida Condominium Law and Practice (3rd Ed. 2003).

I would venture to say, however, that if the “divorce approach” to contract cancellation is adopted, the defining feature of condo ownership will be threatened.  In my experience, many buyers rightly view significant changes to a condo’s common elements as material and adverse — indeed, many view the common elements as the real soul of the building itself, over and above the individual units.  As recognized in Klinger and other longstanding case law,  the buyer’s independent and substantial interest in the common areas should be respected — not only because it is the law, but because from a business vantage point, buyers choose to purchase condos based on the whole package offered by the building.  Treating cancellation cases as divorces between the buyer and developer, however, would unfairly challenge and potentially undermine this interest by enabling developers to make wholesale changes to common elements while leaving their buyers with no recourse.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation. A significant portion of Mr. Beck’s practice is devoted to issues arising under condominium and other real estate purchase agreements.  He can be reached at 305-789-0072 or jared@beckandlee.com

In recent days, a number of readers kindly sent me this opinion piece which appeared in last week’s South Florida Sun-Sentinel.  The commentary, entitled “HUD, congressional action needed to stop tide of condo lawsuits,” was written by Alan S. Becker and Allen M. Levine of the large Florida law firm Becker & Poliakoff, and essentially argues in various ways that developers should not be held accountable for violations of the federal Interstate Land Sales Full Disclosure Act (ILSA), even where there is no dispute that such violations occurred.  Here is an exemplary quote from Becker and Levine: “[I]f these lawsuits [under ILSA] are successful, it will set a dangerous precedent for large numbers of buyers skipping out on their contracts every time the market takes a downward turn[.]“

Back in October of last year on this blog, I stated the possibility that ILSA is “a land mine ready to explode for condo developers“.  It does not surprise me, therefore, that lawyers such as Becker and Levine would argue in a public forum that their big developer clients should be permitted to escape the fallout from the ILSA land mine which is now detonating around them.  Becker and Levine’s arguments are boldly stated, but, in my view, misguided and misrepresent the facts.  Instead of responding to them on this blog, I thought it would be appropriate to submit a reply directly to the Sun-Sentinel, which the newspaper printed in today’s edition here, under the headline, “When it comes to interstate land sales, developers shouldn’t get a free pass“.

I encourage anyone wishing to weigh in on the debate to post comments here.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida.  His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation.  A significant portion of Mr. Beck’s practice is devoted to issues arising under condominium and other real estate purchase agreements.  He can be reached at 305-789-0072 or jared@beckandlee.com

Recently, the Wall Street Journal had a short but incisive item provocatively titled, Rooms With a Bubble View: Condo-Hotel Buyers See Investments Sour as the Market Weakens.  The article characterizes condo-hotels as “one of the most dangerous investments of them all,” and then briefly discusses some of the lawsuits being brought against condo hotel developers in places like Las Vegas, Singer Island and Clearwater.  (I previously wrote on the the lawsuit against the Resort at Singer Island here.)   The basis for all of these lawsuits is that the properties were marketed in such a way as to qualify as “securities” under federal and/or state law, but were not registered as a securities offering, thus entitling the buyers to a refund of their deposits.  If the allegations can be proven, then the remedy is potent indeed: as one attorney quoted in the Wall Street Journal article accurately states, “The rights of recovery are so much better if you can say it is a security.”  A version of the Wall Street Journal article also recently appeared in the Daytona Beach News-Journal, with additional discussion concerning an apparently struggling condo-hotel in Daytona Beach called Plaza Resort & Spa.

It is correct to hone in on securities laws as a potentially powerful weapon for purchasers of condo-hotels to seek rescission of their purchase agreements.  To a significant extent, however, the course that condo-hotel litigation will take — and how such cases will be viewed and ruled upon by courts — is difficult to predict.  Case law addressing the issue of the conditions under which a condo-hotel constitutes an offering of securities and should be registered as such is thin — in fact, non-existent, for all intents and purposes.  The most important guidance comes from a 1973 Release from the Securities and Exchange Commission (SEC) entitled Guidelines as to the Applicability of the Federal Securities Laws to Offers and Sales of Condominiums or Units in a Real Estate Development (SEC Release No. 33-5347).  A copy of the SEC Release can be found here.

The Release sets forth three broad factors, the presence of any one of which could render a condo-hotel as a securities offering, thus triggering the right of a buyer to seek rescission under securities law.  These factors are:

1. The condominiums, with any rental arrangement or other similar service, are offered and sold with emphasis on the economic benefits to the purchaser to be derived from the managerial efforts of the promoter, or a third party designated or arranged for by the promoter, from rental of the units.

2. The offering of participation in a rental pool arrangement; and

3. The offering of a rental or similar arrangement whereby the purchaser must hold his unit available for rental for any part of the year, must use an exclusive rental agent or is otherwise materially restricted in his occupancy or rental of his unit.

The Release itself contains some, but not a great deal of, elaboration concerning what these three factors mean in practice.  For example, a rental pool is defined as a rental system whereby “[t]he rents received and the expenses attributable to rental of all the units in the project are combined and the individual owner receives a ratable share of the rental proceeds regardless of whether his individual unit was actually rented.”  For more helpful detail, however, one must turn to the SEC “No-Action Letters” on the subject of what constitutes a security for regulatory purposes, and many of the key No-Action Letters affecting condo-hotels can be found on this page of the SEC website.  No-Action Letters are prepared by the SEC in response to formal requests from entities asking whether a given set of facts would trigger enforcement action by the agency.  The SEC’s position (i.e., whether or not it would recommend an enforcement action with respect to the proferred facts) is only binding as to the specific inquiry before it.  While No-Action Letters provide some guidance on how a court might rule if faced with similar or even identical issues, it is important to bear in mind that the SEC’s stated position as to a given set of facts would be persuasive, but not binding, upon a court.

Beyond the SEC Release and No-Action Letters, when it comes to legal analysis of the salient issues bearing on how securities law interacts with the offering of condo-hotels, nearly all of the analysis comes from developer-side attorneys seeking to advise their clients how to structure their projects so as to minimize the risk of coming under SEC scrutiny, or positing how local authorities can enact zoning regulations which lessen securities regulation hazards for condo-hotel developers.  For examples of articles in this vein, see here, here, here, and here.

Given the impending wave of condo-hotel litigation that we can surely expect in the coming months owing to buyers looking to recover their deposit monies (and paralleling the tsunami of “plain vanilla” condo buyer lawsuits), the perspective from developer-side attorneys will surely be helpful for predicitng what twists and turns such litigation might take.  But to get a true picture of what is on the horizon, it will be necessary to take a close and critical look at the relevant No-Action Letters as well as case law addressing the issue of what can constitute a security, generally speaking, in order to identify the pressure points which may exist for condo-hotel buyers (and their attorneys) to push in litigating rescission cases.  To fill the gap, I intend to make these issues a focus of my blog, in the weeks ahead, by providing condo-hotel securities law analysis alongside and in the same manner as my articles on the federal Interstate Land Sales Full Disclosure Act and Florida condominium law.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation. A significant portion of Mr. Beck’s practice is devoted to issues arising under condominium and other real estate purchase agreements. He can be reached at 305-789-0072 or jared@beckandlee.com

The Middle District of Florida recently chimed in somewhat negatively on a defense often raised by developers in the many lawsuits brought by buyers of condominiums looking to recover their preconstruction deposit monies in oversupplied and tanking residential real estate markets such as Florida.  The defense might be best termed the “real estate speculator” defense.  I suspect that the Court’s language will be cited by buyers’ attorneys in many future cases.

In Huggins v. Marriott Ownership Resorts, Inc., 2008 WL 552590 (M.D. Fla. Feb. 27, 2008), the purchasers of a condo in a Panama City project called The Grand Residences by Marriott at Bay Point, sued for the return of their deposits upon learning that the unit was allegedly built 90 square feet smaller than promised, and that the floor plan was significantly altered.  Among a host of grounds presented in its motion to dismiss the complaint, the developer “characterize[d] the Huggins as disappointed real estate ’speculators,” asserting:

Plaintiffs are real estate speculators who reserved a condominium unit near the end of the boom in the market in 2005. The market experienced a significant downturn since the Plaintiffs reserved their units, so they are now drumming up theories from breach of contract to fraud to breach of implied warranties in an effort to avoid the effect of their decision to speculate. (emphasis added).

While the Plaintiffs responded by denying that they were speculators and that they actually intended to live in the unit, the Plaintiffs’ intention regarding the property was beside the point, in the Court’s opinion, at least with respect to the early stage of the lawsuit.  As the Court held, “The issue of whether the Huggins were real estate speculators or, instead, intended to live in the condominium unit at Bay Point is beyond the four corners of the Complaint and its exhibits.  For that reason, those matters are irrelevant for purposes of deciding Marriott’s motion to dismiss.” (emphasis added).

In other words, “speculators” are every bit as entitled as any other purchaser to state claims for breach of contract, breach of warranty, fraud, etc. arising out of a purchase agreement.  Whether they will ultimately prevail on such claims, of course, will depend on the facts at issue, but the Court was unwilling — and rightly so — to grant developers a “shortcut” to having so-called “contract cancellation” lawsuits thrown out of court.  At the end of the day, legal rights are immutable and should not be applied differently depending on economic conditions.

 By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation. A significant portion of Mr. Beck’s practice is devoted to issues arising under condominium and other real estate purchase agreements. He can be reached at 305-789-0072 or jared@beckandlee.com

In the past couple months, I have received a noticeable uptick in calls from individuals who have been directed to my law office through this website.  The vast majority of these callers have a specific interest in my articles on the federal Interstate Land Sales Full Disclosure Act (ILSA) and Florida condominium law.  I can only conclude that the enormous inventory of condominiums scheduled for completion this year in Florida and other regions of the country is driving the heightened interest in my analysis of the law most relevant to those who signed a condo purchase agreement and are concerned about their legal options, due to bad and worsening conditions in the U.S. housing market.  Given the following that this blog has acquired, I thought it would be helpful to post a few points intended specifically for readers who have come across this site recently:

1.  To my fellow attorneys: I very much appreciate the many lawyers who have offered me their insights regarding ILSA and the condo law of Florida and other states, and taken the time to send me recent rulings and opinions.  This has been invaluable to the blog’s mission of tracking important legal developments and providing that information to the public.  I encourage my fellow attorneys to keep doing so — the best way to reach me for this purpose is by email at jared@beckandlee.com.  Also, I hope readers will make more liberal use of the “comments” feature here, so that we can get a public discussion going as to the meaning and importance of new case law as it develops.

Lately, an increasing number of attorneys have inquired as to whether I am available to co-counsel on ILSA matters in jurisdictions such as Arizona, California, Georgia, and Nevada, among others.  While my practice is centered in Florida, I do occasionally take cases, including as co-counsel, in other jurisdictions, depending on the facts and circumstances.

2.  To members of the media: I have been making myself available for interviews on condo and real estate legal issues, and will continue to do so in the future as time permits.  Please feel free to set up an appointment by calling my office at 305-789-0072, or by sending me an email.  Note: if you leave a message, it is helpful if you provide a brief summary of the story on which you are working and any deadlines you may be facing.

3.  To condo buyers: Some of the recent callers to my office who have mentioned that they are readers of this blog have been condo buyers seeking legal advice with respect to their purchase agreements.  I highly encourage those in this position to have the condo documents — and especially the contract – readily available when calling, as it facilitates the process of providing advice on potential options.  Given the growing number of buyers who are calling my office after having visited this blog, I thought it would be helpful to link back to one of my popular older articles titled Choosing An Attorney For A Florida Condo Contract Case: It Pays To Do Your Research.  And just a reminder: while as an attorney, I am equipped to offer legal advice, I suggest those looking for insight into the real estate market itself — such as the latest closing rates in various projects and predictions as to when the market will bottom out — get in touch with a knowledgeable real estate guru such as Lucas Lechuga.

Also, I have established a new section at the bottom of the blog called “resources” for the purpose of collecting key links, including on-line versions of ILSA and the Florida condominium statute. 

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida.  His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation.  A significant portion of Mr. Beck’s practice is devoted to issues arising under condominium and other real estate purchase agreements.  He can be reached at 305-789-0072 or jared@beckandlee.com

As reported in the Miami Herald and the South Florida Business Journal, the New York Attorney General’s Office recently ordered developer giant The Related Group to refund preconstruction deposits to buyers who were marketed and sold certain Florida condo units in New York State.

The directive was issued under a New York statute called the Martin Act, a provision of which makes it illegal “to make or take part in a public offering or sale in or from the state of New York of securities of participation interests or investments in real estate,” including condominium units, unless the offering or sale has been registered in New York.  See N.Y. General Business Law section 352-e.  By way of background, the Martin Act is an old law dating back to 1921 that grants the New York Attorney General rather broad prosecutorial powers, and, in fact, disgraced ex-Governor Eliot Spitzer prominently made rather expansive use of the statute during his days as Attorney General in prosecuting various securities frauds.

From the news reports, it appears that Related is being given an opportunity to respond to the Attorney General’s Office and challenge its finding.  One may wonder what kind of power the New York Attorney General would have to enforce its mandate, although it would seem that if push came to shove, the Attorney General could seize any assets held by Related in New York for purposes of enforcement.  Also, while the Martin Act does not itself allow for a private cause of action (meaning that only the New York Attorney General can enforce the law), it is important to bear in mind that the Florida Deceptive and Unfair Trade Practices Act (”FDUTPA”) is broadly worded insofar as ”any law, statute, rule, or ordinance which proscribes unfair methods of competition, or unfair, deceptive, or unconscionable acts or practices” may serve as a basis for a violation of FDUTPA.  Because FDUTPA, unlike the Martin Act, is privately enforceable, buyers who have been aggrieved under the Martin Act could conceivably sue on the basis of these violations in Florida court under FDUTPA.

For these reasons, the attempt to enforce the Martin Act should be an object of close attention for buyers and developers of condo units located in Florida and other parts of the country, especially where the units were marketed in New York State and the sales transaction took place there.  Depending on how things shake out, the New York Attorney General’s Office may have added considerable fuel to the already brightly burning fire of condo contract litigation.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation. A significant portion of Mr. Beck’s practice is devoted to issues arising under condominium and other real estate purchase agreements. He can be reached at 305-789-0072 or jared@beckandlee.com