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

Two recent national news items track the ongoing crisis in the condo/residential real estate market, with a particular emphasis on the bad and worsening state of affairs which continues to envelope Miami and South Florida in general.  From CNN, the S&P Case/Shiller Price index, which charts home prices in 20 major U.S. markets, shows that home prices dropped 10.7% in the 12 months ending January 2008.  The weakest markets: Miami and Las Vegas, tied at a staggering annual decline of 19.3% of each, with Phoenix, San Diego, Los Angeles, Detroit, Tampa, and San Francisco not too far behind.

And this article from Saturday’s Wall Street Journal puts the focus on the woes of the condo market, noting colorfully that “Developers in Miami and Fort Lauderdale, Fla., are readying nearly 10,000 total new units in a market already struggling with canyons of unsold condos.”  The 10,000 figure is truly dizzying.   For purposes of illustration, the same article cites, not surprisingly, Atlanta, Phoenix, and San Diego as three other cities where the over-supply of condo inventory is especially severe.  Taken together, the expected new condo inventory for the coming year in those three cities is about equal to the new supply that will be introduced in Miami/Fort Lauderdale alone!

In addition to the numbers, the following passage from the Wall Street Journal article, which hits upon a key and often overlooked point — the importance of the percentage of the purchase price realized in buyers’ preconstruction deposits — caught my eye:

One big question hanging over the market is how many of the buyers who have put down deposits during construction will show up to close the deal. Some deposits were as little as 3% of the purchase price. The price of a condo has frequently fallen more than the amount of the deposit, giving the buyer an incentive to forfeit the deposit.

For example, if a buyer put down $50,000 for a unit priced at $500,000, and the value falls to $400,000, the buyer is apt to walk away — or find some fault with the unit and sue the developer to get the deposit back. Furthermore, some buyers who still want to move in are finding that they no longer qualify for mortgage loans.

It is no secret that the Florida condo market crash has sparked a rash of lawsuits brought by buyers seeking to recover their preconstruction deposit monies instead of closing on units under contract.  Indeed, this blog has followed the development of this litigation, including the salient issues under Florida and federal law.  No doubt, one of the contributing factors behind the upsurge in lawsuits is the typical hefty percentage paid by buyers as deposits for Florida condos.  The range is anywhere from 10% to 30% of the purchase price, with 20% constituting the norm in my experience.  This means that for Florida condos — which frequently bear purchase prices of anywhere from a quarter million to one million dollars and up — buyers often have a significant amount of cash already invested in the deal to make a lawsuit a risk worth pursuing, and particularly so where a buyer has entered into contracts for multiple units in the same or different projects.

Another important factor driving the condo litigation upsurge in Florida courts is the protection afforded by Florida condo law to buyers’ deposit monies.  The key Florida Statute is section 718.202.  The statute provides that all deposits up to 10% of the purchase price must be paid into an escrow account and held there until closing (any deposits above 10% of the purchase price may be released to the developer, but only “in the actual construction and development of the condominium property,” and the purchase agreement must disclose this possibility).  And particularly relevant given current market conditions, the law also forbids the escrow agent from releasing any funds to the developer where “prior to the disbursement the escrow agent receives from the buyer written notice of a dispute between the buyer and developer.”  The only exception to the escrow requirements set forth in the statute are where the developer files proof of acceptable “other assurances” with the State of Florida — such as a surety bond or an irrevocable letter of credit — to secure the buyers’ deposit funds.

In practice, the Florida escrow requirements mean that a buyer in dispute with the developer over the validity of a condo purchase agreement ordinarily has the power to at least temporarily prevent the developer from accessing a sizeable portion of the deposits — that is, by notifying the escrow agent in writing of the dispute.   First Sarasota Service Corp. v. Miller, 450 So. 2d 875 (Fla. 2d DCA 1984), an older case which arose out of a lawsuit brought by the buyers of 8 condo units against a developer seeking rescission of the contracts and refund of their deposits, depicts this general principle in action.  As the court stated, “The obvious purpose of section 718.202 is to protect purchasers under preconstruction condominium contracts from loss of their deposits should the developer fail to perform its contractual obligations.”  As such, the court held, “since the escrow agent had prior written notice of a claim that there was a dispute between the purchasers and the developer, it made . . . disbursements [to the developer] at its peril.”

The fiduciary duty owed to a buyer by the escrow agent has gained increasing importance in a condo market where plummeting values mean that fewer and fewer purchasers are going through with closing on units, and many of them are seeking to recover their deposits through the legal system.  The oft-heard phrase “possession is 9/10’s of the law” applies in this context and ultimately means that the Florida condominium statute provides significant protection to buyers in a weak and weakening market.

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

This recent item from Miami realtor Lucas Lechuga’s blog caught my attention and prompted me to provide a brief commentary.  In sum, Lechuga reports on a cancelled Miami Beach project where, allegedly, some buyers have requested through their brokers that their deposit monies be refunded, but the developer has taken the position that it will only return deposits in the event that the broker refunds any front-end commission he or she was paid on the sale.  (The situation described is reminiscent of the recent lawsuits filed by The Related Group to “claw back” commissions which were paid to brokerages for units that eventually failed to close.)

While the comments left by readers of Lechuga’s blog suggest a factual issue as to whether the developer is actually drawing this particular line in the sand, I can state as a general matter that I have never seen a purchase agreement where a deposit refund was made contingent upon the repayment of a commission by the broker on the sale, and I have strong doubts as to whether such a condition would be enforceable as a matter of Florida condominium law.  At the same time, however, given current market conditions, it is not unusual for developers to be taking hyper-aggressive stances with respect to their buyers — even where buyers have a clear and indisputable entitlement to a refund of some or all of their deposit monies.  One can only speculate as to the true reasoning behind such stances, but the reality is that many developers have likely resigned themselves to the fact they will be (if they are not already) hit with multiple lawsuits.  With defense lawyers already on retainer to defend against such suits, these days developers may simply find it more in their economic interest to require buyers to go to court rather than to issue refunds to all those who ask.

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

While lately this blog has focused on pressing issues in Florida real estate litigation, including the wave of lawsuits involving Florida condominium contracts, from time to time it can be insightful to frame the issues in a larger context.  One such context is a buzzword heard frequently these days in reports on the current state of the U.S. economy: subprime litigation.

As this recent Business Week article as well as this story from Oregon’s Mail Tribune suggest, “subprime litigation” encompasses lawsuits directly arising out of the collapse of the U.S. mortgage market.  This category includes lawsuits brought by individual and institutional investors whose portfolios have declined as a result of the decrease in value of mortgage-backed securities, as well as by home buyers claiming that they were defrauded by the originators of subprime mortages.  To these types of lawsuits, I would add that subprime litigation also includes the current crop of lawsuits brought by buyers/investors seeking to recover deposits paid under residential real estate contracts.  The ready availability of subprime mortgage financing accelerated the demand for housing in already highly speculative housing markets such as Florida, Nevada, California, and Arizona.  When the rug was pulled out from under that financing — see, for example, the “blacklists” issued by several large banks with respect to South Florida condo projects for which they will no longer extend mortgages — numerous real estate purchasers were left out in the cold.   With many such buyers now unable to get approval for mortgages on the real estate for which they paid hefty deposits several years ago, they are left with no alternative but to file suit to have a chance of recovering that money.

This article by two lawyers at a large Atlanta firm illustrates the nature of the legal battle which is inevitably going to be at the center of the lawsuits involving mortgage-backed investments.  As they wisely predict, much of the fight will be over the process by which risky investments were given high “AAA” ratings enabling them to be sold to portfolio managers.  The authors assert that the rating agencies, when targeted by lawsuits or subpoenas seeking discovery, will attempt to shield themselves with the so-called “journalist’s privilege” and will argue that any information gathered during the rating process — which would reveal the representations concerning the investments made by their issuers and underwriters, as well as the extent of due diligence by the rating agencies themselves — is protected under the First Amendment.

With respect to lawsuits brought under residential real estate contracts, the “information war” will play out differently.  Unlike mortgage-backed securities, residential properties — while also risky investments which teetered on top of the over-extended subprime mortgage sector — were never blessed by authoritative rating agencies.  Rather, any information concerning the suitability of a given property as an investment would have come from the developer, or from the sales agents attempting to move the property.  Federal securities law provides one source of law under which buyers could bring claims based on such information: for example, recent lawsuits such as this one against the developer of a high-end Florida condo-hotel assert that developers made misrepresentations regarding the rental income which could be expected from owning a unit.  Another potential source of law is exemplified by section 718.506 of the Florida Statutes governing sales of condominiums, which reads in relevant part:

“Any person who, in reasonable reliance upon any material statement or information that is false or misleading and published by or under authority from the developer in advertising and promotional materials, including, but not limited to, a prospectus, the items required as exhibits to a prospectus, brochures, and newspaper advertising, pays anything of value toward the purchase of a condominium parcel located in this state shall have a cause of action to rescind the contract or collect damages from the developer for his or her loss prior to the closing of the transaction.”

Note the phrase “published by or under authority from the developer.”  Those condo buyers who try to claim that properties were misleadingly marketed, perhaps by deliberately concealing or coloring any risk associated with them, will need to trace the marketing information to the developer itself.

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

One question I get frequently from individuals who have signed a purchase agreement for residential real estate in Florida, such as a condominium, is whether they risk being faced with a lawsuit from the developer in the event they don’t (or can’t) show up for closing. Generally speaking, the answer to this question is not necessarily a simple “yes” or “no,” but there are some key principles of Florida law to bear in mind as a way of anticipating what might happen if a buyer does not close:

1. Many purchase agreements provide that the seller is entitled to a specified amount of liquidated damages as its sole and exclusive remedy should the buyer default, i.e., fail to close. The available liquidated damages are usually established as a percentage or the entire amount of deposits which the buyer paid. Where the contract provides an exclusive liquidated damages clause, the developer is precluded from receiving specific performance of the contract, or any other remedy for that matter. See Hatcher v. Panama City Nursing Center, Inc., 461 So. 2d 288 (Fla. 1st DCA 1985).

2. It is important to bear in mind that specific performance — which means that a party is compelled by court order to go through with the terms of a contract — is itself an extraordinary remedy. As one court put it, “specific performance of a contract for sale of land will be decreed only if the contract is capable of being mutually enforced with results that are just and practical, the moving party is not guilty of laches and there is no countervailing equity against him, and there is no adequate remedy at law available to him.” Hembree v. Bradley, 528 So. 2d 116, 117-18 (Fla. 1st DCA 1988 ) (emphasis added). Accordingly, if the seller does in fact have an adequate remedy at law under the contract, then specific performance should not be available. For example, if the contract permits the seller to collect liquidated damages in the event of the buyer’s breach, then there are solid grounds for concluding that specific performance is not available, because the liquidated damages provision provides an “adequate remedy at law” to the seller — even if the liquidated damages clause is not “exclusive,” as described above in paragraph 1.

3. Buyers may have an additional defense to specific performance, especially given the current and continuing state of the housing market where mortgage financing could be very difficult or even impossible to obtain. (See, for example, the “blacklists” established by some banks for Miami condominium projects for which the banks are unwilling to extend financing.) Castigliano v. O’Connor, 911 So. 2d 145 (Fla. 3d DCA 2005) dealt with a somewhat tangled set of facts involving a condo purchase agreement, and buyers who were seeking specific performance from the seller, i.e., to require the seller to go through with closing. The court noted that, “[a]s specific performance is an equitable remedy, the purchasers should be prepared to show that it will not be unjust or oppressive on the seller to have the contract enforced,” and found that the standard was not met because “the purchasers have failed to show that a decree of specific performance would not require the seller to make extraordinary efforts or expenditures to close on the sales contract.” By analogy, the same reasoning would seem to preclude a developer from obtaining specific performance against a buyer who is no longer able to obtain a mortgage for a real estate purchase and would thus be forced to bring cash by alternative means to closing. And this reasoning would hold true even in circumstances where the contract left open, or explicitly provided for, the remedy of specific performance.

Under the foregoing principles of Florida law, an attempt by a developer to sue a purchaser in an effort to obtain remedies beyond the contract’s liquidated damages provision will ordinarily be on shaky ground, especially if the developer is seeking specific performance. This does not mean, however, that a developer may not use the threat of seeking specific performance as a tactic to coerce the buyer to close. But whether such a threat is credible and could ultimately carry the day in court depends on the facts and 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

A new opinion from the Middle District of Florida, Bush v. Bahia Sun Associates Ltd., 2008 WL 516825 (M.D. Fla. Feb. 22, 2008 ) is relatively short, but the result could be sweet for real estate buyers looking to cancel their contracts and obtain refunds of their preconstruction deposits.

In Bahia Sun, the plaintiffs brought a claim seeking rescission of their purchase agreement, arguing that it did not comply with 15 U.S.C. section 1702(d), a provision of the federal Interstate Land Sales Full Disclosure Act (”ILSA”).  The developer defendant responded by arguing that the statute did not apply because the transaction was exempt from ILSA, specifically under the exemption by which the seller is obligated to construct a residence/condominium on the sold lot within two years from the date that the buyer signs the purchase agreement.  (I have written more in depth on the so-called “improved lot” or “two-year” exemption here and here.)

The Court disagreed with the defendant’s position, however, and denied the defendant’s Motion to Dismiss.  Here is the part of the opinion which could be read as a boon to buyers looking to avail themselves of remedies under ILSA:

“Plaintiffs have asserted that they can, and will be able to, produce facts and circumstances attendant to the Contract sufficient to prove that the Contract was not intended by Defendant . . . to be a binding commitment for construction of Plaintiffs’ residence within the two-year time frame justifying the relevant ILSA exemption. . . .  Notwithstanding some Contract language favorable to the Defendants, under the applicable standard of review at this stage of the litigation, the Court must accept the Plaintiffs’ allegation [under ILSA] as true.”

As such, the Court looked beyond the bare language in the contract and allowed the Plaintiffs’ allegations that the developer never intended to build within two years, regardless of what the contract stated, to defeat the Motion to Dismiss.  The takeaway point here is that under Bush, a purchase agreement which may appear to be perfectly ILSA-compliant on its face might still ultimately be found to be revocable under the statute, if the buyer can produce the right sort of evidence.

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