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, 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