Due to a busy month, it has been several weeks since my last post.  Numerous topics call out for exploration, owing to the worsening U.S. residential housing market and attendant legal developments.  Fortunately, the Memorial Day weekend permitted me to catch up on some writing.

Many have written in recent days asking for my thoughts on the most recent big case under the Interstate Land Sales Full Disclosure Act (ILSA), Harvey v. Lake Buena Vista Resort, LLC, 2008 WL 1843909 (M.D. Fla. Apr. 22, 2008).  In Harvey, the Middle District of Florida vacated a prior decision in the same case, and granted summary judgment in favor of the buyer plaintiffs on both their ILSA and breach of contract claims.  I am not going to provide an extended analysis here, but Harvey is significant for the following reasons:

(1) The court took seriously the principle that exemptions to ILSA ”must be narrowly and strictly construed.”  In considering whether the developer was entitled to the “improved lot exemption” (under which a developer may escape ILSA by obligating itself to build the development within 2 years from the date the buyer signs the contract), the court held that allowing the seller to extend the completion date on the basis of “frustration of performance, including without limitation, delays occasioned by wind, rain, lightning, and storms” was too permissive to constitute an iron-clad commitment to build in two years.

(2) The court also substantially limited the ability of developers to gain ILSA immunity through what is commonly known as a “savings clause” — that is, boilerplate contract language which purportedly exhibits the parties’ intent for an exemption from ILSA to apply, even if certain provisions of the contract run afoul of the exemption.  As the court stated, to give a savings clause force would be to grant the developer “an ‘escape hatch’ in order to take advantage of the [ILSA] exemption down the road, despite its failure to draft a Purchase Agreement that actually complied with [ILSA] in the first instance.”

On a different but related note, I have been getting numerous inquiries of late from fellow attorneys seeking my opinion regarding whether a given set of facts could constitute an ILSA violation.  The truth is that ILSA, especially its provisions which regulate fraud in the selling of land, is a comparatively “bare bones” law –the statute itself does not provide a whole lot of guidance as to what set of facts could actually comprise a fraudulent transaction.  On this front, however, there is a “hidden secret” of which many are unaware: the regulations promulgated by the U.S. Department of Housing and Urban Development (HUD) under ILSA, which really have the effect of fleshing out the statute.  The ILSA regulations can be found at 24 C.F.R. s. 1710, 24 C.F.R. s. 1715, and 24 C.F.R. s. 1720.

In my experience, too few lawyers make good use of the regulations in litigating ILSA cases.  Knowing the regulations can be invaluable, however, because they contain many details that breathe life into what can certainly be a frustratingly vague law.  By way of illustration, consider just a few examples of “unlawful sales practices” violating ILSA set forth in 24 C.F.R. s. 1715.20:

In selling, leasing or offering to sell or lease any lot in a subdivision it is an unlawful sales practice for any developer or agent, directly or indirectly, to:

. . .

. . .

 (f) Use a Property Report, note, contract, deed or other document prepared in a language other than that in which the sales campaign is conducted, unless an accurate translation is attached to the document.

. . .

(h) Use, as a sales inducement, any representation that any lot has good investment potential or will increase in value unless it can be established, in writing, that:

(1) Comparable lots or parcels in the subdivision have, in fact, been resold by their owners on the open market at a profit, or;

(2) There is a factual basis for the represented future increase in value and the factual basis is certain, and;

(3) The sales price of the offered lot does not already reflect the anticipated increase in value due to any promised facilities or amenities. The burden of establishing the relevancy of any comparable sales and the certainty of the factual basis of the increase in value shall rest upon the developer.

And 24 C.F.R. s. 1715.25(o) states that is a “misleading sales practice” to make,

any representation that implies that the developer or agent will resell or repurchase the property being offered at some future time unless the developer or agent has an ongoing program for doing so.

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

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