As loyal readers of this blog know, the Interstate Land Sales Full Disclosure Act (ILSA) is an often overlooked federal law that has ascended in importance over the past year, owing to the fact that it is one of the major sources of potential rights for buyers under real estate purchase agreements, including contracts for condominiums.  Given the recent U.S. housing market collapse and the resultant litigation boom, numerous buyers have turned to ILSA to fully understand the nature of their rights, and especially with respect to the hefty preconstruction deposits often paid to developers as a condition of signing contracts.

Now, in a striking turn of events in the ongoing litigation “war” between buyers and developers, the U.S. Department of Housing and Urban Development (HUD) – the very agency charged by law with administering and enforcing ILSA – has picked sides, and opted to throw in its lot with developers.  In particular, HUD has voluntarily filed an amicus brief supporting the developer’s position with the U.S. Court of Appeals for the Eleventh Circuit in the matter of Pugliese v. Pukka Development.  As I’ve written previously, the trial court’s opinion in Pugliese was an important ruling favorable to real estate buyers, setting forth an interpretation of ILSA with an expansive view of buyers’ rights and remedies under the statute.  HUD’s amicus brief takes the position that the trial judge misinterpreted the statute and reached the wrong result, creating “an adverse impact on the settled expectations of the housing industry” and exposing developers, in HUD’s own words, ”to greater financial liability and increasing the potential for their default on construction loans.  Such risks for the developer could, in turn, lead to decreased property values for existing owners within a development.”

The issues on appeal in Pugliese revolve around technical matters of statutory construction concerning a law, ILSA, that is notoriously poorly drafted and difficult to comprehend, even for lawyers.  Those with an interest in this rather esoteric debate can access HUD’s brief here, and the original Pugliese decision here.

But the disturbing big picture point is HUD’s decision to spend its resources intervening on the side of developers against buyers, in support of a narrow interpretation of ILSA that lessens rather than expands the statute’s remedial power.   Here is the context for why this should be troubling.  ILSA, when passed by Congress in the late 1960s, was deliberately patterned after another federal statute, The Securities Act of 1933.  The Securities Act of 1933, in turn, was born out of the Great Depression — one of the causes of which was rampant fraud in the sale of securities to the public — and to this day, is one of the enforcement tools of the Securities and Exchange Commission (SEC) in its mission of regulating the securities market.

Unlike the Securities Act, however, ILSA is administered not by a strong agency with a track record of combatting fraud, but by HUD, a comparatively weak agency without a history and culture comparable to the SEC.  In fact, unlike the SEC, HUD’s origins lay in policy development, not enforcement.  It is no surprise, therefore, that the enforcement history of ILSA by HUD has been paltry, if not non-existent.  What is surprising and disappointing, however, is that HUD would take an affirmative stance against buyers in federal court, given the state of the U.S. economy, the U.S. housing market, and the now regular reports of stalled projects and increasingly elaborate mortgage fraud schemes.  Contrast HUD’s stated position to Judge Lynch’s words in the original Pugliese decision, which referred to ILSA as a law “designed to discourage fraud by keeping buyers informed through rigorous disclosure requirements,” with the “remedial purpose of protecting the buying public” which, as such, “should be liberally construed in favor of the public.”  Judge Lynch got it right.

So where does HUD’s posture of non-enforcement of ILSA and alignment with developers leave the real estate buying public? At the agency level, we can expect to see some of the enforcement burden abdicated by HUD actually shouldered by the SEC.  As I have written here, certain types of real estate projects are increasingly objects of scrutiny from the standpoint of securities law, especially those with a condo-hotel component.  The scope of any SEC action is limited, however, to those projects which may be classified as “securities offerings” pursuant to the regulatory guidelines and case law.

But aside from state and federal criminal prosecution and possible SEC involvement, the bulk of responsibility for enforcing the law against crooked developers will rest with private enforcement, that is, civil lawsuits brought by affected buyers through private attorneys.  In recent months, we have witnessed a palpable backlash against such lawsuits brought under ILSA in federal court .  Some of the backlash is justified, and some of it is unjustified.  I will be writing in depth on this recent backlash in the near future, but the general effect is to push more of the lawsuits into state court, packing state judicial systems that, across the board, are already filled to the brim with mortgage foreclosures.

The bottom line is that HUD should seriously reconsider its priorities as the housing market crisis continues to unfold.  Putting teeth into laws, such as ILSA, which exist to protect consumers in the context of real estate transactions is one of the keys to restoring buyer confidence and forging the path to recovery.

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

There is no doubt that the recent Marina Grande opinion from the Fourth District Court of Appeal in Florida is a key decision and, as I’ve written about here, it is an important object of analysis on the issue of what constitutes a “material and adverse” change sufficient to enable a condo buyer to recover his or her preconstruction deposits.  What surprises me, however, is that newspapers reporting on the decision have suggested that it foreshadows an imminent slow-down in lawsuits brought by real estate purchasers.  For examples of this story line, see the June 13th South Florida Business Journal (”Buyer suits show signs of slowing”) and yesterday’s Palm Beach Post (”Is this the death knell for people trying to undo their purchase deals and avoid the closing table?”).

In reality, nothing could be further from the truth.  The number of calls to my office in recent weeks and months from people all over the world who bought Florida real estate and who are now seeking legal advice on what to do about their purchase contracts can fairly be described as a flood, and there is no sign of the floodwaters abating any time soon.  We are only now beginning to realize how overheated the market in Florida real estate (along with the broader U.S. housing market) was in recent years, and that cold realization is carrying with it the discovery of some of the more intricate schemes and scams that were perpetrated during the days when everyone believed that investing in real estate was a golden ticket.  Just by way of example gleaned from news reports in the past several days, consider the recent wave of criminal mortgage fraud indictments in South Florida, along with this report from yesterday’s Naples Daily News concerning an elaborate “lease-to-own” scheme allegedly perpetrated by a developer on Florida’s west coast.

Based on my experience and legal practice, the core and narrow issues in the Marina Grande case — that is, whether rising assessments due to increased insurance premiums and electricity costs were sufficiently material and adverse to enable a buyer to cancel its purchase contract — represent just a tiny sliver of the universe of grounds for buyers’ claims in the ongoing litigation war between buyers and developers.  As I have written on this blog, those grounds include the federal Interstate Land Sales Full Disclosure Act (ILSA), securities law, as well as the multiplicity of state statutory and common law claims.  And as the situation for real estate purchasers continues to worsen in the midst of the ongoing subprime crisis and resultant credit crunch, we can expect to see ever more lawsuits filed by buyers on the basis of new and novel legal theories.

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 Fourth District Court of Appeal has spoken in likely the most watched condominium contract case in recent memory, D & T Properties v. Marina Grande, and the Court has sided with the developer against condo buyers seeking to recover their preconstruction deposits.   A good summary of the decision can be found in Paul Brinkmann’s report from last week’s South Florida Business Journal.  A copy of the opinion itself is available here.

In recent days, many have asked for my take on Marina Grande.  The Court took the time to write a long and detailed opinion which in many ways is self-explanatory, so it is definitely worth reading the opinion in full.  In my view, there two main takeaway points, one “small picture” point and one “big picture” point.

The Small Picture:  The Court held that a 2007 law passed by the Florida legislature had the effect of eliminating a buyer’s right to cancel a purchase contract based on amendments to the condo’s operating budget — i.e., rising assessments — which are based on “matters beyond the developer’s control.”  The substantive interpretation of the 2007 law is not surprising to me; what left me scratching my head, however, was that the Court applied the law retroactively to a purchase contract that was signed well before the law was passed.  Florida law has a very clear and large presumption against the retrospective operation of a statute.  See State Farm Mutual Auto Ins. Co. v. Laforet, 658 So. 2d 55 (Fla. 1995).  Not only that, but even if a legislature passes a law with intended retrospective effect, it cannot be applied retroactively if to do so would impair rights under an existing contract, as such application would violate both the Florida and U.S. Constitutions.  See Fla. Dep’t of Transp. v. Chadbourne, 382 So. 2d 293 (Fla. 1980).  Unquestionably, removing a buyer’s statutory right to rescind a contract is an impairment of the buyer’s contractual rights, and the Court had nothing to say on this issue.

Even given the ruling, however, it is important to recognize that the Court has not entirely foreclosed the possibility for rising assessments to serve as a valid basis to cancel a condo contract.  Instead, the focus will now be on whether such increases were “beyond the developer’s control.”  In many instances, this will not be a black or white determination, and if anything, the Marina Grande opinion has opened up a new line of factual issues for contested litigation in condo contract cases.

The Big Picture:   In the second part of its opinion, the Court actually reversed the trial court’s reasoning, although it reached the same result as the trial court in denying the buyers’ claims to recover their deposit monies.  Essentially, the Court disagreed with the trial court’s view that the individual buyer’s specific situation or financial condition should be determinative of whether the buyer may cancel the contract and recover the deposits.  Rather, as the Court stated, “an objective test is appropriate . . . would a reasonable buyer under the purchase agreement find the change to be so significant that it would alter the buyer’s decision to enter into the contract?”  Here, the Court got it right and properly applied the Florida condo statute as it has been construed in other cases, and averted the disastrous result of turning condo contract into “divorce cases,” or battles over each buyer’s subjective situation.

This result is good for both buyers and developers in the long run, because it will lend predictability to the interpretation and judicial enforcement of condo contracts.  When you think about it, the objective test may actually be more beneficial to buyers in the short run with respect to the rash of condo cases being litigated in courts across Florida.  For instance, with respect to changes to a development’s common elements — for example, a decrease in the size of the swimming pool or the elimination of the gym — the Marina Grande decision clarifies that there is no need to inquire whether an individual buyer would have gotten any use out of the common element in question, only whether a “reasonable buyer” would have cared about the change before entering into the contract.  Not only is this the right way to treat condo buyers — given that collective ownership of all of the common elements is the very defining feature of condo ownership — but it accords with longstanding treatment of condo buyers in Florida courts.

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