Pugliese v. Pukka Development, Inc.: The ILSA Quagmire Gets Thicker For Developers As A New Opening For Condo Contract Revocation Emerges

Update (December 10, 2008): The Eleventh Circuit reversed in Pugliese v. Pukka yesterday.  Read my analysis here.

I’ve received a number of requests to address the Southern District of Florida’s recent decision in Pugliese v. Pukka Development, Inc., so it appears that the topic of this post will be of some interest to this blog’s readership.  For those who are unfamiliar with the Pugliese opinion, Greenberg Traurig (the law firm, par excellence, for South Florida condo developers) provides a helpful overview of the opinion and its potential consequences for developers on the law firm’s website.  For those interested in reading the opinion itself, I have uploaded a copy here.

Here is the upshot of Pugliese:

The Interstate Land Sales Full Disclosure Act (“ILSA”), about which I’ve written more extensively here, is a federal consumer protection statute that mandates certain disclosures and contractual requirements for sales of land, including condominium units.  Because complying with ILSA can be somewhat onerous, developers often seek to fall within one or more of the exemptions set forth in the statute in order to be excused from some or all of ILSA’s requirements. One such exemption is the so-called “two-year exemption” — which effectively entails a promise by the developer to build the development within two years from the date the buyer signs the purchase agreement — and I’ve discussed this exemption, and its pitfalls, here.

Another exemption — the one taken up by the court in Pugliese — is triggered where the development at issue contains fewer than 100 units for sale.  While there has never been any question that such developments fall within an established exemption under ILSA, there has been uncertainty about the scope of the exemption.  The Director of the RESPA and Interstate Land Sales Office of the U.S. Department of Housing and Urban Development (HUD), as well as one Florida state appellate court, have both taken the position that developments with fewer than 100 units for sale — which are explicitly exempt under ILSA from the requirements of registering with HUD and providing a HUD Property Report to buyers — also do not need to comply with certain contractual requirements as set forth under 15 U.S.C. section 1703(d) of the statute: namely, that the purchase agreement provide a clearly identifiable and recordable description of the unit being sold; that the seller provide the buyer written notice of any default under the contract, and a 20-day period to cure; and that, upon the buyer’s default, the seller must refund the buyer any amount which has been paid in excess of either 15 percent of the purchase price or the seller’s actual damages caused by the buyer’s breach — whichever is greater.

The federal court in Pugliese, however, disagreed with the HUD opinion letter, and disagreed with the Florida state appellate court, and found instead that developments with fewer than 100 units still have to comply with the foregoing contractual requirements under 15 U.S.C. section 1703(d), even though they don’t have to register with HUD or provide a Property Report.  The opinion is somewhat long and grounded in detailed statutory construction, but makes a lot of sense.  As part of its ruling, the court found the contract to be validly cancelled and ruled that the deposits had to be refunded.

While the opinion will have something of a narrow application — i.e., only to developments with less than 100 lots or units — Pugliese highlights some important points about issues under ILSA which are currently being litigated in the current real estate downturn.  Indeed, the statute carries a number of ambiguities and “unfilled blanks” which I expect to be the subject of even more opinions, especially from Florida courts, in the near-future.  In any event, buyers, investors, sellers, and developers alike should keep especially tuned in the coming months as the shape of federal and Florida state condo law becomes ever more shaped by the increasingly litigious climate.

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. A significant portion of his practice is devoted to issues arising under condominium purchase agreements. He can be reached at 305-789-0072 or jared@beckandlee.com

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