Add a new breed of condo buyer lawsuit to the growing pile of cases which have been and are being filed under Florida condominium law and the federal Interstate Land Sales Full Disclosure Act in Florida courts.
As reported on CNN, troubled Florida homebuilder WCI Communities has been hit by a class action brought under federal securities law by purchasers of condo-hotel units at an exclusive development, The Resort at Singer Island near West Palm Beach, for failure to register the offering of the units with the Securities and Exchange Commission.
The application of securities laws has historically been yet another example of the murky legal regime which governs condos. One of the best quick summaries on this topic was written by a Nevada attorney and is entitled Condominiums: Violating Federal Securities Laws?. Another helpful summary from a website specifically devoted to condo-hotels can be found here.
There are some important twists and turns to understand, but the basics are as follows: condominiums can risk qualifying as securities where the emphasis is on economic benefits to the purchaser originating from the promoter or a third party’s managerial efforts or rental of the units; where participation in a “rental pool” is offered; or where the purchaser’s own use of the condominium unit is restricted. Not surprisingly, these factors would likely not come into play in the standard residential condo development, but may very well surface as part of a condo-hotel project. If a condo is found to meet the definition of a security, but it has not been registered as such under federal law (the requirements of which are quite onerous and typically something that a developer would seek to avoid), then the buyer would have the right to rescind the purchase agreement, among other possible remedies.
I have reviewed the Complaint which was brought against WCI and is pending in the Southern District of Florida. The key allegations revolve around the notion that The Singer Island Resort is a common enterprise which sought to provide a return on the purchasers’ investment via expert management of the hotel, and that occupancy of the hotel units would be rotated to equalize use of the hotel. Such allegations are certainly a starting basis for stating federal securities law claims in the context of a condo hotel. Whether the lawsuit is successful will depend upon the development of additional facts concerning the marketing and operation of the hotel.
Of course, it is not a bold prediction to expect that more lawsuits like this are on the horizon, given current market conditions. For example, here is a recent article from the Las Vegas Sun describing a similar lawsuit concerning an MGM Mirage and Turnberry-backed condo-hotel on the Las Vegas Strip. And I would not be surprised if there is merit to at least some of these suits, given that the securities laws are highly burdensome and expensive to comply with, and many developers were probably not paying much attention to them — even in situations where the condo units could qualify as a regulated security — when market conditions were favorable.
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 purchase agreements. He can be reached at 305-789-0072 or firstname.lastname@example.org