A Federal Court’s Strong Analysis Of The Interstate Land Sales Full Disclosure Act, And Some Thoughts On How The HUD Regulations Can Shed Light On ILSA

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:

. . .

(b) Give a contract to a purchaser or encourage him to sign anything before delivery of the Property Report.

. . .

 (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

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2 comments

  1. J.H.

    The Harvey case mentioned in your blog reminds me of a 90s case in Federal court where the court ruled that contracts that included language that denied the buyer the right of specific performance (even though State law allowed this language) showed a lack of obligation to construct the project within two years and therefore the condo project did not qualify for the Improved Lot Exemption. Most contracts have a lot of built-in boilerplate language, such as specific performance and delays due to weather, etc., and looks like a lot of that is biting us in the rear right about now.

  2. T.O

    In addition to the CFR there is the Federal Register. There are many practical explanations and examples provided by HUD explaining the regulations. For examples see 61 FR 13596 (1996).

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