As Real Estate Market Stays Sour, Courts Punish Builders Who Stray From Construction Schedules, Relieving Buyers From Contracts

Back in September of 2008, as knowledge of the global financial crisis was both broadening and deepening, I predicted that of the myriad lawsuits being filed by real estate buyers in hopes of recovering their initial preconstruction deposits, among those with the highest probability of success were scenarios in which the developer failed to deliver the project on time.

While there is no sure way of testing this forecast, my sense is that for the most part, it is proving itself true.  Take, for example, a recent opinion from the Eleventh Circuit — the highest federal appellate court with jurisdiction over Florida, and one which has been instrumental in setting the tone for the latest wave of real estate litigation.  In Harvey v. Lake Buena Vista Resort, LLC,  2009 WL 19340 (11th Cir. Jan. 5, 2009), the Eleventh Circuit upheld  the lower court’s order refunding deposits paid toward the purchase of an Orlando condominium, finding that the developer had breached the purchase contract by failing to deliver the unit in a timely manner.  Notably, the Eleventh Circuit left the developer zero room for deviation from the promised two-year construction schedule.  While the developer obtained a certificate of occupancy just five days after the two-year deadline, the court held that this was too late as a matter of law, even though the defendant testified that the extra five days were attributable to a matter outside of its control — the unusually slow processing of a necessary road permit.

Tellingly, in reaching its conclusion, the Eleventh Circuit sidestepped another issue on which the purchasers had prevailed in the lower court — that is, whether the developer had violated the disclosure provisions of the federal Interstate Land Sales Full Disclosure Act (ILSA) in failing to both register the condo with the U.S. Department of Housing and Urban Development (HUD) and furnish a federal Property Report to the buyers.  As I have noted previously on this blog, federal courts have been noticeably reluctant to rule for buyers on claims brought under ILSA, violations of which are often viewed as hyper-technical and immaterial in instances where a project is otherwise delivered according to a developer’s stated promises.

In contrast, it is easy to see why courts might have more sympathy for buyers in cases where construction has been unjustifiably delayed.  The calculus is simple: the longer a building goes unfinished, the more time a buyer’s deposits will have been tied up in an unlivable and unsaleable project.   And every day the real estate market remains mired in a historic slump only serves to exacerbate the downside to the buyer.  The recent but unsurprising rash of lender foreclosure actions against developers — such as this one, this one, and this one — tell a general tale of builders without funds to pay off loans, contractors, or subcontractors.   This means that the many yet-to-be-finished projects around the country will miss the completion deadlines set forth under contract — if they get finished at all, that is.

As a practical matter, those buyers with potential construction delay claims who have decided that they are without the patience of Job are well-advised to assert their legal claims as quickly and decisively as possible.  While construction delay may be a pathway to successful rescission of a purchase contract, generally speaking, the longer one waits to take legal action, the greater the chance that the developer will be able to argue that the buyer — by his or her own delay — has waived any legal claims.

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, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or jared@beckandlee.com

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