The Interstate Land Sales Full Disclosure Act: a ready-to-explode land mine for condo developers?

The Interstate Land Sales Full Disclosure Act (“ILSA”) is a federal law that was passed in the late 1960s to protect out-of-state land buyers. Those were the days when parcels of vacant land could be advertised to remote speculators as promising wonderful development opportunities. Only once the land was purchased and the buyer traveled to view the parcel for the first time did it turn out to be an isolated and worthless area of ​​desert or swamp with little or no potential to access the infrastructure or resources needed to sustain a project. viable development.

In the years since ILSA was passed, it has been argued that the law applies to condominium developments. And as real estate observers know, pre-construction condo investments in places like South Florida can present many of the same problems that vacant land sales once did. In particular, pre-construction condos are being advertised as glamorous out-of-state investment opportunities: a chance to make money and literally own a state-of-the-art piece of paradise. But the glamor wears off quickly once the market turns down and the buyer is unable to resell the property, so he examines the development with a critical eye. At this point, the buyer sees ways in which the building (which may not yet be fully built) deviates from what he or she believes was promised before signing the purchase contract, and the buyer begins to feel cheated.

One of the important requirements of ILSA is that the developer register the development with the US Department of Housing and Urban Development (“HUD”) and provide a thick “Report of Ownership” to the buyer before they sign the development agreement. purchase. Not surprisingly, developers don’t want to meet this somewhat onerous requirement if it’s not absolutely necessary. And indeed, there are a number of exemptions that developers can take advantage of to avoid the ownership registration and reporting requirement.

One particularly important exemption, which is widely misunderstood, is the so-called “two-year” exemption. Generally speaking, a developer is not required to register with HUD and provide a Property Report if the developer provides a contractual commitment to build the development within two years of the date the purchase agreement is signed by the buyer. However, the “two-year” exemption is not as straightforward as it sounds, because while developers can try to “qualify” any two-year commitment by limiting the buyer’s remedies in case the two-year deadline is missed, Florida courts are quite strict in their interpretation of the waiver, so the developer can lose the waiver if they qualify the two-year term that way.

Of particular importance in this last point is 15 USC section 1703(c), a section of ILSA that states that in the event a Report of Ownership is required but one is not provided to the buyer prior to signing the purchase agreement, the Buyer has the option to revoke the contract. Given the current real estate market, it is not surprising that there are a number of cases currently on the docket in Florida state and federal courts alleging that buyers (looking to get out of their condominium contracts) did not receive a Property Report when they should. Has been. Time will tell if the courts agree with these buyers and find the failure to provide a property report a proper basis for canceling their contracts. (See here my previous article on issues related to the buyer’s right to rescission under Florida state law, which is different from the federal law remedy under ILSA.)