New ILSA Decision Makes Piggybacking of ILSA Exemptions More Complex


On May 27, 2010, a federal district court in the Southern District of Florida ruled on behalf of a condominium purchaser who sought rescission and damages from a developer that failed to abide by the Interstate Land Sales Full Disclosure Act (“ILSA”), holding that that the purchaser was entitled to revoke its purchase agreement within the statutorily allowed period.  At issue in the case was whether the developer was exempt from ILSA and therefore from the registration and disclosure requirements. Although the condominium was planned to contain 135 units, the developer argued that it should be allowed to “piggyback” two ILSA exemptions in order to avoid ILSA’s strict registration requirements.  This decision should serve as a reminder to developers who think they may be exempt from ILSA or structure their communities and offerings in an attempt to stay under the 100-unit threshold.  It is imperative to thoroughly analyze and document the basis of your exemption in the event that a consumer rescission suit should arise down the road, and if you cannot do so, a HUD registration may be necessary. 

 

The case described above is First Global Corp. vs. Mansiana Ocean Residences, LLC, 2010 U.S. Dist. LEXIS 5247, decided May 27, 2010 (“First Global”).  The defendant in First Global is a developer from whom the plaintiff purchased a condominium unit.  The defendant had not registered the condominium under ILSA, and therefore the plaintiff did not receive a HUD property report before signing the purchase contact. In addition, the purchase agreement contained no notification of the purchaser’s two year right of rescission in the event the developer failed to deliver the required disclosure statement.  

 

The developer’s defense in First Global was that the condominium was exempt from ILSA and therefore from ILSA’s registration and disclosure requirements.  Although the condominium was planned to contain 135 units, the developer argued that it should be allowed to “piggyback” two ILSA exemptions in order to avoid ILSA’s strict registration requirements; namely, the “two year obligation” and the “100 lot exemption.”  However, at the time that the plaintiff purchased its unit, the developer had not sold any units with a two year obligation to complete.  In rejecting the developer’s argument, the court looked to other pro-consumer ILSA decisions out of Florida and Virginia, explaining that “if a project consists of 123 units, a developer can sell 24 of the units under an obligation to construct a building on property within two years, i.e. qualifying for the two-year exemption, and the remaining 99 units would then qualify under the 100-lot exemption.”  Id.  But according to the court, since the developer “…had not sold any of the units with a two-year commitment to build at the time that [plaintiff] purchased its unit, there were more than 100 units which were not exempt at the time.  Under these circumstances, the unit purchased by [plaintiff] was not exempt from the requirements of the ILSA.”  Id. 

 

The developer also unsuccessfully argued that there was uncertainty as to how many units the condominium would contain; it maintained that since the condominium might ultimately consist of fewer than 100 units at the time of the sale to the plaintiff, it qualified for the 100 lot exemption. However, the court rejected this argument on the grounds that at the time of the sale, the only information that had been communicated to the plaintiff and to the public was that the condominium would contain 135 units.  

 

In making its determination regarding the number of units planned for the condominium, the court also examined the developer’s press releases issued on behalf of the project in order to determine what information had been communicated to the public and the plaintiff at the time the sale was made. The court’s use of press releases bolsters the concept that developers, if they seek to utilize ILSA exemptions, must take every possible precaution in documenting their basis for an exemption and the facts supporting it. In the instant case, it was not enough for the developer to simply claim that its own internal discussions about the proposed unit count provided an exemption from ILSA; ultimately, the court looked at what information had been conveyed to the public and to the purchaser in determining that the developer had not complied with the 100 lot exemption. Not only did this cause the developer to lose the sales and deposits from this purchaser, but in defending themselves they have also been responsible for attorney fees and resources during a time when sales and resources are scarce.

 

If you are currently relying on the 100 lot exemption or any other ILSA exemption, you should seek experienced counsel to review your current situation.  Considering the number of recent court decisions regarding ILSA and the application of its exemptions, you may not be aware of how today’s sales could be affected years down the road by your current actions. If you have any questions in regards to this decisions, or have additional ILSA compliance questions contact Frank Carmel (fcarmel@carmel.us or 202-237-1700) or Aaron Eidelman (aeidelman@carmel.us or 202-787-1322) to discuss your legal compliance needs.

 

This article does not constitute legal advice or the formation of an attorney-client relationship.  Republication of this article without express permission of Carmel & Carmel P.C is prohibited.