You May be Liable Under the Interstate Land Sales Full Disclosure Act and Not Even Know It: ILSA’s Expansive Definitions of “Developer” and “Agent”


The Interstate Land Sales Full Disclosure Act (“ILSA”) takes an expansive approach to the persons or entities that fall under its purview.  Developers, builders, real estate agents, marketing firms, management companies, hotel brands, and operators who do not normally consider themselves a “developer” or an “agent” under ILSA are actually often subject to this federal statute and therefore vulnerable to ILSA liability.  The expansive definition of persons or entities subject to ILSA and the unknown liability therein may cause marketing companies and even lenders to reconsider their involvement in real estate developments.

 

A variety of lawsuits, brought by consumers alleging a common promotional plan between developers and associated parties have shown that the reach of ILSA can be broader than is commonly perceived.  ILSA applies to “developers” and “agents” who are making offerings with more than 25 lots which are promoted under a “common promotional plan”.  The terms “developer” and “agent” may be understood to include all of the various players involved with the sale of residential subdivision lots or condominium units.  Depending on the type of activity, real estate agents, marketing firms, management companies, hotel brands and operators or other parties involved in the sales process may be exposed to ILSA liability.

 

Parties with potential liability in an ILSA complaint can be either the “developer” or a developer’s “agent.”  ILSA defines a “developer” as “any person who, directly or indirectly, sells or leases, or offers to sell or lease, or advertises for sale or lease any lots in a subdivision.”  15 U.S.C. § 1701(5).  Courts that have decided on the definition of a “developer” under ILSA have sought to be inclusive of parties that have had any involvement with the sales process even if they are not a “developer” in the traditional sense of the word.  At least one court has held that the definition of “developer” under ILSA is not limited to the initial entity that subdivided and platted the land.  Lenders should note that courts have held that they do not fall within ILSA’s definition of a “developer” if they are simply making loans to lot purchasers and are not participating in the sales process for purchasers’ lots.  However, special financing programs, below market rates, or a total integration into all of the loans affecting the project (i.e., acquisition, development and end-loans) may create liability where none was previously expected.   The definition of “developer” can also extend to a hotel company that allows a developer to use its brand name in association with a community because of its effect on sales and marketing in the community. 

  

Additionally, if a developer sells its interest in a community but continues to be associated with the marketing and sale of the community, they could potentially have an obligation to comply with ILSA.  In such a scenario, the developer and builders within the community may be seen as a “group of developers” acting in concert if all involved parties use common sales offices, sales agents or marketing materials and land is contiguous or is known, designated, or advertised as a common development or by a common name.  If a court, or HUD, were to find such a group existed, it could create liability for all involved parties in the sale or lease of such property.

  

In addition, ILSA defines an “agent” as “any person who represents, or acts for or on behalf of, a developer in selling or leasing, or offering to sell or lease, any lot or lots in a subdivision.”  15 U.S.C. § 1701(6).  According to the HUD Guidelines, “[b]rokers selling lots as an agent for any person who is required to register are required to comply with the requirements of ILSA for those sales...If the broker has an ownership interest in the lots or is receiving a greater than normal real estate commission, the broker may be offering lots pursuant to common promotional plan and may be required to comply with the requirements of the Act.” 61 Fed. Reg. at 13602.

  

With such broadly defined terms, if the sales contracts did not comply with an ILSA exemption or the responsible entities failed to register the subdivision with HUD, a claim could easily be constructed to include a builder and broker as well as a developer.  The remedies for such a violation could be damages and equitable relief and the general notion under ILSA, as administered by HUD and the courts, is to make the buyer whole.  As such, a developer or agent could be compelled in such a case to extricate the purchaser from their home construction contract.  The statute of limitations on such claims is three years from the date the purchaser signs a contract to purchase the property.

 

Whether you are a developer, builder, broker, or salesperson, you should be aware of how ILSA may apply to your role in the offering.  Such parties do not often realize the potential ILSA implications until they find themselves defending a rescission claim.  In fact, we have recently seen ILSA lawsuits where consumers filed suit against not just the developer, but also the hotel brand company and the builder of a subdivision.  For more information regarding the information in this article or to discuss your legal compliance needs, please contact Frank J. Carmel (fcarmel@carmel.us or (202) 237-1700) or Aaron Eidelman (aeidelman@carmel.us or (202) 787-1322).

 

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.