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Federal Court Sides Against Developers in Key ILSA Case. The Second Circuit Court of Appeals has overturned a key decision involving the Interstate Land Sales Full Disclosure Act (“ILSA”).  The dispute was initially decided by the lower District Court in favor of the developers of two New York condominium buildings- Harlem’s Fifth on the Park Condominium and One Hunters Point Condominium in Long Island City.

ILSA is a federal statute that protects consumers from fraud and abuse in the sale or lease of undeveloped land.  The law requires developers of new condominiums consisting of more than 100-units to register their buildings with HUD and to provide purchasers, prior to contract signing, with a disclosure document called a “Property Report”.   If the developer fails to comply with ILSA requirements, purchasers can rescind their contracts and be entitled to a return of the downpayment.  The importance of the statute was underscored when it was used by many purchasers to get their downpayments back during the recent financial crisis.

Sales in the Fifth of the Park project, consisting of 160 residential units, began in or around 2007.  Within two years of signing contracts, buyers in the project began looking for ways out of their contracts and sent letters to the sponsor indicating that they intended on rescinding their contracts for the sponsor’s failure to follow ILSA requirements.  The sponsor refused to return the downpayments and the buyers commenced litigation.

At the lower court, the developer argued that, although the project initially offered 160 units for sale, the 100-lot exemption applied because it had sold fewer than 100 unfinished units as of the date the temporary certificate of occupancy (“TCO”) was issued for the entire building and the remaining units, which were complete by the time the lawsuit was decided, qualified under another ILSA exemption, the “Improved Lot Exemption.”  15 U.S.C. §1705(a)(2).  The buyers argued that the 100-lot exemption only applies if, at the time the buyers signed their contracts, fewer than 100 units were being offered for sale in the subdivision, regardless of when those lots would ultimately be complete in order to qualify for the Improved Lot Exemption.

In January 2010, the District Court agreed with the developer and ruled that the 100-lot exemption could still apply to a subdivision containing 100 or more lots as long as all lots sold above the 99 maximum would be covered by another ILSA exemption, for example the Improved Lot Exemption.  The Court stated that, “only ninety purchase agreements were entered into before the Condominium was completed and the TCO was issued for the entire building.  As such, the remaining 70 units…qualify for the Improved Lot Exemption.”

In March 2010, another judge in a similar case involving the One Hunters Point Condominium in Long Island City came to the same conclusion. (Click here for decision)

The buyers at both these projects appealed to the Second Circuit Court of Appeals and argued that the developers did not claim the 100-lot exemption from HUD at the time the contracts were signed.   The Circuit Court, reviewing both lower court decisions, agreed with the buyers and ruled that the 100-lot exemption is determined as of the time of the sale of the lot, and not, as the developers argued, at some point in the future, when the developer in fact sells 100 or more non-exempt units.  Therefore, the buyers should have been notified of the claimed exemption at the time they signed their contracts.

It seems obvious that the developers were either unaware of the law or under the impression that it did not apply in New York.  It is hard to believe that the developers ignored the issue at the time the contracts were signed and relied on later claiming that the 100-lot exemption applied to their developments which were clearly above the 100-lot maximum.

The new decision could have significant implications for developers selling condos in New York City, putting them at risk of losing downpayments if proper ILSA procedures are not followed.

Lawyers for the developers indicated that they plan on appealing the case to the U.S. Supreme Court.

-by Nahum Palefksi, Esq. and Jerome J. Strelov, Esq.

Category: ILSA, News, The Buyers World Comment »

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