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DEVELOPERS BEWARE – ILSA MAY BE HERE TO STAY

As you may recall from prior entries, condo purchasers have been employing the Interstate Land Sales Full Disclosure Act (“ILSA”) in their attempts to back out of their contracts before closing.

As discussed in those entries, ILSA is a federal statute that protects consumers from fraud and abuse in the sale or lease of land. The law requires developers of new condominiums 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”.

Prior to the economic downturn, developers were most likely under the impression that ILSA did not apply to condo purchases because it was enacted to protect consumers against fraudulent land deals.  It is this very position that the Developer argued before Judge Robert Patterson in US District Court in a dispute with buyers of condominium units in the Financial District development with a W hotel and 222 residential condominium units.

The Court rejected the Developer’s motion to dismiss and ruled for the buyers who were alleging that the Developer did not properly register the project with HUD, improperly signed the contracts during the time that sales were suspended and did not provide the required disclosures under ILSA.  However, the case turned on the issue of whether ILSA applied to New York condominiums.

In denying the Developer’s argument, the Court took a firm stance on whether ILSA applies to condominiums, satisfying themselves that “the legislative history and HUD’s interpretative analysis amply dictate that ILSA applies to condominiums.”

As we have discussed, several other courts have also sided with purchasers involved in ILSA disputes.  However, these courts have merely assumed that that the law applies to condominiums whereas the result in this case is seen as the first definitive ruling in New York that [ILSA[1]], in fact, applies to condominiums.

The Developer might appeal this ruling, but will have to swim against the tide of courts siding with purchasers in ILSA cases.

By: Nahum M. Palefski, Esq.


[1] The District Court in this opinion referred to the Act as “ILSFDA”, although we have consistently referred to it as “ILSA”.

Category: ILSA, News Comment »

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