It seemed like a great idea at the time. A beachfront townhome in South Florida. A penthouse condominium high above the Vegas strip. Granite countertops and cherry cabinets in the kitchen, and an expansive view from the balcony. What could go wrong?
Well, what might have gone wrong is the builder encountering construction delays, or stalling construction while looking for additional financing in a tight credit market, or worse yet, doing nothing while waiting for the market to turn.
In the meantime, your six-figure deposit has been languishing in a non-interest bearing escrow account while the developer’s agents tell you that this time they mean it when they say completion is expected right around the first of the year.
So what can you do? Well, there are a number of options, some of which are dependent on the terms of the contract and the laws of the state in which the development is located. In addition, you may be entitled to relief under the federal Interstate Land Sales Full Disclosure Act (the “Act”, which can be found at 15 USC 1701).
The Act generally applies to all developments of land consisting of greater than 25 units (sales of smaller developments are exempted under the Act). Units can be raw land, single family homes, townhouses or condominiums, so there is a chance that the Act does in fact provide some possible relief for that townhome or penthouse condominium.
Under the Act, with a few exceptions (some of which are discussed below), the developer is required to provide you with a “Property Report” at the time the contract is signed. This report is required to include a wide range of information on the property, including how many units will be built, what recreational facilities will be offered, how title to common areas will be held, etc. This Report should have been provided to you at contract signing, unless the development is exempt from this requirement, as discussed below.
There are a number of exemptions allowing the developer to forego delivery of the Property Report, but the two most commonly used are the so-called “100-lot” exemption and “improved lot” exemption. The 100-lot exemption allows developers to avoid delivering the Property Report if the total number of units to be sold is less than 100. The improved lot exemption is applicable if either the unit is built and habitable at the time of contract, or if the contract itself requires the developer to complete the unit within 2 years of signing. (It should be noted that these exemptions do not abdicate all responsibility under the Act, they just allow the developer to avoid delivery of the Property Report.)
If you have entered into a contract for a unit where you did not in fact receive the Property Report at the time you signed the contract, and you do not believe your contract qualifies for any of the exemptions listed above, you should contact your legal professional to discuss whether you have a claim under the Act. If you do, possible relief may include cancellation of the contract and return of all deposits, as well as additional remedies available under the Act.
But what if your contract does in fact contain language promising completion within a set period of time, but the deadline has passed? Well, the answer to this question lies in both state law and the Act. With respect to state law, you may have a breach of contract action against the developer, depending on how the specific state courts interpret contracts, so this question should be directed to your local legal professional.
Under the Act, there are two potential avenues for cancelling the contract in such an event. The first is to determine whether the deadline included within the contract is in fact enforceable against the developer. In this question, courts around the nation have consistently interpreted the Act to require that you as buyer must have unfettered rights in the event that the deadline is missed. In other words, the contract cannot in any way limit the remedies that would be available to you under state law for a breach of contract.
For example, a contract that provides that the buyer’s sole remedy is to obtain a refund of the deposit would not meet this strict requirement, nor would a contract that limited the buyer to either obtaining such refund or suing for specific performance (an action where the buyer forces the developer to complete construction and close). This is because the limitations in both of these instances prevent the buyer from seeking all other damages allowable under the applicable state law (i.e., monetary damages). As such, the contract would fail to meet the requirements for the improved lot exemption, and you could have the right to cancel the contract and seek additional damages under the Act.
The second line of inquiry is whether the deadline was missed for a legitimate reason for which the contract and the Act allow the deadline to be extended. Such reasons are typically referred to as “force majeure” or “acts of nature” causes, and include events such as hurricane, tornado, flood, labor strikes and similar events which are in no way under the control of the parties to the contract. So, if the developer can legitimately indicate that one of these causes was the real reason for the delay, your ability to terminate the contract may be limited. (But note that, even in the current economic climate, the inability for the developer to obtain funding or additional buyers does not constitute an excusable delay.)
However, in order to take advantage of this extension right, the developer must have included a so-called “force majeure” clause in the Contract which complies with the requirements of the Act. This means that the contract must list only unexpected occurrences that are recognized by the state courts in which the development is located. As stated before, these include events such as floods, acts of war and hurricanes, but do not typically include financial distress events. If the contract is overreaching in describing the events for which the deadline may be extended, again the contract may be in violation of the Act, for which violation you may be able to cancel the contract and pursue damages.
These few short paragraphs are just an overview of how the Interstate Land Sales Full Disclosure Act may protect you in the event of a stalled development or otherwise unscrupulous developer. If you in fact are involved with such a development, you should consult your legal professional to ascertain whether you have the right to escape a bad situation before it gets worse.
About the Author
Scott A. Frank is a partner in the Real Estate practice group in the West Palm Beach and Boca Raton offices of Arnstein & Lehr LLP (www.arnstein.com). He has extensive experience in real estate law, representing clients with respect to acquisitions and dispositions, development, financing, land use and condominium law. In addition, he has significant leasing experience, representing both tenants and landlords with respect to retail, office and industrial properties. Mr. Frank also advises clients in many aspects of business law, including the selection and creation of business organizations, formation of joint ventures, asset purchases and sales and corporate governance. Mr. Frank can be reached at (561) 650-8476 or email: email@example.com.