The End of Federal Regulation of Condominium Sales?

The Interstate Land Sales Full Disclosure Act, which began life as an attempt to stop land sellers from selling swamp land in Florida and desert land in Arizona as home sites, morphed over time to become the principal tool for real estate speculators seeking to recover contract deposits following downturns in the real estate market.
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The Interstate Land Sales Full Disclosure Act (ILSA), which began life as an attempt to stop land sellers from selling swamp land in Florida and desert land in Arizona as home sites, morphed over time to become the principal tool for real estate speculators seeking to recover contract deposits following downturns in the real estate market.

ILSA, enacted in 1969, applies to the sale of “lots.” This term is not defined in the statute. Courts construing ILSA’s applicability in the mid-1980s determined that the term “lots” included pre-constructed condominium units, thereby ensnaring pre-development condominium sales within the ambit of ILSA.

ILSA requires sellers of unimproved “lots” to file disclosure materials with the federal government, originally HUD and currently the Consumer Financial Protection Bureau, and provide prospective buyers with a disclosure booklet called a Property Report. This requirement resulted in adding a second layer of regulation to the sale of condominiums in many states, including Florida. While many of the disclosures in the Property Report are similar to those required under Florida condominium law, additional disclosures of questionable benefit to buyers in metropolitan areas, such as the availability in distance of designated service providers or the average summer and winter temperatures, were required. The additional filing requirements for preconstruction sales resulted in developers incurring substantial additional legal expenses and marketing delays for an ILSA filing. In light of the costs involved, many developers elected to rely on exemptions from filing, some of which were approved by HUD, many of which later turned out to be unavailable or were ruled by the courts to be improper.

ILSA operated, in practice, not as a benefit to consumers but as a trap for developers. With each downturn in the real estate market, ILSA was the primary weapon utilized for the recovery of contract deposits. But the watershed event was the great recession starting in 2008, when hundreds of purchase contract rescission lawsuits were filed in Florida and elsewhere by real estate speculators attempting to recover their deposits when the condominium market collapsed. In effect, the law operated as a “get out of jail free” card for speculators who made bad investments.

Given the consumer protection basis of the statute, courts were initially very protective of buyers seeking to rescind their contracts. Subsequently, however, many recognized that ILSA was merely a vehicle for exercising “buyer remorse.”

Given the backdrop of the operation of ILSA in the condominium arena and the impossibilities of compliance with certain requirements in some jurisdictions, Congress, in an extremely atypical nonpartisan fashion, unanimously removed from ILSA the filing requirements for condominiums with H.R. 2600 passed in the House of Representatives on September 26, 2013 and with Senate Bill S.2101 passing the Senate approximately one year later on September 19, 2014. President Obama signed the removal into law on September 26, 2014. Although Florida appeared to be ground zero for rescission suits, surprisingly none of the bills’ sponsors were from Florida.

This new law, which will become effective on March 25, 2015, should eliminate the current practice of recording the declaration of condominium prior to entering into purchase contracts for new construction in order to fulfill a perceived requirement of ILSA. This practice, clumsy at best, typically required several recorded amendments prior to the initiation of any closing. Developers’ counsel should be returning to the prior practice of recording the condominium declaration prior to the first closing. In addition, the elimination of the filing requirement should lend more certainty to the effectiveness of preconstruction contracts obtained by developers and increase the availability of financing for condominium projects by lenders who were understandably nervous about the viability of presale contracts after most disappeared in the latest downturn.

The Florida Condominium Act and other state condominium laws furnish consumer protection features for purchasers. In practice, ILSA added little additional practical protection. There is no social benefit to affording more protection to speculators in condominium units then to those who speculate in stock purchases. In fact, it was the excessive speculation in condominiums in Florida that contributed to the bust in Florida’s real estate industry and the burden on the judicial system in processing the inordinate number of rescission cases.

While the filing requirements of ILSA have been removed for condominium sales, developers are not receiving a free pass on this statute, as the anti-fraud provisions contained in ILSA will still be applicable to sales of condominium units.

Martin A. Schwartz is a Partner at Bilzin Sumberg with a wide range of experience in all aspects of commercial real estate, representing developers, lenders and tenants in both Florida and New York. He is a member and active participant in the Condominium and Planned Unit Development Committee of The Florida Bar.