by Richard Linquanti and William P. Sklar
A significant amendment to the Interstate Land Sales Full Disclosure Act (ILSA)1 becomes effective on March 26, 2015. H.R. 2600, passed unanimously by both the House and Senate and signed by President Obama, adds an exemption from registration for a “condominium unit.”2 This is a so-called “b” exemption, meaning the anti-fraud rules of ILSA will still apply to condominium unit sales.
The amendment defines a “condominium unit” to require that, upon conveyance, it will be an “improved lot.”3 Unfortunately, that term is not defined in the amendment or elsewhere in ILSA.
The enactment of this amendment is very good news for Florida’s developer community. No other jurisdiction saw as many lawsuits by consumers seeking rescission of their pending and even closed condominium unit purchase contracts as Florida, both in federal and state courts. Developers generally sought an ILSA exemption because registration was time-consuming and expensive, and required annual reports, an additional and not terribly enlightening disclosure document to be given to consumers, and a contractual limitation on the seller’s remedies should the consumer default in the purchase.
The most common exemptions were for an obligation by the developer to complete construction of the unit within two years of the buyer’s signing the contract4 (build exemption) or for developments consisting of 99 or fewer units not already exempt from ILSA5 (99 lot exemption). The problem with both of these exemptions is that they did not suit a large or complex project, which could frequently take more than two years to construct. For years, developers were able to combine the 99 lot exemption with the build exemption or another full exemption such as sales to builders, so-called piggy-backing of exemptions, but this was severely inhibited by cases that arose in 2011 that held, contrary to previous advice from the agency charged with administering ILSA, the piggy-backed exemptions had to be in place already and could not be anticipated by a marketing plan or other voluntary action by the developer.
The new exemption appears to be quite simple,6 and for most condominium projects first marketed after March 25, it will be. The contract must stipulate that the developer will provide or complete necessary roads, sewers, water, gas, and electric service, and any recreational amenities that are represented will be provided.7 It is advisable that the contract specify that both seller and buyer want and intend the unit to be exempt from ILSA registration for some specified business reason (however minimal), such as accelerating time to market or reducing cost, and that it include a savings clause.8 It is also no longer necessary, and perhaps it is undesirable, to record a declaration before the substantial completion of construction to ameliorate the federal district court rulings in Bacolitsas v. 86th & 3rd Owner, LLC, 2010 WL 3734088 (S.D.N.Y. Sept. 21, 2010), rev’d, 702 F.3d 673 (2d Cir. 2012), and Berkovich v. Vue-North Carolina, LLC, 2011 WL 5037124 (W.D.N.C. Oct. 24, 2011).
There are a few situations, however, where the amendment is not clear or there is a trap for the unwary. An example of the latter is the situation involving a mix of single-family lots or noncondominium townhomes, and condominium units. The exempt condominium units could bring the “common promotional plan” of the offering to under 100 lots. But the 99 lot exemption is not available if the mix of lots and units together exceeds 99. This is because the rules for piggy-backing do not allow excluding units exempt under §1702(b), only under §1702(a), and the condominium units are a subsection (b) exemption. Therefore, the developer’s counsel must be sure to provide for the developer to obligate itself to construct the houses on the lots or the townhome residences in order to satisfy the subsection 1702(a)(2) exemption. If construction is accomplished, the 99 lot exemption is irrelevant; the lots are exempt under the §1702(a)(2) and the condominium units are exempt under the §1702(b)(9).
The most predictable enduring ambiguity is the lack of definition of an “improved lot.” If a condition to closing is that the condominium units will have certificates of occupancy issued, there should be no problem. Such units will be “improved” upon conveyance under any definition. But if a unit might be conveyed “designer ready,” an issue may arise as to whether it is improved. The best guess is that the courts will look to local law to determine if the unit is finished to such a state as to be “improved.” Local building codes might require, for example, the installation of a sanitary fixture, running hot and cold water, electrical fixtures, and some kind of floor covering as a prerequisite to completion.
A bolder approach would be to interpret “improved lot” as applying to the land and not the building. The analogy one might draw is to the requirements of the §1702(a)(2) exemption. That calls for “improved land on which there is a…building…or an obligation ‘to erect…a building’ on ‘land.’”9 Courts have interpreted this to require the issuance of a certificate of occupancy.10 But this must be to satisfy the definition of a “building,” since in the to-be-construed alternative to the exemption there is no requirement for “improved land,” only “land.” So, the argument goes, “improved” lot must mean any improvement, or more conservatively, all improvements needed to support the erection of a building that could be completed to a certificate of occupancy, such as access roads or drives, utilities to the building site, and grading for drainage. Under such an interpretation, not only would a “designer-ready” condominium unit be exempt, but so, too, would a land condominium with no built residence.11 There is no indication, however, that H.R. 2600 was intended to extend to a land condominium within residential improvements constructed thereon.
The greatest potential confusion with the new amendment in the short term is what to do about condominium projects that are registered or exempt before March 25, 2015, and will continue to market units for sale after that date. The question is complicated by the fact that the CFPB12 has advised that starting March 26, 2015, it will not accept any filings, amendments, annual reports, or suspensions for condominium projects, already registered or not. It is to be hoped that this is not CFPB’s final word on the subject. While it is fine that CFPB takes that position as to its jurisdictional enforcement powers, this is not a promulgated regulation and courts have been inconsistent in the amount of deference they give to the agency’s interpretation of ILSA.13 The confusion is compounded by a long-standing HUD14 policy of not allowing a project to have both units under registration and units claiming exemption.
ILSA will continue to apply to units in projects already registered with CFPB and under contract before March 26, 2015. A convincing analysis by the Southern District Court in California concluded recently that the new ILSA amendments cannot be applied retroactively to effect consumers already entitled to ILSA’s coverage.15 All the developer can do is continue to file amendments and annual reports as ILSA requires, and preserve the evidence if such filings are rejected by the CFPB, establishing good faith and the impossibility of further compliance. Fortunately, ILSA does not require delivery to a consumer after contract of any amendments, minimizing the chance of a consumer cause of action on account of the rejected filings.
With the current lack of procedure from the CFPB, the developer has several imperfect choices for units in projects registered with the CFPB before March 26, 2015, but not yet under contract at that date. One is to continue to distribute the property report to consumers as if the new amendment were not applicable. However, that will continue to have the problems mentioned above about keeping the filing current, especially if there needs to be an amendment that affects the property report itself. Another possibility is to claim the new condominium unit exemption and ignore the registration. No court case has tested whether a project can have both registered and exempt units. If the CFPB will not accept future amendments and annual reports, and will state that in writing, then the developer could rely on the exemption and make the argument that the agency made further registration compliance impossible (and that providing an incomplete or inaccurate property report is possibly worse than providing no property report at all). A variation on this possibility is to have the developer file for a termination of the existing registration, effective March 26, 2015. The CFPB may reject this, but then again, the developer can argue a good-faith attempt to comply with ILSA and the agency’s action makes compliance impossible.
The choices are fairly clear for a developer whose condominium project is not otherwise exempt and not yet registered. One is not to enter into contracts for the sale of units until March 26, 2015. This does not preclude precontract activities, including advertising and taking nominal and fully refundable reservation deposits. The other is to register before March 26, 2015 and begin to enter into contracts. Depending on whether there is a better alternative offered by the CFPB in the future, one possible submission approach to the CFPB is to try to build in a self-termination provision to the registration, such as describing the units to be covered by the registration as be only those for which a contract is entered into on or before March 26, 2015. The hope is that this will avoid the issue of what to do with contracts entered into after March 26, as discussed above.
If the real estate market remains relatively stable for the next two years, it is not very likely that the transition issues will present any great difficulties as a practical matter. Of more likely interest will be cases that one might predict as some developer inevitably tests the boundaries of the requirement for an “improved lot.”
1 15 U.S.C. §1701. For a more complete background on the Interstate Land Sales Full Disclosure Act, see J. Aron, Condominiums and the Interstate Land Sales Full Disclosure Act Part I, 34 ActionLine 10 (Fall 2012); J. Aron, Condominiums and the Interstate Land Sales Full Disclosure Act Part II, 34 ActionLine 7 (Winter 2013); J. Aron, Condominiums and the Interstate Land Sales Full Disclosure Act Part III, 34 ActionLine 6 (Spring 2013); R. Linquanti, Aspects of the Interstate Land Sales Full Disclosure Act, 44 Real Property, Trust and Estate L. J. 441 (2009).
2 15 U.S.C. §1702(b)(9).
3 15 U.S.C. §1702(d).
4 15 U.S.C. §1702(a)(2).
5 15 U.S.C. §1702(b)(1). As discussed below, those exemptions needed to be under subsection (a), i.e., full exemption, not (b), registration exemptions.
6 15 U.S.C. §1702(b)(9) (“the sale or lease of a condominium unit that is not exempt under subsection (a)”).
7 15 U.S.C. §1702(a)(2)(D).
8 These have proven in many cases to be helpful in avoiding an argument that the developer’s method of disposition was chosen to evade ILSA, which is prohibited for both the §1702 (a) and (b) exemptions. See, e.g., Gentry v. Harborage Cottages-Stuart, LLC, 654 F.3d 1247 (11th Cir. 2011); Taplett v. TRG Oasis (Tower Two) Ltd, LP, 755 F. Supp. 2d 1197 (M.D., Fla. 2009); and Aikin v. WCI Communities, Inc., 26 So. 3d 691 (Fla. 2d DCA 2010).
9 15 U.S.C. §1702 (a)(2) (“the sale or lease on any improved land on which there is a residential, commercial, condominium, or industrial building, or the sale or lease of land under a contract obligating the seller or lessor to erect such a building thereon within a period of two years.”).
10 Harvey v. Lake Buena Vista Resort, 568 F. Supp. 2d 1354 (M.D. Fla. 2008), aff’d, 306 Fed. Appx. 471 (11th Cir. 2009).
11 The practitioner will want to consider how to avoid an argument that a land condominium was selected over a traditional subdivision simply to evade ILSA.
12 Consumer Financial Protection Bureau, the agency that administers ILSA.
13 Compare Nickel v. Beau View of Biloxi, LLC, 636 F.3d 752 (5th Cir. 2011), and Nahigian v. Juno-Loudoun, LLC, 2112 WL 1511815 (4th Cir. 2012), declining to give “great deference” to interpretative rules and other pronouncements, and 200 East Partners, LLC v. Gold, 997 So. 2d 466 (Fla. 4th DCA 2008), disregarding a formal opinion letter from HUD, the regulatory agency for ILSA before CFPB, to the developer, with Rondini v. Evernia Properties, 2008 WL 793512 (S.D. Fla. 2008), giving HUD interpretations of ILSA “great deference.”
14 The U.S. Department of Housing and Urban Development, the predecessor administrative agency for ILSA.
15 Beaver v. Tarsadia Hotels, 2014 WL 5480672 (S.D. Cal. 2014).
Richard Linquanti is a shareholder at Carlton Fields in Tampa, where he practices law relating to land business, the Interstate Land Sales Full Disclosure Act, business planning and implementation, front-end transaction structuring, partnerships, limited liability companies, joint ventures, land use, condominium, and mixed-use and master communities. He is an adjunct professor at the Stetson University College of Law and a fellow of the American College of Real Estate Lawyers.
William P. Sklar is of counsel to Carlton Fields in West Palm Beach, where he is a member of the real estate and finance practice group. He serves as regulatory counsel in compliance matters under numerous federal, state, and local statutes, regulations, and ordinances, including the Interstate Land Sales Full Disclosure Act. He is an adjunct professor of law at the University of Miami School of Law and a member of the faculty of the LL.M. graduate law program in real property. He is also director of the University of Miami’s Boyer Institutes on Condominium and Cluster Developments and Real Property Law.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Michael Allen Dribin, chair, and Kristen Lynch and David Brittain, editors.