ILSA: Not the Name of a Hurricane
An Ill Wind Blows
It’s hurricane season and a storm is brewing in New York. The Interstate Land Sales Full Disclosure Act, known as “ILSA” in the trade, a Federal statute enacted in 1968, is intended to protect the huddled masses from unscrupulous developers, by requiring registration of certain aspects of land offerings with the U.S. Department of Housing and Urban Development and by providing a “property report” to offerees, disclosing salient details about the offering.
Long Story Short...
Developers in New York were either oblivious to the requirements of the statute and failed to comply or simply thought compliance was not required. Now flash forward 40 years to the real estate crash in 2007, and lawyers representing folks trying to get out of condo contracts in New York, discover ILSA, and are asserting failure to comply with the provisions of same as a means to terminate condo contracts with pre-crash pricing.
There's Always a Get Out of Jail Free Card
A statute is only as good as its exemptions. In this case, when the subdivision (that would be a condominium) has fewer than one hundred lots (that would be apartments), or if the project will be completed within two years, the requirements of the statute do not apply and developers have no obligation to comply with the registration and disclosure provisions. In two recent cases, developers have attempted to rely on these exemptions to avoid liability under the statute, with very different results.
The Courts Are Divided
In a Federal court decision in January 2010 involving Fifth on the Park Condominium, the developer asserted that since less than 100 units had been completed at the time the temporary certificate of occupancy was issued and since the project would be completed within the statutory two-year period, the condominium qualified for the ILSA exemptions and did not have to comply with the requirements of the statute. The Court ruled that the condominium could “stack the exemptions”, even though the project would ultimately contain more than 100 units. The plaintiff-purchasers are appealing.
In an unrelated but very significant Federal court decision earlier this month, the Court ruled that the defendant-developer of 111 Fulton Street, failed to comply with the registration and disclosure requirements and ordered the return of the deposits of three purchasers (aggregating $300,000.00). Although the decision has been reported in the media as the first case to require the return of a deposit, in May of this year, a Federal court also required the same developer to return a purchaser's deposit for a similar failure to comply with ILSA. So it's not the first and probably will not be the last.
In all fairness, the statute, the voluminous exemptions and the logic of the decisions are not easy to follow, to say the least.
So Which Court Decision Will Prevail?
What we do appear to know is that ILSA does apply to condominium transactions in New York. What is still undecided is whether condominium developers will be able to take advantage of exemptions from the statute thereby avoiding the return of deposits to purchasers with buyer’s remorse. With hundreds of cases pending, it’s anyone’s guess as to which court’s decision will ultimately be upheld on appeal to the Second Circuit or whether the issue of ILSA's application will be resolved with certainty. As there are over 100 ILSA cases pending, as reported in the New York Times City Room blog on August 13, 2010, requiring a developer to return deposits based upon a failure to comply with ILSA could open up the floodgates to numerous additional claims.
Residential Reality: Not a Good Development for Developers
Taking the current real estate economy into consideration, these latest legal twists and turns only add to the woe pile of the New York residential real estate development community and could result in a slew of deposits going back to purchasers who no longer wish to go forward with their transactions. As the market continues its bounce along the bottom, one could argue that time is not on the side of developers who need deals to close.
For the record, I have had two clients who asserted ILSA claims, one resolved, one pending. In each case, I was not directly involved in the litigation.