The Interstate Land Sales Full Disclosure Act’s Two-Year Completion Exemption From the Condominium

The saying “a little bit of knowledge is dangerous” is true for real estate agents and condo developers dealing with ILSA. This law has a lot of rules and consequences, and it’s important to know how it affects condo developers. One important rule is the “two-year completion” exemption, which many developers use. A recent case, Hardwick Properties, Inc. v. Newbern, 11 So. 2d 35 (Fla. 1st DCA 1998), discusses how developers can still be exempt from ILSA even if they break a contract with a buyer. This case has caused some confusion, so it’s important for developers to be careful. ILSA is a law that aims to protect people who want to buy property in a new development. It requires developers to give potential buyers detailed information about the property before they make a decision. It also prohibits developers from selling or leasing property in a new development unless they follow the rules of ILSA. Developers need to make sure they understand the law and follow its requirements before they start selling any property. In simple terms, ILSA has broad reach and can apply to condominium projects and subdivisions. A lot or unit in a condominium project is considered a lot under ILSA, and a subdivision is any land divided into lots for sale. If a developer has multiple projects that are connected in certain ways, they may be considered part of a “common promotional plan” and lose certain exemptions from ILSA. It’s important for developers and their lawyers to carefully review ILSA’s definitions to determine if their projects are subject to the law. If a developer wants to sell a condo, they need to follow rules set by the Interstate Land Sales Full Disclosure Act (ILSA). First, they have to register their property with HUD by providing detailed information about the property and their financial situation. Once approved, they can start selling and marketing the condos, but they have to give potential buyers a property report with all the details about the property. The developer also has to follow anti-fraud rules and keep HUD updated on any changes. Buyers also have the right to cancel the contract within seven days of signing. ILSA does not cover certain situations, such as reservation agreements and nonbinding agreements for potential property purchasers. Also, the sale of undivided property interests without the right to exclusive use of a specific lot is not covered. There are exemptions available for condominium developers, such as the “25 lot” exemption and the “sales to builders” exemption, which can be determined by the developer or their lawyer without needing approval from HUD. In simple terms, the HUD exempts certain subdivisions from the requirements of the ILSA law if they contain 25 or fewer lots. There are some details to this exemption that can change how many lots are actually considered exempt. For example, if a subdivision has more than 25 lots but fewer than 25 are being sold together as part of a marketing plan, those sales would be exempt. This means a developer might be able to avoid the law by selling lots separately. There are exemptions in place for developers who are selling lots in a subdivision. The exemptions mean that the developer doesn’t have to follow certain rules about selling the lots. For example, if a developer sells fewer than 25 lots, they don’t have to follow some of the rules. There are also exemptions for selling to builders, selling a small number of lots in a year, and selling land with a building already on it. These exemptions make it easier for developers to sell lots without having to follow as many rules. If a developer is not sure if their project is exempt from ILSA registration, they can ask HUD for confirmation in three ways. They can ask for an exemption order, request an advisory opinion, or ask for a no-action letter. These options help the developer avoid breaking the law and facing penalties. If a developer breaks the rules of ILSA, they can be fined up to $10,000, go to jail for up to five years, or both. If they knowingly or seriously break the rules, they can be fined up to $1,000 per violation, up to $1,000,000 in a year. People who want to buy property from a violating developer can take them to court or cancel their contract within two years if they didn’t get the required property report before signing. It’s important for developers to follow ILSA rules to avoid these penalties. Florida courts have different interpretations of the exemption for completing construction within two years. In one case, it was said that a developer’s contract must have a clear commitment to finish building within two years, without any limitations. Another case said that a buyer must be able to seek damages if the unit is not completed on time. And a third case said that a contract being silent about seeking damages doesn’t mean the buyer can’t do so. In 1990, the Florida Supreme Court ruled that for a condominium unit sale to be exempt from certain regulations, the sales contract must obligate the developer to construct the unit within two years without limiting the buyer’s remedies for damages or specific performance. A later case, Hardwick Properties, Inc. v. Newbern, created uncertainty by allowing the exclusion of special and consequential damages from a buyer’s remedies. Despite appearing to favor developers, the court actually allowed for further review to determine if the damages provided in the contract were sufficient. The Hardwick court made it harder for people to sue developers for not finishing their buildings on time. They said that the person suing needs to prove that the damages they suffered because of the delay were not enough to stop the developer from breaking the contract. This means that the person suing will have to spend a lot of time and money finding and presenting evidence about the real estate market and the developer’s financial situation. This makes it tougher for people to prove that the developer broke the contract. In simple terms, the Hardwick decision makes it harder for developers to avoid paying for damages if they don’t finish a construction project on time. This means that buyers could potentially get more money from the developer if they are late in completing a project. As a result, developers’ lawyers are still figuring out how to best protect their clients in legal contracts. The court’s decision in Hardwick has made it uncertain for developers when drafting sales contracts. Here are two options for developers to consider:

1) Limiting a buyer’s ability to claim special or consequential damages in the sales contract, but risking potential penalties and legal actions.

2) Allowing buyers to seek damages for the developer’s breach of contract, but risking a broad interpretation of what “damages” includes.

In simple terms, the court’s decision has made it tricky for developers to protect themselves in sales contracts. If the seller doesn’t follow through with the contract, the buyer can get their deposit back and still have the right to take legal action. Developers can seek advice from HUD to make sure their contracts meet the two-year completion exemption requirements, but it may not provide a definite answer. Until then, developers will have to decide how to draft their contracts based on their own financial situation and ability to handle potential legal issues. It’s important for condo developers to understand ILSA laws to avoid legal trouble and financial risks. Knowing the exemptions can help them avoid extra paperwork and costs. They also need to decide if it’s worth it to follow the two-year completion rule or risk lawsuits from buyers. It’s important to accurately assess a project before starting construction and getting financing. This will help determine the risk of completing the project and selling it quickly.

Source: https://www.floridabar.org/the-florida-bar-journal/the-interstate-land-sales-full-disclosure-acts-two-year-completion-exemption-from-the-condominium-d/