Is That Sale “Final"?: Purchase of a Condominium Unit May Be Revoked for Developer’s Failure to Comply with the Interstate Land Sales Full Disclosure Act
Lenders providing financing of a residential construction project often impose benchmarks on the progress of the project which measure contract and sales volume. The continuing satisfaction of a contract or sales benchmark could be jeopardized if the developer failed to comply with the Interstate Land Sales Full Disclosure Act (ILSA). Generally, ILSA is a federal consumer protection statute that regulates the sale of unimproved lots marketed and sold through interstate commerce. Under ILSA, developers must register with or submit a “Statement of Record” to the Consumer Financial Protection Bureau (CFPB, until July 21, 2011, ILSA was administered by the Department of Housing and Urban Development) and provide a “Property Report” to the purchaser prior to the execution of any contract or agreement of sale, unless the sale is exempt under ILSA. If a developer sells or leases a lot subject to and not exempt from ILSA and fails to comply with its requirements, such contract or agreement may be revoked at the option of the purchaser within two years from the date of signing. A reminder of how ILSA applies as a matter of Federal strict liability occurred recently in Tencza v. Tag Court Square, LLC. In Tencza, the U.S. District Court for the Southern District of New York held that a residential condominium unit was not exempt from ILSA as an “Improved Lot”, thereby affirming a unit purchaser’s right to revoke the purchase agreement even after conveyance to and occupancy by the purchaser.
Underlying Facts of Tencza
In May, 2007 the purchasers and the developer entered into an agreement of sale for the purchase of a condominium unit. The developer did not file a Statement of Record with the Department of Housing and Urban Development (HUD), and did not provide the purchasers with a Property Report as required by ILSA. At the time the agreement of sale was entered into, the condominium unit was not complete and ready for occupancy and the agreement of sale did not obligate the developer to erect the condominium unit within two years from the date the purchasers signed the contract of sale. The closing occurred in April, 2008 and the purchasers moved into the unit sometime during the end of 2008 or the beginning of 2009. Upon occupancy, the purchasers made a number of changes to the unit. On April 23, 2009, the purchasers sent a letter to the developer advising that they were exercising their right to revoke the agreement of sale under ILSA. The purchasers subsequently filed a complaint asking the court to “revoke and rescind the Purchase Agreement and award the sum of $2,880,000.00 with interest, costs and attorneys fees” to the purchasers, arguing that because the developer failed to comply with ILSA by filing a Statement of Record with HUD and provide the Property Report, the purchasers had the absolute right to revoke their purchase of the unit. The developer asserted that the purchasers’ complaint should be dismissed because ILSA did not apply to condominium units and that, even if did apply, the sale of the subject unit was exempt under the “Improved Lot Exemption”.
Analysis of Improved Lot Exemption
The “Improved Lot Exemption” provides that ILSA’s requirements do not apply to “the sale or lease of 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 two year period”. The Court in Tencza stated that “Under HUD regulations, to qualify for this exemption a condominium either… must be completed before it was sold, or it must be sold under a contract obligating the seller to erect the unit within two years from the date the purchaser signs the contract of sale.” Since the agreement of sale did not obligate the developer to erect the subject unit within two years from the date the purchasers signed the agreement of sale, the Court looked at whether the subject unit was complete before it was purchased. “HUD guidelines provide that for a building or a unit to be complete, it must be physically habitable and usable for the purposes for which it was purchased. A residential structure, for example must be ready for occupancy and have all necessary and customary utilities extended to it before it can be considered complete”. The “Improved Lot Exemption” did not apply to the sale of the subject unit since at the time the purchasers entered into the agreement of sale the subject unit was not complete and ready for occupancy. A temporary certificate of occupancy for the unit was not issued until almost a year after the agreement of sale was signed.
Contract and sales volume are important measurements of the success of a residential project. In order to achieve a level of certainty with respect to those measurements, developers and financiers of residential projects should be aware of the application and interpretation of ILSA and regulations promulgated under it in order to prevent revocations of contracts and conveyances.
For additional information regarding this alert, please contact Nancy Sabol Frantz (email@example.com | 215.864.7026) or a member of the Real Estate and Finance Groups.
 15 U.S.C. § 1701 et seq.,
 Tencza v. Tag Court Square, LLC at page 1
 Id at page 1
 2013 WL 2449178 (S.D.N.Y) (June 6, 2013).
 Tenczas at page 5.
 Id at page 4
 15 U.S.C. §1702 (a) (2)
 Tenczas at page 5.
 Tenczas at page 6.