On Sept. 26, President Barack Obama signed legislation into law that amends the Interstate Land Sales Full Disclosure Act, a federal law known in the real estate industry as ILSA. Viewed as a crucial victory for condominium developers, this new legislation clarifies ILSA’s requirements and specifically impacts developers of condominiums containing 100 or more units. These developers will now no longer be required to register the condominiums with the federal government and will be exempt from onerous disclosure requirements of ILSA. This legislative fix will result in the continued recovery of the condominium development industry, which is crucial in South Florida as over 35,000 new condo units have been announced since 2011 (The Real Deal).
Originally enacted in 1968 at a time when condominiums were a relatively new phenomenon, ILSA was designed to protect consumers from unscrupulous developers who were cheating buyers and engaging in land sale scams. However, over the years, ILSA has been interpreted and applied to require developers selling residential property within certain developments to register with the federal government and make various disclosures to purchasers in the form of a property report. Many of ILSA’s disclosure requirements are duplicative of individual state requirements, such as Florida’s Condominium Act, and others, such as those related to disclosures of the topography of the land and the soil erosion, make no sense in the context of urban condominium development.
Court decisions regarding ILSA have caused uncertainty for developers for decades. Starting in the 1980’s, courts started applying ILSA to condominium development based on a technical reading of the law and the U.S. Department of Housing & Urban Development’s broad interpretation, however, the use of ILSA as forming the basis of a private cause of action was rare until 2008. During the real estate downturn, as a result of decreasing values, purchasers under contract on new condominium units increasingly looked for escapes from what they perceived as undesirable purchase and sale agreements. At this time, ILSA, which the courts held applied to the sale of condominium units, was used by such purchasers as a tool to cancel regrettable contracts and to receive returns of deposits. This resulted in numerous litigation claims against developers and exacerbated the downturn of the already struggling housing market.
The explosion of ILSA litigation in 2008 resulted in new and disturbing interpretations of the law. Courts interpreted the ILSA’s requirements very narrowly, giving buyers openings to find technical reasons for non-compliance by the developers. As the housing market downturn continued, more and more buyers filed lawsuits demanding cancellation of contracts and deposit returns. While some courts acknowledged that ILSA became a method of channeling buyer’s remorse, courts were compelled to apply the law as written, allowing buyers to cancel otherwise valid contracts with huge ramifications for developers and the housing market. These lawsuits slowed the housing recovery and left many large condominium developments unfinished or unoccupied.
Seen as a simple fix to solve the unintended consequence of ILSA’s application to condominium development, this new legislation provides clarity by distinguishing condominium sales from other types of land sales. While the consumer protections of ILSA will continue to ensure that buyers will have the right to cancel contracts in cases of actual fraud, at a time when the housing industry is recovering, the legislation will end the exploitation of ILSA. This fix will provide stability to developers and result in easier sales of condo units, ultimately allowing Miami’s real estate market recovery to continue.
Jeffrey R. Margolis is a partner at Berger Singerman, a business law firm, and is based in Fort Lauderdale. Visit www.bergersingerman.com