Laws that are enacted as a reaction to one problem can sometimes find new life in a very different context. As we shall see in this report, lawyers for condominium sponsors and purchasers can draw some interesting lessons from a spate of recent cases emanating from the Southern District of New York.

Back in the 1960’s, Congress created the Interstate Land Sales Full Disclosure Act (15 U.S.C. §§ 1701 et seq.), (commonly acronymed as “ILSA” or the less-pronounceable “ILSFDA”) as a response to the unscrupulous practices of land speculators who were subdividing and selling undevelopable desert and swamp lots in faraway places like Arizona and Florida, to unsuspecting out-of-state purchasers. These lots usually had no access to roads, utilities or any of the promised amenities, and when purchasers actually went to see their lots, they would discover the fraud – in most cases too late to obtain recourse or without any recourse at all.

If we fast forward to 2008, just after the real estate bubble burst, several New York lawyers used existing legal precedent to breathe new life into what might otherwise appear to be an arcane statute out of history.

These lawyers represented purchasers of new construction and rehab luxury condominium units in New York who had signed contracts at historically high prices, and when the bubble burst, discovered that they had “buyer’s regret.” Prices dropped so dramatically that the possibility of just walking away from half-million dollar down payments actually looked attractive, so some of them just went ahead and did just that.

Purchasing an alternative unit or property elsewhere, their lawyers turned toward the idea of recovering down payments and possibly even obtaining damages awards – and by making use of ILSA provisions they have found some success in situations that fit the statute.

Condo developers in these cases had not dotted their “i’s” and crossed their “t’s” in compliance with ILSA’s statutory requirements and HUD regulations.

Perhaps they or their counsel were unaware of ILSA. Perhaps they just did not want to go through the aggravation and expense of going into full compliance. Perhaps they thought, incorrectly, that their project was exempt from the requirements.

The Southern District has been a recent hotbed of ILSA activity related to condominium developments, and these cases are illustrative of what happens to condo developers who flout ILSA with or without any intent to do so.

In the case of Bacolitsas v. 86th & 3rd Owner, LLC, 09 Civ. 7158 (PKC) decided on September 21, 2010, Southern District judge Kevin Castel held in favor of purchasers at the Brompton Condominium. When the bottom fell out of the market, the purchasers attempted to renegotiate their $3.4 million contract price down by $600,000. The developer refused, and the buyers decided to cancel the contract.

Their lawyers found a way to get the down payment back, using ILSA, and the court agreed, ruling that:

“the Act permits a purchaser to revoke a purchase contract–“for good reasons, bad reasons or no reasons”–in the event the terms do not provide “a description of the lot … which is in a form acceptable for recording … in the jurisdiction for which the lot is located.”

Providing a recordable legal description for a condominium unit at a point in time when the building is in the planning stages can be an interesting job, particularly since the declaration is not nearly ready for recording, and it is possible that the exact percentage of common elements has not yet been assigned.

Because the problem with providing a lot description was a problem with condominium developers, the federal Department of Housing and Urban Development (HUD) permitted developers to simply describe a unit as “Unit X in that certain condominium established by the Declaration of Condominium for Always Built Collassal Condominium to be recorded in the Office of the (Recording Officer) of (county name) county,”

We can’t tell from the Brompton decision whether that would have been sufficient to satisfy the statutory requirement of recordability, since that would ordinarily be decided in accordance with state law, and the New York Condominium Act has some relatively clear requirements for condominium descriptions (See Real Property Law § 339-o) – The description of the land would be fairly easy, as would the unit designation and the statement of use. A statement of the common interest, however, would require that this be worked out by the developer early in the process.

In Nu-Chan, LLC v. 20 Pine Street, LLC, No. 09 Civ. 00477 (PAC), decided September 30, 2010, another Southern District judge, Paul Crotty, made it clear that ILSA applies to condominium developers, in granting summary judgment. Two unit buyers at 20 Pine Street Condominium sued to revoke their contracts because the developer did not register the condo with the Office of Interstate Land Sales Registration (“OILSR”) or give a HUD Property Report. The 20 Pine developer completely failed to abide by the requirements of ILSA. The developer’s counsel attempted to argue that ILSA did not apply to condominiums despite many previous cases and federal regulations that indicated otherwise. Judge Crotty made it very clear that condo developments with over 100 units were clearly subject to the registration requirements of ILSA. While there are some exemptions, the developer in this case did not fit into any of them.

In this case, the developer, who was doing a partial conversion of an existing commercial building in downtown Manhattan, argued that the premises was improved, and not a “lot” under ILSA standards. This argument, while creative, was rejected. For the Improved Lot exception to work, the conversion would have had to have been complete.

In Nu-Chan, the developer won a Pyrrhic decision on the issue of the automatic rescission right, which runs after two years – but damages may be claimed under 15 USC 1703(c) for three years from the date the contract was signed.

Our third case is An v. Leviev Fulton Club, LLC, Slip Copy, 2010 WL 3291402 (2010 S.D.N.Y.), which was decided August 10, 2010. In this case, the developer took the position that it was exempt from ILSA under the “two year exemption,” under which it claimed to have obligated itself to complete the project within two years. The Court, looking within the four corners of the contract, used the developer’s own contractual weasel words to hold that the exemption did not apply. In the contract, the developer only “anticipated” closing within two years, so there was no binding exemption. The contract should have had a clear option for the purchaser to withdraw without penalty if the development was not completed within the two years.

While these three cases came from the bursting of the housing bubble, they represent a warning to condo developers and their attorneys to pay closer scrutiny to ILSA requirements. A fifteen unit condominium in Park Slope won’t have an ILSA issue, while a developer with pre-sales of a several-hundred unit development on the East River in DUMBO should be making sure of compliance.

The cases also serve as a possible additional weapon in the arsenal of purchaser’s counsel looking for a way out for their clients who may merely have changed their minds and now want out. If the developer should have been in compliance with ILSA, it may come as a rude awakening.