Condominium Law Group Update: Eleventh Circuit Denies Relief to Condominium Buyers Under ILSA
10/6/2009

In an important victory for condominium developers, the Eleventh Circuit has dismissed claims for rescission and damages asserted by buyers of condominium units under the Interstate Land Sales Full Disclosure Act ("ILSA"). The Eleventh Circuit's opinion will make it significantly more difficult for condominium unit buyers to rescind their purchase and sale agreements based on an alleged failure of the developer to comply with the "completed lot" exemption under ILSA.

ILSA is a federal statute that applies to the sale of residential lots, including condominium units. ILSA requires a residential developer to register the project with the United States Department of Housing and Urban Development ("HUD") and to give prospective buyers a disclosure statement before entering into a unit sale agreement unless the project is exempt from the statute. The registration process is time-consuming and very costly. The disclosure statement is extremely expensive to prepare. ILSA entitles a buyer who did not receive a disclosure statement to rescind his or her unit sale agreement for a period of two years after signing the agreement (even after closing on the unit).

ILSA contains an exemption for "completed lots." To be exempt, the residence must be complete at the time the unit sale agreement is signed or the agreement must obligate the seller to complete the residence within two years from the date the buyer signs the agreement. A handful of recent state and federal cases in Florida have fueled a wave of buyer rescission claims by denying the completed lot exemption to projects where the unit sale agreement limited the buyer's ability to collect consequential damages or where it contained a force majeure clause. Since such contract provisions are common in unit sale agreements, these cases posed a major risk of loss to residential developers.

In Stein v. Paradigm Mirsol, LLC (11th Cir. Sept. 30, 2009), the court held that neither a unit sale agreement limiting the buyer's remedies to specific performance or actual damages (and waiving special and consequential damages) nor a force majeure clause for delay "beyond the control of the Seller" rendered the two-year obligation to construct illusory. A number of lower court cases had denied the completed lot exemption where the unit sale agreement contained a waiver of consequential damages or an ordinary force majeure clause. Consequently, developers around the country have seen an increase in suits for rescission and return of earnest money under ILSA, even though the lower court cases were at odds with long-standing guidance from HUD. The Eleventh Circuit's decision will undercut such claims where the unit sale contracts for the project have been drafted in accordance with the HUD guidelines on the completed lot exemption. Developers using sale agreements that are drafted to comply with the HUD guidelines on the completed lot exemption should be considerably less vulnerable to rescission claims as a result of this decision.

For more information please contact:

David Rockwell (206) 386-7694; dhrockwell@stoel.com
Joe McCarthy (206) 386-7534; jpmccarthy@stoel.com
Howard Feuerstein (503) 294-9215; hmfeuerstein@stoel.com
Michelle DaRosa (503) 294-9468; mddarosa@stoel.com