The Interstate Land Sales Full Disclosure Act: an Overview
| Publication year | 2009 |
| Pages | 93 |
2009, August, Pg. 93. The Interstate Land Sales Full Disclosure Act: An Overview
August 2009
Vol. 38, No. 8 [Page 93]
Real Estate Law articles are sponsored by the CBA Real Estate Law Section.
Coordinating Editor
Joseph E. Lubinski, Denver, of Ballard Spahr Andrews & Ingersoll (303) 299-7359, lubinskij@ballardspahr.com
About the Author
Adam K. Feldman is of counsel with Brownstein Hyatt Farber Schreck, LLP, where he practices real estate law (303) 223-1100, afeldman@bhfs.com.
This article provides an overview of the Interstate Land Sales Full Disclosure Act, explaining why the Act is especially relevant in today's real estate market.
Many real estate practitioners have heard of the Interstate Land Sales Full Disclosure Act (Act),(fn1) but most probably do not fully appreciate the relevance of the Act in today's troubled real estate market. The Act's significance has taken on new meaning, as an increasing number of contract purchasers look for ways to terminate real estate purchase and sale agreements (contracts) and obtain a refund of their earnest money deposits. As a result, litigation seeking rescission of contracts under the Act has increased exponentially over the last couple of years. Legal malpractice claims arising under the Act also have risen dramatically over the same time frame. Given the current economic recession, both of these trends should be expected to continue for some time.
This article provides an overview of the Act, focusing particularly on the two exemptions to the Act most often relied on by developers, and discusses recent case law interpreting these exemptions. The article also presents the advantages and disadvantages of registering a project under the Act, as opposed to relying on one or more exemptions, and discusses the penalties for failure to comply with the Act. The process for registering a project under the Act is not discussed in detail in this article, but both the process and requirements for a registration are explained at great length in the regulations interpreting the Act.(fn2)
Overview of the Act
Unless an exemption applies, the Act requires the registration of all subdivisions with the Secretary of the U.S. Department of Housing and Urban Development (HUD).(fn3) The Act defines a "subdivision" as:
Though once a heavily contested issue, it is now well-accepted that condominium projects constitute subdivisions and are subject to the provisions of the Act.(fn5)any land which is located in any state or in a foreign country and is divided or is proposed to be divided into lots, whether contiguous or not, for the purpose of sale or lease as part of a common promotional plan.(fn4)
A "common promotional plan," as used in the context of the definition of a subdivision, is a:
plan, undertaken by a single developer or a group of developers acting in concert, to offer lots for sale or lease; where such land is offered for sale by such a developer or group of developers acting in concert, and such land is contiguous or is known, designated, or advertised as a common unit or by a common name, such land shall be presumed, without regard to the number of lots covered by each individual offering, as being offered for sale or lease as part of a common promotional plan.(fn6)
A developer registers with HUD by filing a statement of record.(fn7) The statement of record includes two principal components: a property report that is given to a purchaser prior to execution of a contract (Property Report) and additional information about the subdivision that is submitted to, and kept on file by, HUD.
The purpose of the Act is to provide consumers basic information about the property prior to execution of a contract. Such information includes the proximity of the project to community facilities (such as schools and hospitals), whether the obligations of the developer have been secured, and additional information that might be relevant to a purchaser when deciding whether to purchase a property. Further, the purchaser is provided a seven-day right of rescission after signing the contract, should the purchaser change his or her mind after execution of the contract.
Exemptions
Registration under the Act is not required if the subdivision falls within one of the eight exemptions that except the subdivision from all provisions of the Act (Full Exemptions)(fn8) or one of the eight exemptions that except the subdivision from only the registration requirements under the Act (Partial Exemptions).(fn9) The difference between the Full Exemptions and Partial Exemptions is that projects qualifying for a Partial Exemption still must comply with the anti-fraud provisions of the Act.(fn10)
The exemptions from the Act are self-operating and do not require a determination or approval from HUD to be relied on by a developer. A developer nonetheless may request an advisory opinion from HUD that confirms whether, based on the information provided by the developer, the subdivision meets the requirements of a specified exemption. Requesting such an opinion adds costs and takes time. HUD typically has a thirty-day review period (during which the developer would not want to execute any contracts that rely on the exemption). Furthermore, HUD may ask for a local opinion on state law, so legal practitioners should be aware of this before requesting an advisory opinion on behalf of their clients.(fn11)
A developer whose subdivision does not meet all of the requirements of an exemption may request a finding of substantial compliance from HUD that would entitle the developer to rely on the exemption. Though useful, such substantial compliance findings may be sought only prior to undertaking sales in a subdivision, and may not be sought after noncompliance with the strict requirements of an exemption are discovered.(fn12)
As mentioned above, there are sixteen exemptions (eight Full Exemptions and eight Partial Exemptions). The following two are the most relevant to this article and are the most commonly used.
Improved Lot Exemption
This also is known as the "Two Year Exemption" and is the most commonly used Full Exemption. It exempts:
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 with a period of two...
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