The Interstate Land Sales Full Disclosure Act's two-year completion exemption.

• Author: Sklar, William P.

From the Condominium Developer's Perspective

This article reviews the act as it impacts condominum developers, focusing on ILSA's prohibitions and requirements, exemptions and exlcusions, and penalties for violation.

The truth of the adage "a little bit of knowledge is dangerous" manifests itself for many real estate practitioners and their condominium developer clients that encounter the Interstate Land Sales Full Disclosure Act (ILSA or the act).[1] The act presents practitioners with a plethora of choices (and a wide range of potential penalties for choosing incorrectly): determining whether to register a subdivision with the Department of Housing and Urban Development (HUD) or whether to rely on one or more of the act's exemptions, and pinpointing which exemptions apply to a particular client. The purpose of this article is to review the act to the extent it impacts condominium developers particularly, focusing on ILSA's prohibitions and requirements, exemptions and exclusions, and penalties for violation. Specifically, the "two-year completion" exemption, frequently utilized by developers, will be addressed in detail in conjunction with Florida case law interpreting this exemption. The case law analysis discusses at length one of the most recent reported cases construing the two-year completion exemption, Hardwick Properties, Inc. v. Newbern, 11 So. 2d 35 (Fla. 1st DCA 1998), which discusses a developer's ability to contractually limit a purchaser's remedies for the developer's breach of contract, yet remain subject to the two-year completion exemption. Finally, this article examines the implications of Hardwick and prescribes practice and contract drafting suggestions following the uncertainty the case creates.

ILSA and its Prohibitions and Requirements

Florida case law and HUD guidelines have propounded and clarified the purposes and objectives of ILSA. According to HUD, the enforcer of ILSA and its corresponding regulations, ILSA's purpose is consumer-protection oriented in nature and its goal is full disclosure of information, to insure prospective purchasers and lessees (this article may refer only to "purchasers" or "sales" transactions, and such references should be interpreted to apply to "lessees" and "lease" transactions, as applicable) have obtained adequate disclosure of facts about a particular subdivision so that an informed decision relative to a potential purchase can be made.[2] Congress' initial intent in promulgating the act was the protection of purchasers from unscrupulous developers selling undeveloped home sites that were, in fact, undevelopable.[3] A review of the act's provisions reveals the requirement for submission to HUD of in-depth, detailed information about a developer and its particular offering in question.

A developer is best advised to examine the act's terms and determine whether its project is subject to, or exempt or excluded from, the act's requirements before commencing any sales or marketing activity of the applicable units. In brief summary, ILSA prohibits a "developer" from selling or leasing any "lot" in a "subdivision," through the use of interstate commerce, unless it complies with ILSA or falls within an applicable exemption or exclusion.[4] Each of the terms in quotations are terms of art specifically defined in the act, and are addressed separately below.

The definition of "developer" is extremely broad, so many individuals and entities will fall within its parameters. A developer is defined as any person or entity who, directly or indirectly, sells or leases, or offers to sell or lease, or advertises for sale or lease, any lot in a subdivision.[5] Note that this definition contemplates not only the act of conveying a unit, but also all related marketing and sales promotional efforts, a significant distinction if a subdivision must be registered, thus precluding any marketing activities until an effective registration is issued by HUD.

The definitions of "lot" and "subdivision" are as equally broad, with the effect of creating far-reaching jurisdiction for ILSA. ILSA defines a lot as any portion, unit, or undivided interest in land located in any state or foreign country if the interest includes the right to the exclusive use of a specific portion of the land.[6] Applicable Florida and federal cases, as well as specific ILSA regulations, have confirmed that a condominium unit is considered a lot and, therefore, is subject to the act's requirements (the terms "unit" and "lot" will be used interchangeably throughout this article).[7] Because a subdivision is defined simply as any land located in any state or foreign country divided or proposed to be divided into lots, whether or not contiguous, for the purpose of sale or lease as part of a "common promotional plan,"[8] many proposed condominium projects will fall within these definitional parameters. In fact, a developer must be alert and cognizant that two or more of its projects may be construed together by HUD as a "common promotional plan," defined in ILSA as any plan undertaken by one developer or a group of developers acting in concert to offer lots for sale or lease.[9]

The primary potential result of HUD's construction of one or more of a developer's condominium projects as a common promotional plan is to preclude the use of certain exemptions from ILSA, particularly exemptions based upon a certain maximum number of lots in a subdivision, discussed more specifically below. HUD provides further clarification of what constitutes a common promotional plan, by specifying such plan is presumed to exist if the land is contiguous or advertised as a common development or by a common name, and by delineating the following characteristics indicative of such a plan: 1) common sales agents; 2) common sales facilities; 3) common advertising; and 4) common inventory.[10] A developer and its counsel must thoroughly analyze each of the act's definitions to determine whether a given project meets the threshold requirements for subjection to ILSA.

Once a developer determines its condominium does or may fall within the act's jurisdiction, it needs to understand the requirements of developers dictated by the act. Initially, ILSA obligates a developer to register a subdivision with HUD's Office of Interstate Land Sales Registration by filing a document referred to as a statement of record, which includes a variety of extremely detailed information pertaining to the developer and the property being offered, ranging from title status of lots to be conveyed, land use requirements, utilities, access, infrastructure conditions, local services available, subdivision characteristics, and financial conditions and monetary obligations of the developer.[11] Only after HUD has approved a statement of record and issued an effective date may a developer sell and market lots, assuming compliance with ILSA's other requirements, including its anti-fraud provisions.[12]

Another requirement of ILSA pertains to disclosure to potential purchasers, and constitutes the core purpose of the act. After a developer has received an effective date from HUD and commences sales and marketing activity, it must deliver a property report, the content and format of which is derived exclusively from the statement of record, to each prospective purchaser or lessee in advance of his signing any sales contract or agreement.[13] HUD has memorialized its concern that the property report be delivered to purchasers in a timely, overt manner by explicitly prohibiting, for example, the attempted concealment of a property report or the use of such document in a language other than that in which the sales campaign has been conducted.[14] HUD imposes additional requirements on developers subject to ILSA, including compliance with antifraud provisions that prohibit fraudulent or misleading sales practices or representations,[15] and post-effective date requirements of 1) filing...