In a September 21, 2010, decision by the Federal District Court for the Southern District of New York, a condominium developer who had duly registered its condo project under the federal Interstate Land Sales Full Disclosure Act (ILSA) was found in violation of that law because its sales contract was not able to be recorded in the deed records of New York City. (Bacolitsas v. 86th & 3rd Owner, LLC, No. 09 Civ. 7158, 2010 WL 3734088 (S.D.N.Y. Sept. 21, 2010)). In Bacolitsas, husband and wife purchasers signed a contract to purchase a $3.4 million apartment at The Brompton, a luxury condominium tower being built on the Upper East Side of Manhattan, and received a developer-provided, HUD-accepted full disclosure Property Report prior to signing the contract. When construction was complete, the purchasers tried unsuccessfully to negotiate an 18 percent price reduction from the developer, then refused to close. The purchasers pressed for a return of their $510,000 escrowed deposit, were refused by the developer, had their claim turned down under the New York condominium law by the Office of the New York Attorney General and then sued alleging ILSA violation.
The court found that ILSA § 1703(d)(1) permits a purchaser to revoke “[a]ny contract ... for the sale ... of a lot [or condominium unit] ... which does not provide (1) a description of the lot which makes such lot clearly identifiable and which is in a form acceptable for recording by the appropriate public official responsible for maintaining land records in the jurisdiction in which the lot is located ... ”. The court concluded that the purchase contract in this case (1) lacked a notary block format for acknowledging signatures, and (2) contained an express prohibition against recordation. The court ordered a return of the purchaser’s deposit.
From the perspective of a condominium developer whose contracts often are expressly or implicitly not recordable, the Bacolitsas decision is troubling. However, an important counterbalance to the Bacolitsas decision is readily available – a Florida federal court decision issued more than a year earlier, Taplett v. TRG Oasis (Tower Two), LTD., L.P., 2009 WL 7231455 (U.S.D.C. M.D. Fla, 2009) (“Taplett”). Taplett was not cited in Bacolitsas.
Mr. Taplett purchased a condominium unit in the Oasis Tower Two condominium in Fort Myers, Florida, was given a HUD-accepted Property Report and paid $135,380 into escrow. Florida’s condominium statute allows sales prior to recordation of the declaration – the developer complied by providing the purchaser with an unrecorded declaration and its accompanying prospectus. The property description entered by the developer in the sales contract consisted of the proposed unit number and “Oasis Tower Two,” the name of the condominium to be constructed. The purchaser argued that the “recordable form” requirement of ILSA § 1703(d)(1) was not met. However, more than a year prior to the Bacolitsas decision, the Florida court in Taplett came to the opposite conclusion, stating that the developer’s providing the purchaser with a copy of the proposed declaration along with a contractual obligation to record the declaration prior to closing was sufficient, stating:
“To penalize a developer for giving the entire [declaration] document rather than a mere identifying reference (required so that the same document could be found) would be absurd. In any event, [ILSA] is not aimed at ensuring technical compliance with state recording statutes. Rather, its focus is preventing fraud through the disclosure of pertinent information [by providing each purchaser with a HUD-accepted Property Report]. Under Florida’s statutory scheme, it is the Declaration, not the later condominium parcel filing, that contains the relevant disclosures and descriptions of property. Given [the developer]’s disclosure of the proposed Declaration (which included a property description and other information) and its compliance with Florida’s statutory framework, this Court finds no violation of § 1703(d)(1).”
These two cases, plus several that are pending, present similar issues and demonstrate that experienced ILSA counsel is advisable not only for compliance in the first instance but also for developers to successfully defend their compliance with ILSA against purchasers’ challenges. Defense strategies are available but must be established and utilized properly to maximize the chance of the developer’s success.
From the standpoint of advocacy for developers, much can be learned from a review of the Bacolitsas and Taplett decisions. Based upon review of these cases and others brought under ILSA, if a developer is sued under similar circumstances, its defense should include the following components.
1. Focus on facts.
The condominium project should be described in the moving papers so the judge will understand that the project is of high quality and completely constructed and finished at the time the purchaser seeks rescission. Usually the basic facts are as stated in the prior sentence, but obviously, the facts should be supported by detail; for example, that temporary or final certificate of occupancy of the building or particular unit has been issued and the number of closings on other units. Although quality and completion status are not at issue in cases involving § 1703(d), facts pointing to quality and completion should be raised as background. If the buyer is a company or LLC, or if the purchase price of the unit is substantial, these facts also should be raised since ILSA decisions sometimes appear to factor the concept of “no harm, no foul” and often recite the completion status of the project and unit sales prices.
It is also important to note that controversy regarding compliance with § 1703(d)(1) arises only with respect to HUD-registered projects. Registration brings full disclosure via the issuance and distribution of a Property Report to each purchaser prior to purchase and the protection of a seven-day rescission period to each purchaser. Compliance with ILSA through registration should be highlighted and described since to have accomplished a property registration and compliant dissemination of the Property Report fulfills ILSA’s primary objective. See e.g., Stein vs. Paradigm Mirasol, LLC, 586 F.3d 849 (11th Cir. 2009) (“Stein”) at 853: “ILSA ‘utiliz[es] disclosure [through registration and issuance of a Property Report] as its primary tool’ to discourage fraud. [citing Winter v. Hollingsworth Properties, Inc. 777 F.2d 1444, 1447 (11th Cir. 1985)]. It requires developers selling or leasing property to provide the purchaser with a Property Report before the sales contract is signed. See 15 U.S.C. § 1703(a)(1)(B). If the developer fails to provide a property report, the purchaser generally has the right to revoke the contract. Id. § 1703(c).”
2. Supportive provisions in statute and regulations.
Careful review of the key ILSA provision casts doubt on the interpretation in Bacolitsas. Section 1703(d) states:
[In a registered subdivision as to which conveyance by deed does not occur within 180 days of signing a sales agreement for a lot or unit], “[a]ny contract or agreement which ... does not provide – (1) a description of the lot which makes such lot clearly identifiable and which is in a form acceptable for recording by the appropriate public official responsible for maintaining land records in the jurisdiction in which the lot is located ... [and two other conditions not at issue in the Bacolitsas or Taplett decisions] [italics added to “which” above to emphasize that “identifiable” and “form acceptable for recording” modify “lot description” and not “contract or agreement”] may be revoked at the option of the purchaser or lessee for two years from the date of the signing of such contract or agreement.”
The Bacolitsas court also cites the regulations of the U.S. Department of Housing and Urban Development (HUD) which administers ILSA that addresses the same point:
“The contract will not be subject to rescission if it includes, among other provisions, ‘[a] legally sufficient and recordable lot description ... ’. The [HUD] regulation’s wording varies slightly from that of the statute. The statute requires that the ‘lot’ be described ‘in a form acceptable for recording,’ 15 U.S.C. § 1703(d)(1), while the regulation interprets the statute to require ‘[a] legally sufficient and recordable lot description ... ’. 24 C.F.R. §§ 1710.105(d) (2)(iii)(A). The two phrases do not have any discernable difference that is material to the case at hand.”
Bacolitsas finds that the statute and regulations are consistent on the key point: both focus on the lot description. Both the statute and the regulations state that the sales contract must contain a legal description of the lot or unit being sold that is sufficiently specific for recording purposes in the local jurisdiction. Note especially that neither the statute nor the regulations state that the contract document itself must be in a form acceptable for recording or actually recorded.
Where neither the controlling statute or regulations require the sales contract to be recordable or actually recorded, why did the Bacolitsas court scour the contract in search of provisions extraneous to the legal description itself? And what did the court find? Answering the second question first, the court did not find any deficiency in the legal description itself; instead the court cited a single omission from the contract which it said was sufficient to subject the transaction to rescission under section 1703(d)(1) of ILSA: at the very end of the contract following the signature lines for the buyer and seller, the contract did not contain lines for a notary to sign attesting to their signatures nor was the contract, in fact, acknowledged. Although the court hinged rescission on lack of acknowledgement, it states that further support for rescission is found in clause 31 of the contract that states the purchaser may not record the contract. However, the court did not analyze the legal description provision of the contract or find it deficient in terms of meeting the ILSA requirements. As to the “why” of the court’s extension of its review, one possible answer is provided in the following section.
3. Resist judicial foray into “contextual interpretation.”
Given that the statute and regulations focus on the property description, why did Bacolitsas base its decision on matters extraneous to the property description clause? The court bases its analysis on two Second Circuit precedents and summarizes them in a way that highlights the key inconsistency between the two.
In the same paragraph, setting the stage for its decision, the court states, “In matters of statutory interpretation, a court is to ‘examine the text of the statute itself, interpreting provisions in light of their ordinary meaning and their contextual setting.’ [preceding italics added for emphasis] In re Application of New York Times Co. to Unseal Wiretap & Search Warrant Materials, 577 F. 3d 401, 406 (2d. Cir. 2009).” The court immediately follows that sentence, as if the second sentence would logically follow from the first, with a citation that shows a far more restrictive scope of judicial analysis of statutes: “A court must interpret a statute as it is, not as it might be, since courts must presume that a legislature says in a statute what it means and means in a statute what it says. (Life Receivables Trust v. Syndicate 102 of Lloyd’s of London, 549 F. 3d210216 (2d. Cir. 2008).” Clearly, although the first citation conjures up a court’s purview to examine the “context” of a statute, the court’s second quotation emphasizes avoidance of contextual examination.
Nonetheless, without any effort to resolve the tension in its two cited precedents, in the very next paragraph of the opinion – the turning point of the court’s decision – the Bacolitsas court embraces and stretches its first cited precedent and ignores the second. The court states that despite the consistent and clearly stated wording of both the statute and regulations, the provision regarding requirements for the legal description does not, in the court’s view, make sense unless the court grafts a new requirement onto the statute that the entire contract document must be in a form able to be accepted for recording by the New York County recording authorities. As the Bacolitsas court stated:
“A ‘description,’ standing independently from the legal instrument in which it is contained is generally not considered to be a recordable document and, as discussed below, would not be a recordable document in the jurisdiction in which this condominium unit is located. Read in context, the statute requires that the description be included in a document that is in a form capable of being recorded.” (italics added for emphasis).
In the space of a brief paragraph, the court finds that ILSA’s requirement of a sufficient “legal description” means that ILSA requires the contract document as a whole to be immediately recordable. And the court arrives at its finding despite expressly acknowledging that neither the statutory provision nor the HUD regulations state that the sales contract must be recorded or recordable. Indeed, ILSA and the HUD regulations focus solely on the legal description clause in the contract. In the only evidence regarding sufficiency of the legal description utilized in the sales contract adduced during the Bacolitsas court proceedings, a plaintiff’s expert and a defendant’s expert both testified in depositions that the legal description used in the contract was sufficient for recording purposes.
Why would ILSA call for a specific, recordable lot description and yet not call for the sales agreement to be in recordable form? Although the Bacolitsas court found that a contextual reading of ILSA § 1703(d)(1) “requires” a reading that the condominium sales agreement also to be in recordable form, a full understanding of ILSA carries no such requirement. A specific, recordable lot description helps form the foundation for a legally enforceable contract which protects both buyer and seller. Such a lot description also would support a purchaser’s legal claims to the unit by assuring that the subject matter of the contract is not illusory, void for vagueness or frustrated as to subject matter. These benefits do not require recordation: contrary to the statement in Bacolitsas, it is not only to record a contract that a specific legal description is useful. Further, actual recordation of condominium unit sales agreements is not customary in the United States for reasons of title consistency and, in some states, state condominium statutes and others laws. ILSA was not intended to upend traditional real estate practices in thousands of counties nationwide or contravene state law.
Does the ILSA requirement of a clearly identifiable and recordable lot description call for judicial interpretation or “correction” to bridge the gap between a sufficiently detailed description of the condo unit being purchased and a unit sales contract that as to each and every detail will be accepted for recording? Such a bridge is unnecessary and contravenes the plain words of the statute. If a bridge is to be created and traversed, it is a legislative function.
4. Interpret “legal description” consistently with ILSA precedent and policy favoring registration.
The developer in Bacolitsas had registered the condominium project – registration being a key objective of ILSA – and provided the resulting full disclosure Property Report to prospective purchasers. It was undisputed that the legal description itself was sufficiently definitive so as to be considered specific and nothing about the legal description prevented the contract from being recorded. These characteristics meet the standards set forth in ILSA § 1703(d)(1), and the Bacolitsas court did not take issue with the sufficiency of the legal description itself. What’s more, New York state has one of the most rigorous real estate registration regimes in the United States, and pursuant to New York law, the condominium project was filed, reviewed and ultimately approved by the New York Attorney General’s Office prior to any offering. The plaintiffs received the project’s New York registration materials and the ILSA Property Report, and received New York’s seven-day rescission period.
ILSA is a consumer protection statute which “us[es] disclosure as its primary tool to protect purchasers from unscrupulous sales of undeveloped home sites.” See Winter 777 F.2d at 1447. Registration provisions of ILSA must be applied liberally in favor of broad coverage, with its exemptions narrowly construed, to ensure that Congress’s essential purpose of full disclosure through registration is realized in favor of purchasers. Olsen v. Lake Country, Inc. 955 F.2d 202, 206 (4th Cir. 1991). Unit purchasers are protected by the statute’s full disclosure mandate afforded by detailed HUD regulations and manifested by the developer providing a HUD-accepted Property Report to purchasers prior to their purchase. Failure to do so entitles the purchaser to a two-year right of revocation of the contract and refund of all sums paid. Section 1703(a), (c) and (e). In further support of the goals of registration and disclosure by use of the Property Report are the three contract requirements found at § 1703(d). Pursuant to ILSA’s logic favoring registration, given that § 1703(d) contains exceptions which undermine registered projects, judicial use of such exceptions should reflect restraint rather than assertive application.
Given that registration is the key objective of ILSA and its standard of compliance, the three-pronged rescission penalty lurking in the § 1703(d) exceptions favors narrow exercise where, as in Bacolitsas, registration has been fully effectuated. To hold otherwise would result in the anomaly that fully registered and compliant developers would be subject to rescission to the same degree as careless claims of exemption or even intentional non-compliance. Courts have repeatedly stated that exemptions should be narrowly construed in order for the number of registrations to be increased. Why would courts act contrary to the “full disclosure through registration” purpose of the statute by imposing an “interpretation of context” for § 1703(d)(1) that would make stiff rescission penalties more likely for registered developers?
5. HUD regulations support limited scope of “legal description.”
The Bacolitsas court stated that HUD’s regulations are consistent with the statute with respect to the “legal description” requirement of § 1703(d)(1): “The statute requires that the ‘lot’ be described ‘in a form acceptable for recording’ [citation omitted], while the regulation interprets the statute to require ‘[a] legally sufficient and recordable lot description ... ’. 24 C.F.R. §§ 1710.105(d) (2)(iii)(A).”
Moreover, the HUD regulations support the view, well known to experienced practitioners, that actual recordation or “recordability” of the lot sales contract is not required for registration. Reg. 1710.209(a)(5) directs the developer to “state [in the Property Report disclosure document] whether it is unlawful to sell lots prior to final approval and recording of a plat map in the jurisdiction ... ”. HUD policy has long held that lots or units can be registered and sold by contract of sale as long as it is lawful to do so in the state in which the project is located even where conveyance by deed is not possible at the time of sale but is expected at some time after sale. HUD regulations address the facts and circumstances surrounding recordation of the contract and deed in a comprehensive fashion and specifically address situations where the contract is not in recordable form. See Reg. 1710.109(d) “Recording the contract and deed – (1) Method or purpose of recording. (i) State what protection, if any, recording of deeds and contracts gives a lot purchaser in your jurisdiction. (ii) If the sales contract or deed may be recorded, so state. Also state whose responsibility it is to record the contract or deed. (iii) If the developer or subdivision owner will not have the sales contract officially acknowledged or if the applicable jurisdiction will not record sales contracts, state that sales contracts will not be recorded and why they will not be recorded. (iv) If at, or immediately after, the signing of a contract, the contract or a deed transfer to the buyer is not recorded by the developer or owner or if title to the lot is not otherwise transferred of record to a trust, or if other sufficient notice of transfer or sale is not placed of record, then the developer shall include the following, or substantially the same, warning in the disclosure narrative under the caption ‘Method and Purpose of Recording’: ‘Unless your contract or deed is recorded you may lose your lot through the claims of subsequent purchasers or subsequent creditors of anyone having an interest in the land.’”
As seen above, HUD has for at least three decades handled recordation of the sales contract as an issue of disclosure. HUD does not issue deficiencies in its review of developer’s registration for disclosing that the contract is not in recordable form nor does HUD deny registration or direct the developer to provide for a two-year rescission right in such a case. By such treatment, HUD expresses its consistency with the statute and regulations that recordation or “recordability” of the contract document is a disclosure issue only, but is neither a cause for two-year rescission nor in any other way violative of ILSA.
6. ILSA does not preempt longstanding state condominium law nor does it impose new federal substantive standards for real estate.
Bacolitsas concerns the sale of a unit in a New York City condominium project and Taplett focuses on a condominium purchase in Fort Myers, Florida. Both states have comprehensive condominium regulation which feature providing unit purchasers with copies of relevant documents including the declaration of condominium, giving purchasers rescission periods equal to or greater than the seven days provided under ILSA, and disclosure of relevant facts and circumstances. Both state condominium laws allow the legal description used in the contracts for the respective projects and ILSA was never intended to preempt state condominium laws.
Congress considered a federal condominium act at the same time that it was considering ILSA and found that state regulation of condominium sales was the wiser path of regulation. Indeed, in the Stein decision, the 11th Circuit Court of Appeals suggests that in ILSA matters, the nature and extent of duties (including one would surmise, the duty to record) pertaining to contracts are matters of state law rather than ILSA. (See Stein 586 F.3d at 854). As noted above, the Taplett court found it would be “absurd” to interpret ILSA in such a way as to find the developer’s legal description in the contract violative of ILSA. The U.S. Supreme Court has stated that the function of the court is to enforce the plain meaning of a statute so long as to do so is not absurd. (Arlington Cent. Sch. Dist. Bd. of Educ. v. Murphy, 548 U.S. 291, 296, 126 S.Ct. 2455, 2459 (2006)).
In Taplett, the 2009 case in Florida, the legal description used by the developer in its sales contract was not sufficiently specific to be recordable and thus did not meet the requirements of § 1703(d)(1) notwithstanding which the federal court found for the developer on the dual grounds that the purchaser received more than the statute required and that in any event ILSA was not intended to upend Florida’s statutory scheme of regulation of condominium sales.
In Bacolitsas, the 2010 case in New York, the legal description used by the developer in its sales contract was sufficiently specific to be recordable and so met the letter of § 1703(d). However, the federal court expressly “interpreted” the statutory provision saying that because the contract as a whole was not recordable, the developer did not comply with the statute and the purchaser was entitled to a full refund despite the developer’s compliance with New York state’s comprehensive condominium sales statutes.
Why are opposing judgments sometimes rendered in factually similar cases? There is no sure answer to the question but more important, how will the next case – your case, Mr. or Ms. Developer – be decided in Florida, New York or elsewhere? Litigation outcomes are never assured. However, as discussed in this alert, counsel experienced in ILSA matters is well positioned to emphasize (1) favorable facts, (2) statutory/regulatory consistency, (3) principled resistance to judicial “interpretation,” (4) statutory policy favoring registration, (5) HUD regulations supporting propriety of non-recordation of sales contracts, and (6) federal statutory respect for state regulation of condominiums. These arguments should strengthen a developer’s hand.