The Interstate Land Sales Full Disclosure Act (ILSA) requires developers selling residential property to register the development and make various disclosures to purchasers in the form of a “property report” unless the development and/or sale of property within the development meet one of the exemptions provided in the Act. The two most common exemptions are (1) the “improved lot exemption,” which applies to the sale of land on which a completed building exists or the sale of land under a contract obligating the seller to complete construction within two years from the date the buyer signs the contract, and (2) the “100 lot exemption” under which a subdivision that contains fewer than 100 lots or units is exempt from the registration and disclosure requirements of ILSA. Some exemptions, such as the improved lot exemption, are full exemptions from ILSA so the developer does not have to register the development or comply with the antifraud provisions of ILSA. Other exemptions, like the 100 lot exemption, are partial exemptions only from the registration and disclosure requirements of ILSA.

Sales contracts must also comply with ILSA, and for property which is exempt from ILSA, sales contracts must contain certain provisions to qualify for the exemptions. Failure of sales contract to include provisions needed to meet one of the exemptions will allow purchasers to cancel their agreements. Even technical violations of ILSA will allow purchasers to cancel their sales contracts, in some cases even after closing.

Penalties for violations of ILSA can be severe, including (a) the purchaser may rescind the transaction and obtain a full refund of all money paid toward the purchase of the lot for up to two years following the date of the sale, (b) the developer can be liable to the purchaser for damages, interest, court costs, expert fees and attorneys’ fees incurred for up to three years following execution of the purchase contract, (c) the developer can be liable in the amount of $1000 for each “knowing” violation of ILSA, and (d) the developer can be punished with fines of up to $10,000 and/or imprisonment for up to five years if found guilty of willfully violating ILSA or making untrue statements to purchasers regarding the property.

Congress recently made it easier to comply with ILSA in the condominium context and, thereby, avoid this potential pitfall in the development and sale of residential property. President Obama signed legislation approved by the House and Senate amending ILSA to clarify that the registration and disclosure requirements of ILSA do not apply to the sale of condominium units that are not otherwise exempt from ILSA. Although the anti-fraud provisions will apply to condominiums that do not meet one of the full exemptions from ILSA, the legislation which goes into effect on March 25, 2015 is viewed as a crucial victory for developers. Despite the new legislation, developers must still ensure that their sales contracts contain provisions needed to meet the exemptions from ILSA, and ILSA must be considered in non-condominium projects.