Buyers Get Relief from Swamp Land Law

pre-construction condos by Robert Jones

A long forgotten law passed in the late 1960s to protect out-of-state buyers from investing in worthless Florida swamp land, the Interstate Land Sales Full Disclosure Act (ILSA) is now being tested as a way to get condo buyers out of their contracts.

The act requires developers building 100 or more units to register with the federal Department of Housing and Urban Development (HUD) and provide potential buyers with a thick, detailed property report prior to ratifying a contract. One attorney calls the Interstate Land Sales Full Disclosure Act (ILSA) “a land mine ready to explode.”

Just when you thought the real estate market couldn’t get any more chaotic, along comes this long lost law that could turn the condo market upside down by forcing developers to return at least tens of thousands of buyers’ deposits totaling hundreds of millions of dollars. Even the lawyers filing these suits aren’t sure what the eventual outcome will be, but one thing is certain: Developers will never do business the same way again.

Similar suits have been filed in at least three other states, California, Nevada and Georgia, jurisdictions where people are looking for avenues of relief from contracts they’ve signed.

The law provides an exemption for buildings completed within two years of signing the contract. However, because the documentation required under ILSA is costly and time-consuming, most developers simply wrote a loose, highly negotiable two-year completion date into their contracts and then forgot about providing reports or registering with HUD.

In the boom years, buyers didn’t care if their building took longer than that because often times they could flip their contracts for a profit even before a project topped out, reaping large profits. But once the market started to crash, ILSA got a second look. Some lawyers started to wonder: If buyers didn’t get a property report and yet their units were not completed within two years, then weren’t the developers in violation of ILSA? And if so, wouldn’t the courts nullify their contracts and return the buyers’ deposits?

So far, courts seem to be siding with buyers when interpreting ILSA. In Florida, where most of the case law is being created, judges “tend to interpret the statute strictly,” says Jared H. Beck, a trial lawyer in Miami. “The intent of the statute is that it’s a consumer protection statute. To the extent that developers try to skirt these requirements, courts in Florida tend to be less willing to read exceptions into the statute that accrue to the benefit of developers.”

Armed with a few encouraging decisions, attorneys from coast to coast are now filing ILSA suits by the thousands on behalf of reluctant property buyers. As a federal law, ISLA applies across the board in every jurisdiction in the U.S. The vast majority of case law interpreting ILSA has come down in Florida.

What will the effect be of all this litigation on an already uncertain housing market? If courts throw out contracts and thousands of buyers walk away from bad investments, will some condo markets ever find a bottom and start to recover?

Beck admits that the ILSA lawsuits are creating turmoil, and says the turmoil is “necessary evil … It might be a cost that we have to pay as a society to make sure that we have strong consumer protection statutes.”

And down the road, he believes, when the market does eventually recover and buyers start wading in again, they will do so with more confidence, knowing their rights are protected. “Economically I think it’s good in the long run because it reinforces people’s faith in the legal system,” Beck says. “I think the enforcement of consumer protections is ultimately good for the free market.”

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