Condominium Law Alert: Second Circuit Reverses Ruling Prohibiting Pre-Sales in Non-Exempt Projects Under ILSA

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The Interstate Land Sales Full Disclosure Act ("ILSA") is a federal statute that applies to sales and leases of residential and commercial lots in all fifty states. Unless a project is exempt from ILSA, the developer must register the project with the U.S. Bureau of Consumer Financial Protection and must deliver a disclosure document to prospective purchasers. In addition, the sales contract must contain certain federally mandated provisions, including "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." If a developer violates ILSA, the buyer has (in addition to other rights) the right to rescind for up to two years after signing the contract, even after closing. After the housing bubble burst in 2008, many buyers across the country asserted ILSA rescission claims.

In the case of Bacolitsas v. 86th & 3rd Owner, LLC, the trial court allowed a pre-sale buyer of a $3.4 million condominium unit to rescind a purchase and sale agreement and obtain a refund of $510,000 in deposits because the agreement did not contain a recordable legal description of the unit. The developer could not, however, provide a recordable legal description of the unit until the condominium declaration was recorded, which could only happen after construction was complete. Under most state laws, an actual legal description of a condominium unit or platted lot is not available until the recording of the condominium declaration or the plat. Most state laws allow parties to enter into purchase agreements prior to recording, provided closing does not occur until after legal creation of the unit or lot.

The sales contract in Bacolitsas did contain a draft unit deed and did identify the dimensions and locations of all rooms, the floor plan, the location of the unit in the building and the legal description of the land on which the project was being built. The developer argued that this was sufficient disclosure and that requiring an actual recordable legal description would outlaw pre-sales on a national basis. The trial court was not persuaded, stating that it was not preventing pre-sales, it was only ensuring that a buyer had a right of rescission in each pre-sale.

Bacolitsas, along with a similar decision from the federal district court in North Carolina (Berkovich), was very troubling to developers of condominiums and planned communities. One particularly harmful aspect of Bacolitsas was that it would allow a buyer to rescind a purchase contract under ILSA even after closing on the unit or lot.

In December of 2012, however, the U.S. Court of Appeals for the Second Circuit reversed the Bacolitsas decision. The Court of Appeals held that ILSA is concerned with disclosure rather than recording, and that ILSA requires a useful description of the unit or lot, not a recordable legal description of the unit or lot. The court also recognized the prevalence and utility of pre-sale agreements. By doing so, the Second Circuit has eliminated the uncertainty created by Bacolitsas and Berkovich and restored common sense to ILSA by legitimizing pre-sale contracts in condominiums and planned communities.

For more information concerning ILSA or state law compliance in condominiums or planned communities please contact a key contributor.

Key Contributors

Joseph P. McCarthy
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