Interstate Land Sales Act: How a Presale Contingency Clause May Negate ILSA's "Improved Lot" Disclosure Exemption

Recently, in Jankus v. Edge Investors,¹ the United States District Court for the Southern District of Florida (Court) issued a highly controversial ruling holding that the use of the 180-day “free look” presale contingency clause in the developer’s condominium unit purchase agreement invalidated the developer’s use of the improved lot exemption from the registration and disclosure requirements of the Interstate Land Sales Act (ILSA). While the full impact of the ruling is unclear, undoubtedly Jankus will have a negative impact on the ability of developers to utilize the 180-day free look period while simultaneously availing themselves of the improved lot exemption from registration under ILSA.

In Jankus, a purchaser of a condominium unit sued the developer of the condominium project, alleging that the developer failed to provide the required property report disclosure required by ILSA. In its defense, the developer asserted that the sale of the unit was exempt from the disclosure requirements of ILSA because the developer availed itself of the improved lot exemption, a commonly used exemption that provides that ILSA’s disclosure requirements do not apply to sales under a contract in which either (a) the promised improvements already exist at the time of contract, or (b) the developer has unconditionally obligated itself to complete the promised improvements within a period of two years or less.² The purchase agreement executed by the plaintiff in Jankus expressly provided that construction of the promised improvements would be substantially completed within two years from the date of execution of the purchase agreement.

The plaintiff argued that the sale of the condominium unit was not exempt from ILSA’s disclosure provisions under the improved lot exemption due to the developer’s inclusion of a presale contingency clause. This presale contingency clause stipulated that the sales agreement for the purchase of the condominium unit could be cancelled by the developer (with a refund of the unit purchaser’s deposit) if the developer sold less than 80 percent of the total units within 180 days following the date on which the first purchaser of a unit in the condominium executes a binding purchase agreement. The developer’s inclusion of this presale contingency clause was made in reliance on the federal regulations implemented by the U.S. Department of Housing and Urban Development (HUD), which expressly allow for presale clauses conditioning the sale of a unit on a certain percentage of sales of other units if the clause is legally binding on the parties for a period of not more than 180 days.³ The Court in Jankus, however, ruled that the effect of the presale contingency was to give the developer the unilateral ability to withdraw from the contract in the event the specified presale contingency was not met, while limiting the purchaser’s remedy to a refund of its deposit in the event such a cancellation occurs. In the Court’s view, this condition made the developer’s obligation to complete construction within two years illusory, thus precluding the developer’s ability to rely on the improved lot exemption.

The Jankus holding will likely have a material impact on developers as many lenders condition construction loans with presale requirements similar to that in Jankus. If lenders continue to demand that such presale requirements be implemented in order for developers to receive financing, reliance on the improved lot exemption from ILSA will be placed in jeopardy. Absent a developer’s ability to meet one of the other ILSA exemptions, this would obligate developers to register with HUD and provide a HUD-approved property report to purchasers.

Interestingly, the HUD-promulgated federal regulations that allow for the 180-day presale contingency⁴ state that the inclusion of a presale contingency shall not serve to extend the two-year period for performance. In light of the general view that deference be given to statutory interpretation by government agencies entrusted to administer a particular statute when the statutory language is ambiguous,⁵ some may argue that the regulation allowing the 180-day presale contingency contemplates the use of such presale contingencies in conjunction with the improved lot exemption, such that they are not mutually exclusive. To date, this has been the view traditionally adopted by most courts. Proponents of this view may cite a recent case from the Court, Pilato v. The Edge Investors,⁶ which gave such deference to HUD-promulgated guidelines in holding that a force majeure clause placed in a purchase agreement did not render the seller’s obligation to complete construction within two years illusory, nor did an 80-percent presale contingency clause (similar to that in Jankus) render the obligation illusory. For the present, however, developers should be aware that the reasoning in Jankus reaches a different conclusion, and that reliance on the improved lot exemption may be frustrated when a presale contingency is employed.

¹ 2009 WL 961154 (S.D. Fla. Apr. 8, 2009).

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If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individual:

Dan Bachrach
Orlando, Florida
407.244.3261
dbachrach@foley.com

Anthony M. Rodriguez
Tampa, Florida
813.225.5454
arodriguez@foley.com