Developers Must Prove Legitimate Business Purpose In Order To Enjoy Exemption from ILSA Disclosure Requirements

On September 7, WSHPC&B Partner Edward G. Guedes scored a major appellate victory in the Eleventh Circuit Court of Appeals on behalf of purchasers of condominium units asserting federal and state claims against a developer.  With contributions from Partner Laura K. Wendell, Ed successfully argued that the developer was not entitled to certain exemptions from disclosure requirements where the developer structured transactions for the sole purpose of evading those disclosure requirements.

Under the Interstate Land Sales Full Disclosure Act, commonly referred to as "ILSA", a developer is prohibited from selling or leasing a lot unless a printed property report is furnished to the purchaser or lessee within two years of the signing of any agreement by the purchaser or lessee. If a property report is not provided, the purchaser or lessee has a right of revocation that must be exercised within two years of signing the agreement. The agreement must contain this right of revocation.

In Gentry v. Harborage Cottages-Stuart, LLLP, several purchasers of condominium units sued a developer for allegedly violating the Interstate Land Sales Full Disclosure Act and for state claims. Among their various claims, the plaintiffs alleged that Harborage violated the ILSA by failing to furnish a property report to the purchasers and failing to include the purchasers' right of revocation in their agreements. The District Court granted summary judgment in favor of the plaintiffs, and the developer appealed.

On appeal, the defendants argued that they did not have to provide either to the plaintiffs because all the units were covered by an exemption. The contracts for thirty six units obligated Harborage to erect the building within two years, thus qualifying these contracts for the "two year exemption." The remaining ninety nine units were covered by the exemption for subdivisions containing fewer than one hundred units. The plaintiffs alleged that the defendants structured the sales of the units in a manner designed to thwart the application of ILSA requirements, and that they could not benefit from this attempt to evade the statute.

In a case of first impression, the Eleventh Circuit Court of Appeals examined the issue of whether the use of two separate purchase agreements, which technically exempt the seller from ILSA requirements, constitute a method of disposition adopted for the purpose of evading those requirements. Although developers may structure transactions in order to meet an exemption, they cannot do so with the sole purpose of evading ILSA requirements. The Court held that a developer seeking an exemption must produce factual evidence that the method of disposition has a "real world objective that manifests a business purpose." When applying this reasoning to Harborage's method of disposition, the Court held that Harborage did not present any evidence of a legitimate business purpose in using two different sales contracts. Because no legitimate business purpose was offered, Harborage could not claim an ILSA exemption, and its failure to provide a property report was a violation of the ILSA. The Court affirmed the lower court's decision.

You can read a copy of the Court's ruling here.

Categories: LitigationCondominium AssociationsAppellate Law & PracticeLand Use & Zoning (Private)Contracts
Tags: Jamie A. ColeEdward G. GuedesMichael S. PopokJoseph H. SerotaLaura K. WendellILSAFort Lauderdale Business Litigation AttorneysFort Lauderdale Business Litigation LawyersMiami Commercial Litigation AttorneyMiami Commercial Litigation LawyerSouth Florida Commercial Litigation AttorneySouth Florida Commercial Litigation LawyerFort Lauderdale Condominium Association AttorneysMiami Condominium Association AttorneysSouth Florida Condominium Association AttorneysSouth Florida Business Dispute Litigation AttorneysSouth Florida Business Dispute Litigation LawyersSouth Florida Private Transactions AttorneysSouth Florida Private Transactions LawyersFort Lauderdale Private Transactions AttorneysMiami Private Transactions AttorneysMatthew H. Mandel
Author(s): Brooke P. Dolara