Thousands of condo buyers (and would-be condo buyers) from New York City to Los Angeles are hoping a recent legal ruling involving homeowners in a Virginia community will allow them to get back their hefty deposits put down on shuttered or poorly selling condo projects.
The Wall Street Journal reported that since the real-estate market crashed about two years ago scores of would-be buyers who put down deposits to buy condos have tried to use an obscure federal law to void the deals they signed. The law, enacted in 1968 and called the Interstate Land Sales Full Disclosure Act (aka ISLA), requires developers of subdivisions with 100 or more units to provide a “laundry list of disclosures;” everything from condo association information, zoning regulations and even details such as where the nearest police station is.
However, courts in New York sided with the developers, not consumers, when these cases were heard. The Journal cites two recent decisions, involving a condo project in Harlem and another in Long Island City, where judges decided that the projects were marketed as having more than 100 units however, because fewer than 100 were actually sold, the disclosure rules don’t apply.
But, the Virginia case seems to have turned the tide and sided with consumers in a similar predicament. A federal judge in Alexandria issued an opinion in March that said a couple could recoup $2 million they paid a developer as a deposit on a lot in a proposed 160-home development.
The couple took out a $6 million loan for their home in the development, which was slotted to be managed by Ritz-Carlton. The luxury hotel chain owner subsequently pulled out of the development, causing the couple to change their minds and sue the developer to recoup their deposit. The ISLA law states that if the developer fails to meet the disclosure requirements buyers are entitled to back out of the deal and regain their deposits. The law was originally intended to reduce fraudulent sales of swampland in Florida and barren desert in Arizona.
Ritz-Carlton countered by claiming that the development was exempt from ILSA, citing the low number of houses that sold (only 31); the same argument that helped developers in New York win their cases.
A lawyer for Ritz-Carlton declined to comment.
The Journal added that determining whether a development has 100 or more units, and therefore is subject to the law, isn’t as easy as it would appear.
The decision in Virginia puts the focus on the “intentions of the developers” rather than on what ends up actually happening; according to New York-based attorney William J. Geller, with law firm Adam Leitman Bailey. The Journal said Geller is currently handling 438 ILSA-related complaints.
The lawyer who argued and lost the Harlem and Long Island City cases said he plans to appeal those decisions, using the Virginia opinion as the basis for an appeal.
The New York state attorney general’s office also said that complaints from buyers trying to recoup their deposits are on the rise; the office received 475 escrow dispute last year alone, nearly double the number of disputes filed in 2008.
“Los Angeles is a powder keg on this very issue as more and more completed condominium developments started and pre-sold during the boom come on-line,” Andrew Morrow, head of KMFM’s real estate practice group, said. “Owners who are now not willing or able to close on the deal or have seen the value of their investment plummet 40% to 60% before they even took possession are scrambling for relief from heavy purchase termination penalties. I think its just the tip of the iceberg.”
