Condo contracts: The need for full disclosure
The real estate market in South Florida is ever changing, especially the condominium market. The speed in which properties develop is dictated by supply and demand. Some areas of South Florida are experiencing a flurry of development. As a result, litigation has also increased, and questionable condominium contracts have been a primary cause. In particular, a central focus of recent litigation has been whether the contracts comply with the Florida Condominium Act and the federal Interstate Land Sales Full Disclosure Act (ILSA). Violations of either statute could serve as a basis for voiding a condominium purchase and sale contract.
Under the Condominium Act, before offering units for sale, Developers will in most cases be required to prepare a detailed prospectus or offering circular describing the project. The Developer will then need to file the prospectus with the Division of Florida Condominiums, Timeshares, and Mobile Homes “prior to entering into an enforceable contract of purchase and sale of any unit or lease of a unit for more than five years and shall furnish a copy of the prospectus or offering circular to each buyer.” Fla. Stat. § 718.504. In addition, the Condominium Act states that each buyer shall be furnished with a separate page entitled “Frequently Asked Questions and Answers,” and the Act requires certain disclosures in the contract for the sale or lease for an unexpired term of more than five years of a condominium unit. Fla. Stat. §§ 718.504, 718.503. These requirements, in particular, are often overlooked by many Developers. As a result, under Fla. Stat. § 718.505, many cases focus on whether there was substantial compliance with the Condominium Act and whether non-compliance warranted rescission of the contract. Section 718.503 permits a buyer to rescind a contract within 15 days after its execution by the Buyer, or 15 days after the date of receipt from the Developer of any amendment which “materially alters or modifies the offering in a manner that is adverse to the buyer.” See Fla. Stat. § 718.503. A material change is one that is “to a significant extent or degree,” while an adverse change is “contrary to one's interests or welfare; unfavorable.”
As noted earlier, violations of ILSA also can serve as a basis for voiding condominium purchase and sale contract. ILSA was passed to protect buyers of out-of-state parcels from scams, given their inability to inspect the pre-construction areas on-site. As applied, ILSA is a federal consumer protection act intended to prevent fraudulent land sales. Generally, a review of the cases involving ILSA often concerns whether the property is exempt from the Act, and if it is not, whether the contract violates the Act. Generally, Developers seek to be exempt from the registration requirement of ILSA. Exemptions may be either total or partial, and are self-determining. The exemptions include projects in which lots are leased or sold to a person in the business of constructing residential, commercial, or industrial buildings on the lot purchased, or with a commitment to complete a home within two years. 15 U.S.C. § §1702(a)(2), (a)(7). Developers who are not exempt from the registration portions of the Act must furnish a Property Report to buyers before the signing of the agreement. Failure to comply with the law can make the contract voidable at the buyer’s option, cause the Bureau of Consumer Financial Protection to shut down property sales, or even result in a criminal offense for willful violations.
Developers and their attorneys should take all precautions to ensure compliance with both State and Federal law. In addition to checking for compliance with the Condominium Act and ILSA, developers and their counsel must not overlook the common law causes of action and defenses that govern contracts. At their core, written agreements to sell condominiums are nothing more than real estate contracts. Developing condominiums can be both fun and exciting. However, developers and attorneys should plan ahead, review applicable statutory and common law, and ensure that their condominium contracts are in compliance with all State and Federal requirements.