On September 18, 2014 Congress amended the Interstate Land Sales Full Disclosure Act ("ILSA") to exempt condominiums from the filing and registration requirements. Originally intended to protect consumers against fraudulent land sales practices such as selling lots that were underwater or unable to obtain utility services, the federal courts and the Department of Housing and Urban Development ("HUD"), the agency tasked to administer the law, ruled that ILSA applied to the sale of condominium units. Most condominiums were exempt from ILSA either because they had fewer than 100 units or because they could be completed and delivered within two years after the date of the contract of sale. However, after the real estate bubble burst in 2008, purchasers who contracted to pay more than the reduced fair market value got buyer's remorse and turned to ILSA either to cancel their purchase agreements or to seek damages. Those developers who had structured their purchase agreements to qualify for exemption were able to enforce those contracts. Others who had not paid attention to HUD's detailed requirements for exemption found that their sales evaporated and that their deposits had to be returned.

ILSA has always had two forms of exemption:

(1) under 15 U.S.C. §1702(a) "lots" were completely exempted from all provisions of ILSA if, among other exemptions, the contract was for "the sale or lease of any improved land on which there is a residential, commercial, condominium, or industrial building, or the sale or lease of land under a contract obligating the seller or lessor to erect such a building thereon within a period of two years;" 
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(2) under 15 U.S.C. §1702(b) "lots" were exempt from only the filing and registration requirements that a "Property Report" be filed with HUD before the developer could enter into any binding contracts of sale. The three main ways to qualify for a subsection (b) exemption were to contain less than 100 units, to be sold entirely within one state to in-state residents who visited the unit and by selling not more than 12 units in any twelve-month period.

Although most condominiums could qualify for an exemption, larger, high-rise buildings could not be completed within the two-year period and were required to register with HUD and distribute a HUD-approved Property Report which could take up to six months to be approved—in addition to any disclosure document required by state condominium law. Thus, the legislation was particularly problematic for developers in New York City where many condominium projects could not qualify for an exemption and a massive securities-like offering plan also had to be filed with the state Attorney General's office and given to purchasers. Introduced primarily by congressional representatives from New York, the changes to ILSA were contained in H.R. 2600 and S. 2101.

The changes essentially added a new exemption to 15 U.S.C. §1702(b) for "the sale or lease of a condominium unit that is not exempt under subsection (a)" and defined the term "condominium unit" to mean:

a unit of residential or commercial property to be designated for separate ownership pursuant to a condominium plan or declaration provided that upon conveyance—

  1.  the owner of such unit will have sole ownership of the unit and an undivided interest in the common elements appurtenant to the unit; and
  2. the unit will be an improved lot.

Although a significant change for developers of condominium projects that could not previously qualify for exemption, depending on how HUD implements this change in regulations, this may not have much effect on most developers who can deliver units within two years. HUD will have to determine whether the additional regulatory requirements for the purchase agreement—regarding (1) force majeure delays, (2) purchasers' right to specific performance and (3) the 180-day limit on the developer's right to cancel for failure to meet a presale requirement—will continue to apply in order to qualify for an exemption under 15 U.S.C. §1702(a). To be clear, the new exemption does not affect the misrepresentation and fraud provisions of ILSA—they will still apply to projects exempt under 15 U.S.C. §1702(b).

Nevertheless, the legislation finally permits larger condominium projects to avoid duplicative disclosure requirements without reducing necessary protections for consumers purchasing vacant lots they have never seen.

This article is presented for informational purposes only and is not intended to constitute legal advice.