Realty Law Digest
Condominiums—Although Purchasers Had Closed On Their Unit And Made Certain Improvements, They Were Entitled to Rescission Under the Interstate Land Sales Full Disclosure Act—Sponsor Failed to File A Statement of Record With HUD And A Required Property Report—ILSA Applicable to Condominiums—Contract Merger Into A Deed Does Not Preclude Rescission—Fact that Unit May Not Be In Substantially Similar Condition Does Not Preclude Rescission, But Impacts the Amount of Refund that Purchasers Would Receive—Court Cited the Significant Cost of Litigation And Directed that Counsel, Accompanied by Party Representatives, Promptly Meet For At Least Two Hours to Attempt to Resolve the Matter.
The plaintiffs had commenced an action against a condominium developer/sponsor (sponsor) under the Interstate Land Sales Full Disclosure Act (ILSA). The plaintiffs alleged that the sponsor had "failed to file a statement of record" (statement) with HUD and "to provide a statutorily-required property report" (report). Each party had moved for a summary judgment. The court granted the plaintiffs' motion for partial summary judgment as to liability and denied the sponsor's motion.
ILSA had been enacted "to prevent false and deceptive practices in the sale of unimproved tracts of land by requiring developers to disclose information needed by potential buyers." "ILSA requires developers to submit 'a statement] of record'" (Statement) to HUD, and "wait until such statement is 'in effect'…before selling or leasing any nonexempt lot.'"
Certain sales are exempted from ILSA. The sponsor asserted that the subject sale comes within the "Improved-Lot Exemption," which exempts "from compliance with ILSA 'the sale or lease of any improved land on which there is a residential, commercial, condominium, or industrial building.'" If a developer sells or leases a nonexempt lot in violation of ILSA, "such contract or agreement may be revoked at the option of the purchaser or lessee within two years from the date of such signing." (15 U.S.C. §1703[c]).
The sponsor had converted an industrial building to residential condominiums, pursuant to an offering plan and amendments filed with the office of the New York State Attorney General. The sponsor had not filed a statement for the condominium with HUD. In 2007, the plaintiffs had visited the condominium three or four times and thereafter, entered into a purchase agreement (contract). The parties thereafter agreed to make certain modifications to the subject unit. Thus, a "rider" amended and modified the contract. It reaffirmed the price and provided for modifications to the floor plan. At the purchasers' request, the sponsor had agreed to not construct a wall and thereby, create a three bedroom unit, as opposed to the original contemplated four bedroom unit.
During the period of construction, the plaintiffs visited the unit several times and developed a punch list of unfinished items. On April 16, 2008, the NYC Dept. of Buildings issued a temporary certificate of occupancy (TCO). As of such date, the parties agreed that "the Unit was physically habitable and ready for occupancy." On April 28, 2008, the parties entered into an agreement which stated "'as a condition of the closing, Unit Owner requested and Sponsor performed certain punch list work,' but that 'there remain a few items from the Punch List Work which have not been completed in the Unit as of the date hereof'" (the punch-list agreement). The sponsor "agreed to complete the remaining punch-list work in a timely manner" and, in return, the purchasers "agreed to the following 'as-is' clause:
Unit Owner (i) accepts the Unit in its "as is" condition…and (ii) Unit Owner hereby releases and…discharges Sponsor…, from all manner of actions, causes of action, suits, debts, dues, sums of money, damages, claims and demands whatsoever in law or equity, which Unit Owner,…ever had, now have, or may have, now or hereafter upon or by reason of any matter arising from or out of the Punch List Work (other than the Surviving Punch List Work).
The punch-list agreement, dated April 28, 2008, stated "that 'the closing…has occurred as of the date of this Agreement." Notwithstanding such provision, the parties disputed when the closing occurred. Approximately nine months later, around the end of 2008 and the beginning of 2009, the plaintiffs moved into their unit. The plaintiffs had made some changes. They had painted the walls, had windows tinted, hung window treatments, added pavers on the terrace and installed electrical outlets and lighting fixtures, a sound system, an alarm system, and "an unattached 'island' in the kitchen." The sponsor noted that the pavers were installed in areas that had already been completed by the sponsor and that "the kitchen island, although unattached, is so large as to be immovable without mechanical assistance."
On April 23, 2009, the plaintiffs purported to exercise their right to revoke the contract pursuant to §§1703(c) and (e) of ILSA. The plaintiffs stated that "upon receipt of the purchase price of the condominium, plus closing costs, apportionments, and accrued interest, [the plaintiffs] would tender the deed and convey the Unit back to [the sponsor]." The sponsor refused to acknowledge the revocation. The plaintiffs then commenced the subject action.
Additionally, on May 25, 2010, the plaintiffs and other unit owners, filed an action in the state court against the sponsor (state litigation). The plaintiffs in the state litigation, alleged "breach of contract, fraud, negligence, and unjust enrichment." The sponsor asserted an affirmative defense of waiver, arguing that the plaintiffs' participation in the state litigation was "inconsistent with this action and estops them from seeking revocation." On Dec. 19, 2012, an amended complaint was filed in the state litigation, which "list[ed] 'The Board of Managers of the…Condominium' as the plaintiff, rather than the individual unit owners." The plaintiffs were no longer listed as plaintiffs. The plaintiffs continue to reside in the unit.