Board of Contributors: Recent Rulings on Condo Contracts Have Widespread Significance

The Interstate Land Sales Full Disclosure Act, a federal statute that was initially designed to prevent unscrupulous land sales of desert land in Arizona and marsh land in Florida, has been one of the primary weapons employed by buyers seeking to recover their contract deposits as a result of the economic downturn starting in 2008.

Developers' failure to comply in various respects with ILSA's provisions or exemptions have permitted buyers in many cases to cancel their purchase contracts and obtain a return of their deposits. A recent case from a federal appellate court, however, may have made it more difficult for buyers attempting to rescind their contracts — and make life simpler for developers' attorneys.

Although ILSA contract rescission cases occurred nationally, Florida was in the forefront. It is therefore strange that two cases having the greatest impact on Florida condominium sales practices did not arise in Florida.

In cases involving pre-construction purchase agreements, one from New York and one from North Carolina, the purchasers asserted a contract rescission claim under a provision in ILSA requiring purchase contracts to contain "a description of the lot [unit] ... which is in a form acceptable for recording by the appropriate public official responsible for maintaining land records ... ."

In the New York case, Bacolitsas v. 86th & 3rd Owner, LLC, the trial court held that, in order to comply with this provision, the purchase contract had to be in a form recordable in the land records. The purchase contract under review did not contain any recording information for the declaration of condominium, since it was intended that the declaration be recorded at completion of construction; nor did it contain notarized signatures necessary for recording. In the face of these perceived inadequacies, the court allowed the purchasers to rescind their contract and obtain a return of their deposits.

The North Carolina case, Berkovich v. The Vue-North Carolina, LLC, rejected the idea that the purchase contract had to be recordable but agreed with the trial court in Bacolitsas that the purchase contract had to contain a legal description which referred to the book and page of the recording of the declaration. But this was an impossibility for the developer to insert in a pre-construction contract under North Carolina law since the condominium statute did not allow a declaration to be recorded prior to completion of the building.

Here again, the purchasers were able to reclaim their deposits.

The existence of these two cases caused Florida developer attorneys drafting pre-construction purchase contracts to change their traditional practice of recording the declaration of condominium upon completion of the building and shortly before the first closing on individual units. Instead, in an attempt to avoid potential rescission contract claims, developers' counsel began recording the condominium declaration prior to the developer taking any purchase contracts. Such recording allowed developers to provide a description of the unit with the appropriate book and page reference for the declaration of condominium and therefore hopefully avoid rescission claims predicated on these two cases.

Recording the declaration prior to construction, however, does create problems for the developer.

This pre-construction recording results in the creation of so-called "phantom units" — unbuilt units created and legally existing in law but not in fact.

The creation of unbuilt condominium units is permissible under the Florida Condominium Act. But once the condominium comes into existence upon the recording of the declaration of condominium, it has to be administered with annual budgets, unit owner meetings and other association compliance obligations. In addition, many of the outside dates for action described in the Condominium Act, such as correction to errors in the documents, the period for adding phases to a phased development and the outside period for turnover of the condominium association, are triggered by the recording date of the declaration.

Therefore, it is not unlikely that three years or more will have elapsed between the recording of the declaration, the presale process and the completion of the condominium. This long lead time will likely result in some statutory periods having already elapsed by the time the building is completed; other periods may be severely truncated.

It was therefore significant that a New York federal appeals court recently overruled the lower court decision in Bacolitsas.

The appellate court held that as long as the condominium documents distributed to buyers described the condominium unit and its relationship to the property with the graphic descriptions typically appearing in an unrecorded declaration, the fact that a book and page number for a recorded declaration did not appear in the condominium documents (because the declaration had not been recorded) did not violate the provisions of ILSA requiring a legal description "in a form acceptable for recording."

This decision, together with some consistent Florida cases, should alleviate the necessity to record the condominium documents prior to completion of the building, thereby eliminating the administrative nightmare of operating a condominium association for a building that does not exist.