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By: Marc DeCandia
Ballard, Spahr, Andrews & Ingersoll, LLP
The Interstate Land Sales Full Disclosure Act is a complex
law that impacts various transactions. Many attorneys are not
aware of the implications on their transactions. The below
outlines includes the pertinent highlights of that Act and helps
illuminate the various provisions and exceptions.
I. Introduction.
A. General Applicability.
The Act generally applies to the sale or lease of lots in a
subdivision by making use of interstate commerce or the mails,
and unless the sale or lease is exempt under the Act, the
developer must register the subdivision with the Department of
Housing and Urban Development ("HUD"). Except in the case of an
exempt transaction, a developer may not sell or lease lots in a
subdivision, unless a Statement of Record is in effect and
unless each purchaser is given a printed Property Report prior
to signing any contract or agreement for sale or lease, all in
accordance with the provisions of the Act and the regulations.
See 24 C.F.R. § 1710.3 (2003).
II. Definitions.
A. "Developer" means
any person who, directly or indirectly, sells or leases, or
offers to sell or lease, or advertises for sale or lease any
lots in a subdivision. 15 U.S.C. § 1701(5). HUD has ruled that
other third parties, such as banks which offer lots obtained
through foreclosure, and individuals who buy lots at a tax sale
for resale to others, may be deemed a "developer" for purposes
of the Act.
B. "Lot" means any
portion, piece, divisions, unit, or undivided interest in land
located in any State or foreign country, if the interest
includes the right to the exclusive use of a specific portion of
the land. 24 C.F.R. § 1710.1. The term "lot" includes
condominiums, cooperative units and campsites according to the
HUD Guidelines for Exemptions ("Guidelines").
III. Reservations Excluded.
A. Reservations. A
"Reservation" is defined as a "non-binding agreement used to
gauge market feasibility for a developer through which a
potential purchaser expresses an interest to buy or lease a lot
or unit at some time in the future." Guidelines, Part III(a).
IV. Statutory Exemptions from both Anti-Fraud
Provisions and Registration Requirements
A. General.
Prior approval of HUD not required.
1. Twenty-Five Lots. The sale or lease of fewer than 25
lots.
2. Improved Lots. The sale or lease of any improved land on
which there is located a residential, commercial, condominium or
industrial building, or the sale or lease of land under contract
obligating the seller or lessor to erect such a building thereon
within a period of two (2) years. 15 U.S.C. § 1702(a)(2).
a. Building Complete at Time of Sale. A building must be
"physically habitable and useable for the purpose for which it
was purchased" in order to be deemed complete.
b. Building Not Complete at Time of Sale. If the building is not
complete, the contract of sale must contain a provision
obligating the Seller to complete the building within two (2)
years, beginning with the date on which the prospective
purchaser signs the contract.
i. In a phased project, the obligation applies only to the phase
in which the unit sold is to be located.
ii. Pre-sales clauses which condition completion of construction
on a certain percentage of sales are permissible so long as the
pre-sale clause is legally binding and the presale period does
not exceed 180 days from the date the first purchaser signs a
contract within the project.
iii. The contract may allow for Force Majeure delays if the
provisions are legally recognized as defenses to actions in the
jurisdiction where the building is to be constructed.
iv. Limitation of remedies, including specific performance is
prohibited.
3. Government Sales and Leases. The sale or lease of real estate
by any government or governmental agency is exempt. This
exemption extends to sales and leases by a city, state, or
foreign government as well as the United States government, but
does not exempt sales or leases by federal or state chartered
and regulated institutions (such as banks, and savings and loan
institutions).
4. Sales to Builders. The sale or lease of lots to any
person who acquires such lots for the purpose of "engaging in
the business of constructing residential, commercial, or
industrial buildings, or for the purpose of resale or lease of
such lots to persons engaged in such business." Sales to
individuals who intend to build their own homes are not exempt.
See Guidelines, Part IV(g). In addition, a sale to a non-broker
who is buying a lot for investment with indefinite plans for
resale is not exempt.
5. Industrial or Commercial Developments. The sale or
lease of real estate for industrial or commercial development is
exempt where the real estate is zoned by the appropriate
governmental authority for industrial or commercial development;
or the real estate is restricted to such use by a recorded
declaration of CCR's , provided certain conditions are
satisfied.
V. Common Statutory Exemptions - Exempt from Registration
Requirements Only [Subject to Anti-Fraud Provisions]
A. One-Hundred Lot Exemption.
Subdivision lot sales are exempt from registration requirements
if, since April 28, 1969, the subdivision has contained less
than 100 lots, and will continue to contain less than 100 lots.
When counting 99 Lots:
i. Wholly exempt lots are not counted. This permits
"piggybacking" of this exemption with certain other exemptions.
ii. Resales of lots not counted.
iii. Includes all lots in a common promotional plan.
B. Twenty-Acre Lots. This section exempts the sale of
lots in a subdivision from the registration requirements of the
Act if, since April 28, 1969, each lot in the subdivision has
contained at least 20 acres.
C. Single-Family Residence Exemption.
This exempts the sale of lots in a subdivision that are limited
to single-family residential use, provided other conditions are
met.
VI. Regulatory Exemptions - No Prior HUD Determination
Required
A. Sales to Developers. The sale or lease of lots "to a
person who is engaged in a bona fide land sales business" is
exempt. 24 C.F.R. § 1710.14(a)(3); Guidelines, Part VI (b)(3).
The purchaser must be a person who plans to subsequently sell or
lease the lot or lots "in the normal course of business."
Guidelines, Part VI(b)(3).
B. Lot Sales to a Government. The sale or lease of real
estate to a government or governmental agency is exempt. 24
C.F.R. § 1710.14(a)(5); Guidelines, Part VI(b)(5).
VII. Regulatory Exemptions - Prior HUD Determination
Required.
A. General. The Secretary of HUD may exempt from
registration requirements any subdivision or lots by issuing an
Exemption Order upon a determination that registration is not
necessary in the public interest and for the protection of
purchasers based on the small amount or limited character of the
offering. The anti-fraud provisions apply to these exempt
transactions.
B. Multiple Site Subdivisions. The definition of
"Subdivision" includes contiguous and non-contiguous lots which
are offered for sale or marketed under a common promotional
plan. Accordingly the sale of such lots pursuant to a common
promotional plan must be included in determining the 100 lot
statutory exemption found at 15 U.S.C. § 1702(b)(1). However,
upon issuance of an Exemption Order the sale of lots contained
in multiple "sites" of less than 100 lots each, offered pursuant
to a common promotional plan, is exempt from the registration
requirements of the Act, even if the aggregate member of such
lots in multiple sites exceeds 100. 24 C.F.R. § 1710.15(a).
VIII. Advisory Opinion.
When it is not clear that an offering is exempt, Advisory
Opinions are an alternative to seeking an Exemption Order from
HUD to clarify the situation.
IX. No-Action Letters If one or more sales or leases do
not qualify for an exemption, a No-Action letter may be
requested from the Secretary of HUD. A No-Action Letter simply
signifies that HUD will not take any affirmative action to
require registration. The issuance of a No-Action letter does
not preclude any future agency action which may become necessary
because of new information or a change in the circumstances. A
no action letter will not be issued, if a sale or lease has not
already occurred.
X. Registration of Subdivisions - Statement of Record.
A Subdivision may be registered by filing with the Secretary a
Statement of Record. The Statement of record consists of two
parts. The first is the Property Report and the second is the
Additional Information and Documentation section.
A. Property Report This is a narrative disclosure to be
provided to each purchaser before the contract is signed.
B. Additional Information and Documentation Section
Includes details regarding the planning and physical
characteristics of the subdivision and the experience and
financial backing of the developer. Includes exhibits such as
plats, maps, titles documents and sales and financing contracts.
This is not provided to purchasers but is on file with HUD.
XI. Civil Remedies/Penalties.
A. Civil Remedies
1. Remedies.
In general, a purchaser or lessee may bring an action at law or
in equity against a developer or agent for any sale or lease
transaction in violation of 15 U.S.C. § 1703(a). The court may
take into account amount paid for Lot, cost of improvements and
fair market value of lot at time of purchase and at time relief
is sought. May also bring an action at law or in equity against
the seller or lessor to enforce the purchaser's revocation
rights under 15 U.S.C. § 1703(b), (c), (d) or (e) See 15 U.S.C.
§ 1709(a) - (b).
2. Limitation of Actions.
In general, there is a three (3) year statute of limitations for
action under the Act. See 15 U.S.C. § 1711.
B. Criminal Penalties. Willful violations of the Act,
including willfully making untrue statements of material fact in
a Statement of Record or Property Report (or omitting to state
any material fact) may, upon conviction, be fined up to
$10,000.00 or imprisoned for not more than five (5) years, or
both. 15 U.S.C. § 1717. No limitations period stated in statute.
C. Civil Money Penalties. The Secretary of HUD may also
impose a "civil money penalty" on any person who knowingly and
materially violates the Act or any rule, regulation or order
issued pursuant to the Act. The amount of the penalty may not
exceed $1,000.00 for each violation and the maximum penalty for
all violations by a particular person during a one-year period
shall not exceed $1,000,000.00. 15 U.S.C. § 1717a. No
limitations period stated in statute.
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