“I have some prime swampland in Florida to sell you” is a slang expression used to poke fun at the gullibility of a person. This saying is based on events of the 1960s and 1970s where local scammers would attempt to induce out of state purchasers to acquire “lucrative” land which, in reality, turned out to be worthless, undevelopable plots. The federal Interstate Land Sales Full Disclosure Act (“Act”), 15 U.S.C. §§1701, et. seq., passed by Congress in 1968 and patterned after the Securities Law of 1933, was a reaction to that and other scams involving the sale of land. The Act was intended to provide a mechanism to inform buyers of land and to curb fraud and misrepresentation by sellers. In short, the Act forbids a “developer” or “agent” (for purposes of this article, a “seller”) who uses interstate commerce to sell or lease any nonexempt “lot” without first filing an acceptable “statement of record” with the U.S. Department of Housing and Urban Development and delivering to the buyer, prior to the sale, a “property report” which meets the requirements of the Act. When a buyer brings an action against a seller under the Act, the remedy sought, more times than not, is complete rescission of the purchase (as opposed to damages or equitable relief). While not all land sales require compliance with the Act (such sales being exempt under §1702 of the Act), for those sales and sellers that do fall under the jurisdiction of the Act, failure to comply can have serious consequences.
Despite the Act’s good intentions, sellers and their advisors are citing three related concerns with the structure and application of the Act:
(1) Buyer’s Remorse. Sellers argue that instead of shielding buyers from unscrupulous sellers, the Act is being used by buyers to combat buyer’s remorse. This is especially true for buyers of investment properties or vacation homes who are looking for a way out of purchases and construction contracts made prior to the downturn in the real estate market. Sellers are arguing that the Act is being used as a vehicle by buyers – even sophisticated buyers who went into the transaction with their eyes wide open – to leave the seller holding the bag and incurring the buyer’s loss on a bad real estate investment.
(2) The Punishment Doesn’t Fit the Crime. Related to the first point is the seller’s second argument that outright rescission of the transaction, is an unfair, even severe, remedy for a situation where the developer or agent unintentionally failed to comply with the Act and where no fraud or misrepresentation was alleged. Instead of fraud and misrepresentation, recent litigation under the Act has focused on the following issues: whether the Act applied to a particular transaction, availability of exemptions, including partial exemptions, under the Act; and whether a limitation period contained in the Act bars a suit. To quote another saying, sellers contend that “the punishment doesn’t fit the crime”. An appropriate middle ground on this issue remains to be seen.
(3) Even Courts are Conflicted. Combine the above two points with the fact that there is a conflict in the courts over the interpretation of the Act, and it leaves sellers and their advisors playing an elaborate guessing game (or, perhaps a game of “Russian Roulette”) in navigating the complexities of the Act. In addition to being knowledgeable about the Act and the regulations promulgated thereunder, sellers must also be vigilant to consult local applicable case law on interpretation of the Act. It is for these reasons that some practitioners believe Congress must revisit the Act and update or modify it accordingly.
In summary, sellers who deal in and with real estate transactions would like to see changes to the Act to bring it in line with the lessons that have come to light in the past forty years, including, most notably, those derived from the issues discussed above. Nevertheless, the other side of the same coin is the admonishment to sellers to make review of and compliance with (if required) the Act a standard part of any real estate development project and to seek out professional help when needed. Don’t create an unintended escape hatch for a buyer in an otherwise solid, well-planned and executed development project.