While New York real property sales are primarily governed by state law, there are also federal statutes that affect the rights of buyers and sellers. One such law is the Interstate Land Sales Full Disclosure Act (ILSA). Congress adopted ILSA in 1968 to protect consumers against “sight unseen” purchases of subdivided, undeveloped property that often turned out to be worthless. As the U.S. Second Circuit Court of Appeals noted in a2011 caseinvolving the application of ILSA, “Some such land was inhabitable, and other such land, though possibly habitable, would require an enormous investment by the developer and local government to make it so.”
Consequently,ILSA requires developers who subdivide property into 100 or more lots file a “statement of record” with the U.S. Department of Housing and Urban Development. The developer must also provide “the purchaser or lessee” of any subdivided lot with a “property report” containing certain disclosures. If the purchaser does not receive this report, ILSA allows him or her to unilaterally revoke the sales contract without penalty.
Real Estate Bubble Collapse Led to Increase in ILSA Litigation
ILSA frequently applies to the sale of condominiums. Following the 2007-2008 financial crisis, many condominium buyers invoked ILSA in an attempt to revoke sales contracts on units that were suddenly worth less than the purchase price. Such litigation continues to work its way through the courts, including a recent decision by the Second Circuit here in New York.
In this case, a couple signed a contract in November 2007 to purchase a $4.3 million condo in a building then under development in Manhattan. The buyers provided a 15% down payment, as is typical with such contracts. Shortly before the contract was signed, the condo developer delivered the property report required by ILSA to the buyers' attorney.
The condo development was not completed until 2009. At that point, the buyers informed the developer they were exercising their right to revoke the contract under ILSA. Among other things, they argued the developer failed to comply with ILSA because it delivered the property report to the buyers' attorney rather than the buyers personally. A district judge in Manhattan agreed and awarded summary judgment to the buyers.
But in a September 21decision, the Second Circuit reversed, holding the developer did not fail to comply with ILSA. The law requires the developer furnish the buyer with a property report. It does not, however, state “the developer must hand the Report directly to the purchaser, and not to the purchaser's attorney, who likely handles all other documents relevant to the transaction.” In this case, the buyers' attorney acted as their agent, and under ILSA, as with most laws, the agent has full authority to act on behalf of the principal.
Need Help With a Real Estate Deal?The lesson from this case is not that the buyers made a mistake by hiring an attorney to negotiate their condo purchase. To the contrary, an experienced New York real estate attorney is often invaluable in assisting buyers and sellers with all aspects of legal compliance. If you need someone to assist you with a real property transaction, contact the attorneys at Waldhauser & Nisar, LLP, right away.