E-Alert Case Updates

Court Construes Interstate Land Sales Full Disclosure Act in Buyer’s Favor

Long v. Merrifield Town Center Ltd. P’ship
No. 08-2371 (United States Court of Appeals for the Fourth Circuit, July 13, 2010)
By Colleen K. O’Brien, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

Plaintiffs Melvin and Mary Long, condominium buyers, sought to rescind their contract with a condominium developer and obtain a refund of their deposit. They initiated a lawsuit against the developer involving the Interstate Land Sales Full Disclosure Act (“ILSFDA”), codified at 15 U.S.C. § 1701 et seq., and its Improved Lot Exception, § 1702(a)(2).

The ILSFDA is a statute that seeks to prevent interstate land fraud and to protect unsuspecting and ill-informed investors from buying undesirable land. The statute requires certain disclosures be made prior to a purchaser’s execution of a sales contract. However, the ILSFDA does not apply in all cases and has certain exceptions. One exception, the Improved Lot Exception, U.S.C. § 1702(a)(2), applies when a buyer is assured that the lot he is purchasing either already contains a building or structure or will contain one within two years of the purchase date. The guarantee of construction within a reasonably short time negates some of the concern the purchaser may have about being defrauded by unscrupulous developers.

The issue before the Court was the date the Improved Lot Exception’s two-year period began to run. The purchasers argued for a narrow construction of the Exception. Their argument was that the two-year period began to run when a purchaser signed the sales contract. The developer argued for a broad construction of the Exception. Their argument was that the two-year period began to run when the developer ratified the sales contract. In this case, the developer’s policy was to ratify sales contracts between one and three months after the contracts were signed by the purchasers.

The Court agreed with the purchasers and opted for a narrow construction of the Improved Lot Exception. The Court determined that the two-year period began to run when the purchasers signed the sales contracts, not when the developer ratified the sales contracts, sometimes up to three months later. To the Court, extending the two-year period to the date of ratification by the developer would frustrate and defeat the purpose of the ILSFDA, which protected buyers. “‘To confer on sellers the power to extend the two-year period by delaying ‘ratification’—perhaps indefinitely—would allow sellers to engage in an end-run around ILSFDA’s protections, a result plainly contrary to Congress’s carefully crafted scheme to protect property purchasers.’” Long at *10 (quoting Ahn v. Merrifield Center Ltd. P’ship, 584 F. Supp. 2d 848, 855 (E.D. Va. 2008)).

The Fourth Circuit Court of Appeals held that because the developer’s sales contracts did not require the developer to construct and deliver the condominiums inside of two years from the purchaser’s signing of the contracts, the Improved Lot Exemption of the ILSFDA did not apply. Consequently, the Court reversed the district court’s order dismissing the purchaser’s ILSFDA claims and remanded the case.