March 14, 2018

Issues with the Condominium Unit Exemption in ILSA

Richard Liquanti

The Interstate Land Sales Full Disclosure Act includes among its remedies an automatic right of rescission, even for closed transactions and without any proof of harm, and has been a popular statute for bringing claims when the real estate market suffers a downturn.

IssuesThe Interstate Land Sales Full Disclosure Act (ILSA), 15 U.S.C. §§ 1701 et seq., is a federal statute, patterned on the 1933 Securities Act, that aims to prevent land sales fraud and uninformed purchases of unimproved real property by requiring registration of subdivisions with the Consumer Financial Protection Bureau (CFPB) and pre-contract consumer disclosure of a Property Report. ILSA includes among its remedies an automatic right of rescission, even for closed transactions and without any proof of harm, and therefore has been a popular statute for bringing claims when the real estate market suffers a downturn.

Because registering under ILSA has several drawbacks—including cost, time, administration, and substantive purchase contract requirements—developers generally seek to obtain the advantage of an exemption. Although there are numerous full and partial exemptions from ILSA, condominium units are considered "lots" under ILSA. Berlin v. Renaissance Rental Partners, 723 F.3d 119, 124–27 (2d Cir. 2013). Some of the more accessible exemptions, namely, for a promise to complete construction within two years ("Improved Lot Exemption," 15 U.S.C. § 1702(a)(2)) and for subdivisions under 100 lots ("100-Lot Exemption," 15 U.S.C. § 1702(b)(1)), are often unavailable as a result of the increased size and complexity of construction since the late 1960s when ILSA was first enacted.

In 2015, Congress passed H.R. 2600 through both houses by rare unanimous approval. Signed into law by President Obama in March 2015, the new law amended ILSA to exempt condominium units from registration and disclosure ("Condo Exemption," 15 U.S.C. § 1702(b)(9)). Although the Condo Exemption will provide relief to many condominium developers, it does not solve all ILSA's issues for condominiums.

The Condo Exemption was added to the partial exemptions from ILSA (15 U.S.C. § 1702(b)), meaning that the anti-fraud and misleading statements prohibitions of ILSA apply, but not the requirements for filing a Statement of Record with the CFPB or delivering a Property Report to consumers. The exemption also means that the purchase contracts of condominium units need not include certain provisions limited to developers, especially the provision that if the buyer defaults, the developer may not retain more than 15% of the purchase price as liquidated damages. Id. § 1703(d)(3). Although many state condominium statutes permit condominium units to be unimproved land, the Condo Exemption requires that a unit be conveyed at closing as an "improved lot."

Some ILSA complications remain for the condominium developer. Because the Condo Exemption is only a partial one, the exempt units must be included in the number of subdivision lots if the developer in a mixed housing project is determining a possible 100-Lot Exemption for the noncondominium units. Second, it is not clear what provisions must be included in the condominium unit purchase contract to ensure the benefits of the Condo Exemption. Finally, the ILSA concept of an "improved lot" may not allow a developer to benefit from the exemption if the closing occurs when the condominium unit is only "decorator-ready," that is, without having received a final certificate of occupancy.

Implications for the 100-Lot Exemption

As previously stated, the 100-Lot Exemption is a partial exemption for subdivisions containing fewer than 100 lots. In determining the number of lots, ILSA expressly permits the developer to exclude those lots that already have a full exemption at the time the consumer signs the purchase contract, the so-called piggy-backing of one exemption on another exemption. Nahigian v. Juno-Loudoun, LLC, 677 F.3d 579 (4th Cir. 2012). The Condo Exemption also is a partial exemption under 15 U.S.C. § 1702(b), not a full exemption under 15 U.S.C. § 1702(a), and therefore the condominium units, while themselves exempt from registration, must be counted as lots in determining whether other housing types in the same common promotional plan (in ILSA's terms, the "subdivision") are exempt as a plan to sell under 100 lots.

The consequences of these rules can admittedly be ridiculous. For example, if a subdivision includes 200 pre-construction condominium units that qualify for the Condo Exemption, and 20 single-family lots that are planned to be sold to consumers without constructed houses, the 20 lots are not exempt from ILSA registration because the condominium units are "lots" for purposes of the 100-Lot Exemption. The developer, absent some other exemption, would be required to register the 20 lots, but not the 200 condominium units. The full exemption for subdivisions containing fewer than 25 lots, 15 U.S.C. § 1702(a)(1), would not be available because the 200 condominium units are part of the "subdivision."

This situation would seem to be an excellent opportunity for a regulatory exemption by the CFPB, which ILSA permits on a finding that the public offering is of a limited character. Unfortunately, the CFPB has announced no plan to add to its regulatory exemptions at this time.

It may be that a condominium unit sale qualifies not only for the partial Condo Exemption but also for a full exemption. In that case, the Condo Exemption provision states that the full exemption applies. Thus, in a pre-construction situation, it may be to the developer's advantage to obligate itself to complete construction of the unit within two years if possible, to ensure the advantage of the full Improved Lot Exemption, reducing the number of lots in the subdivision and allowing single-family lots without houses to be sold without ILSA registration.

Establishing the Condo Exemption

It has long been established that, for ILSA purposes, a sale occurs when the consumer commits to a purchase decision, which is no later than the time the purchaser signs a purchase contract. Bodansky v. Fifth on the Park Condo, 635 F.3d 75, 83 (2d Cir. 2011). Therefore, that is the time when an ILSA exemption normally is either established or fails. In the Improved Lot Exemption, for example, the law is interested in the developer's obligation in the contract to construct the residence within two years, not whether or not the developer actually fulfills the obligation. Thus, a lot improved within two years but without a contractual obligation to do so is not exempt, while a good-faith obligation stipulated in the contract provides an exemption even if the residence is not in fact constructed within two years (the consumer's recourse at that point being for specific performance).

The Condo Exemption may turn this analysis on its head by defining a "condominium unit" as one that on conveyance will be an "improved lot." Only one other ILSA exemption is contingent on a future event, that being the sale of not more than 12 lots in a 12-month period beginning with the sale of the first lot in a subdivision. 15 U.S.C. § 1702(b)(2).

It may be that the only way to know, at the time the consumer signs the contract, that the requirement that the condominium unit be an improved lot at closing will be satisfied, is for the contract to make the closing expressly contingent on the issuance of a final certificate of occupancy. Most purchase contracts will include a notice to close and closing procedures in which "substantial completion" of the unit is required. But, if those provisions define that as the issuance of a temporary certificate of occupancy or an architect's certification of substantial completion, it does not necessarily mean that a governmental permanent certificate of occupancy will have been issued by the time of closing. That, in turn, will be an issue if the term "improved lot" is given the same meaning as courts and commentators have come to use for the full exemption known as the "Improved Lot Exemption." 15 U.S.C. § 1702(a)(2).

Until the issue is litigated, it cannot be known for certain if the Condo Exemption is satisfied by the actual improvement of the lot at the time of closing, or if a court will decide that the contract must provide at the time the purchase contract is signed by the consumer (being the time at which ISLA exemptions are generally determined) that on conveyance the condominium unit will be an improved lot. This would not be an irrational position to take. For example, the consumer's rescission rights under 15 U.S.C. § 1703 must be asserted "within two years from the date of such signing" of the purchase contract (15 U.S.C. § 1703(c)), and ILSA's nonfraud statute of limitations is "three years after the date of signing of the contract of sale or lease," 15 U.S.C. § 1711(a)(1), periods that may well expire before the condominium building is built and the closing occurs. In any event, current condominium unit purchase contracts that close on "substantial completion" but without issuance of a final certificate of occupancy probably do not satisfy the Condo Exemption's express requirement.

Decorator-Ready Units

As noted above, the exemption requires there to be an "improved lot" at the time of conveyance. ILSA does not define this term. It could be that any development work done with respect to the unit makes it an improved lot. There is a long history, however, in ILSA guidance and cases to refer to the exemption that requires issuance of a final certificate of occupancy as the "Improved Lot Exemption" (e.g., Gentry v. Harborage Cottages-Stuart, LLLP, 654 F.3d 1247 (11th Cir. 2011)), so for planning purposes the prudent counsel will assume that conservative position.

Some construction often occurs after closing, such as installation of flooring, lighting, and plumbing fixtures. Developers that sell condominium units with significant finish items remaining to be constructed by the purchaser typically market them as "decorator-ready" or "designer ready." These sales are more common among higher-priced units where the purchasers are more likely to want unique and customized finishings. The developer must be alert to the likelihood that such a unit may not qualify for a final certificate of occupancy at the closing, and therefore the unit may not have the benefit of the Condo Exemption.

The good news is that the Condo Exemption is determined on a unit-by-unit basis, so the failure of one unit to be exempt does not affect the potential for exemption of other units in the condominium. The bad news is that, because all condominium units that must rely on the Condo Exemption are "lots" for purposes of the 100-Lot Exemption, a single decorator-ready unit in a 100+ unit condominium project is required to register under ILSA, absent which the purchaser of that unit will have an automatic right of rescission for two years.


The Condo Exemption is welcome and should substantially reduce potential ILSA litigation during the next economic downturn, when consumers seek to escape from contracts entered into during the peak of the market. Most of the reported ILSA cases between 2007 and 2012 involved condominium units, not single family lots. But condominium developers are not completely off the hook, and traps for the inattentive still exist. There are issues ripe for test-case litigation, and judging from the period during and immediately after the last recession, test cases will be brought.

Richard Liquanti

Richard Linquanti is a shareholder in the Tampa, Florida, office of Carlton Fields.