Creative practitioners are seeking ways in this upside down economy to help their clients break contracts without incurring substantial costs and more importantly, to avoid claims for breach of contract. Allison Lissner and Tara Duggan Ryan explain in their New York Law Journal article "Buyers Rely on 1968 Federal Law to Terminate Contracts" that lawyers are making use of the Interstate Land Sales Full Disclosure Act of 1968 (15 U.S.C. §1701, et seq.) (the "Act") to get out of new construction contracts.
The Act was created to protect buyers purchasing land in another state that was advertised as an incredible development opportunity. Unfortunately, back then purchasers would not visit the property until after closing and would find that they purchased swamp land or something else as equally worthless. The Act requires developers to register subdivisions of 100 or more lots with the Secretary of Housing and Urban Development ("HUD") and to deliver a disclosure document, called a property report, to each purchaser prior to executing the purchase agreement. There are certain exemptions contained in Section 1702 of the Act such as, if under a contract of sale a developer obligates itself to complete construction within two years, then the contract is exempt from the requirements of the Act. However, most developers do not make these kinds of promises.
Currently, there are many cases pending in the U.S. District Court in the Southern District and other federal courts in New York where purchasers are seeking the return of their deposits. These purchasers are claiming that developers failed to comply with the Act by failing (i) to register with HUD; (ii) to deliver the property report or (iii) to provide a seven day right of rescission disclosure. The Act provides the purchaser with the right to terminate the contract if any of these requirements are not satisfied. In addition, §1709 of the Act allows a purchaser to bring an action, at law or in equity, against a developer who violates the Act.
During the real estate bubble many developers decided not to register with HUD, running the risk that purchasers would one day seek to terminate their contracts based on the developers' noncompliance. It is not clear what will happen since none of these cases have been decided. However, if purchasers prove successful in court then it may pave the way for many others sitting on the sidelines to terminate their contracts.
The Law Offices of Matthew L. Holden, LLC is a New York real estate and general practice law firm representing clients throughout New York and New Jersey. Founded by Matthew L. Holden, The Law Offices of Matthew L. Holden, LLC is located in Hackensack, New Jersey.
