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Land Purchasers Get Money Back

When a couple bought a lot for $1.7 million in what was to become a luxury golf course community, one of the selling points for them was the involvement of a prominent real estate management company. Before committing to the purchase, the buyers received assurances from the developer that the management company could not just “walk away” from the project and that the company was legally bound to the development for 30 years. Two years after the lot was purchased and before any house was built on it, the management company and the developer parted ways, ending the involvement of the company that had drawn the couple to the property.

The buyers sued under the federal Interstate Land Sales Full Disclosure Act. The Act requires that the prospective purchaser receive from the seller timely notice of its rights under the Act, as well as a property report. It was undisputed that these two requirements had not been met, but the developer sought to defend the lawsuit on the basis of a statute of limitations and an exemption in the Act that is based on the size of the development. Neither of these defenses was successful.

There is a two-year statute of limitations in the Act for automatic revocation by right that, had it been applied, might have made the buyers’ claim untimely. But the federal court ruled that another, three-year limitations period in the Act was to be applied. Under that provision, the claim by the purchasers of the lot to rescind the sale was timely.

As for the exemption defense, the Act states that it does not apply to the sale of lots in subdivisions containing fewer than 100 undeveloped lots. The Act also does not apply to “the sale or lease of lots to any person who acquires such lots for the purpose of engaging in the business of constructing residential, commercial, or industrial buildings,” the so-called sales-to-builders exemption.

The sales-to-builders exemption is to be applied before the lot count is made; however, the developer could not include future sales in determining the number of sales that fell under the sales-to-builders exemption. Without subtraction of those future sales, the calculation did not bring the development under the 100-lot threshold, making the developer subject to liability for its violations of the Act.

In ruling for the purchasers, the court essentially canceled the contract of sale for the property, rendering it as though it did not exist. Thus, the remedy for the failure of the developer to disclose objectively material information was the return of the property title to the developer and the return of the purchase price, plus interest, to the purchasers.

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