Federal Law in Land Use

Developers Beware of the Interstate Land Sales Full Disclosure Act

In a 13-page summary judgment order entered last week, a federal court in New York ruled that the sponsor of a Manhattan luxury building–The Brompton–must return a $510,000 deposit plus interest to the once-prospective purchasers of a $3.4 million condominium. The decision, termed a “real game changer” and a “free ticket out” of certain condominium purchase agreements, employs the relatively arcane Interstate Land Sales Full Disclosure Act, 15 U.S.C. Sec. 1701, et seq. to allow the plaintiffs, a Greek shipping executive and his wife, to back out of their sales contract.

The decision in Bacolitsas v. 86th & 3rd Owner, LLC, 09 Civ. 7158 (PKC) by The Honorable P. Kevin Castel could have broad implications for developers. Judge Castel ruled that the Act permits a purchaser to revoke a purchase contract–“for good reasons, bad reasons or no reasons”–in the event the terms do not provide “a description of the lot … which is in a form acceptable for recording … in the jurisdiction for which the lot is located.” The snag, however, is that lenders will often prohibit the recordation of sales contracts, even going so far as to include clauses forbidding recordation, insofar as such a recorded contract could constitute a lien on the property (ironically, a fact Judge Castel found persuasive in ruling for the prospective purchasers).

The sponsor intends to appeal. In the meantime, that $510,000 will buy plenty of hot dogs at the Papaya King, which is pictured above and located, like The Brompton, at Manhattan’s 86th Street and 3rd Avenue.

Mike Thelen is an associate in Womble Carlyle’s Real Estate and Real Estate Litigation practice groups. He regularly represents a wide variety of clients, from local governments to businesses, in both state and federal venues throughout North Carolina.

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