Real Estate Strategies Update – Court Rulings Narrow One Hundred Lot Exemption Under the Interstate Land Sales Full Disclosure Act
The Interstate Land Sales Full Disclosure Act (the Act) has taken on new importance for residential developers and builders as purchasers seek ways to escape contracts to purchase residential property. Two recent decisions by the U.S. District Court for the Eastern District of Virginia highlight the need for careful planning to qualify for exemptions under the Act. In addition to providing a brief overview of the Act and its accompanying regulations, this article summarizes how the recent decisions narrow the usefulness of the One Hundred Lot Exemption.
The Act is an antifraud statute originally enacted as part of the Housing and Urban Development Act of 1968. In order to prevent false and deceptive practices in the sale of unimproved tracts of land or condominium units, the Act requires that a developer of a covered subdivision or condominium file a statement of record and provide a property report to prospective purchasers prior to executing a purchase agreement unless the transaction qualifies for either a full or partial exemption. The U.S. Department of Housing and Development (HUD) has issued interpretive rules to guide developers as to what types of transactions qualify for an exemption.
In March of 2010, the Alexandria Division of the U.S. District Court for the Eastern District of Virginia issued two opinions addressing the Acts so-called Sales to Builders Exemption and the One Hundred Lot Exemption. The Sales to Builders exemption is a full exemption from the Acts requirements where the buyer acquires lots to engage in construction of residences for the purpose of resale. In contrast, the One Hundred Lot Exemption is a partial exemption. It exempts a developer from the Acts requirements to file a statement of record and provide prospective purchasers a property report, but not its anti-fraud provisions. The One Hundred Lot Exemption applies to the sale or lease of lots in a project containing fewer than one hundred lots or condominium units which do not otherwise qualify for a full exemption. In other words, if a project has one hundred or more lots or units and a number of lots or units qualify for full exemptions, leaving ninety-nine or fewer non-exempt lots remaining that do not qualify for full exemptions; the development qualifies for the One Hundred Lot Exemption.
At issue in the recent cases was whether a developer may claim the One Hundred Lot Exemption where the developers originally intended to sell a number of the lots in a subdivision to builders (to qualify for the Sales to Builders Exemption) but had not yet done so. The buyers sought to void their contracts due to the developers failure to deliver a property report. In defense, the developers claimed that the transactions qualified for the One Hundred Lot Exemption.
In order to qualify for the One Hundred Lot Exemption, the developers attempted to show that of the 164 lots in the development, it had intended to sell more than 64 lots to builders. Because those lots would fall under the Sales to Builders Exemption, the sale of the remaining lots qualified for the One Hundred Lot Exemption because there would then be fewer than one hundred non-exempt lots remaining. The developer relied on the HUD guidelines which provide that the One Hundred Lot Exemption may be applied where other full exemptions, like the Sales to Builders Exemption, result from past or ‘future’ sales. The guidelines lead to the conclusion that so long as a developer has not entered into more than ninety-nine contracts that do not qualify for any full exemption, the One Hundred Lot Exemption applies.
The District court disagreed, emphasizing that, even in light of HUD guidelines, the exemptions under the Act should be read as narrowly as possible. The Court did not apply the HUD guidelines, but said it was not bound by them. The court concluded that the development did not qualify for the One Hundred Lot Exemption because the Sales to Builders Exemption does not apply to intended, but not yet completed, future sales. Because the developer had not actually sold enough lots to bring the number of non-exempt lots below one hundred, the development did not qualify for the One Hundred Lot Exemption.
For residential developers in the Eastern District of Virginia, the courts decision limits the use of the One Hundred Lot Exemption to situations in which at the time of the first contract for the sale of a lot or condominium unit that is not covered by a full exemption there are no more than ninety-eight other lots or condominium units that are not covered by a full exemption.
The foregoing overview is intended to provide an introductory summary of the Act and recent case law affecting the interpretation of exemptions and HUD guidelines. For more information regarding Act compliance, please contact Charles E. Land.
Charles E. Land is a partner in the firms Norfolk office and is the Co-Chair of the Real Estate Strategies Group. His practice focuses on helping clients develop, buy and sell property for residential, commercial or industrial use. Chip can be reached at (757) 624.3131 or firstname.lastname@example.org.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.