September 22, 2014Client Alert

Dodging a Big Development Risk in the Interstate Land Sale Act

If you develop condominiums, and they are sold both within and outside of your state, you just won a big victory in a fight you might not even have known was occurring.

On September 18, 2014, the Senate passed a bill matching an earlier House bill, which exempts condominium units from the disclosure and registration requirements of the Interstate Land Sale Act (ILSA). ILSA was adopted in the mid-1960s, to require extensive disclosures and registration of projects that were selling “lots” in interstate commerce. In the vernacular, it was seen as the way to prevent innocent purchasers from being sold swamp lots sight unseen. Along the way however, the definition of “lots” was deemed to include condominium units, despite the original intent of ILSA.

In most states, the sale of condominium units is regulated by state law, which requires extensive disclosures to potential buyers, often giving potential buyers the ability to terminate their offers for any reason or no reason, within a time period after the disclosures are given, and may include other terms which prohibit unfair practices. However, the ILSA requirements are much more onerous, and often contradictory to the existing state disclosure laws.

ILSA was not invoked for many years, but suddenly was rediscovered as a weapon during the last recession, in an effort for buyers of condominiums to rescind their offers when prices fell. If ILSA remained enforceable against condo units, it would require condo project developers to file extensive and expensive project plans, in addition to complying with their state laws, or risk cancellation of their sale agreements for any slight issue.

The clarification will go into law after the bill is signed, but the passage by both houses of Congress should terminate any effort to use this law as a free ticket to cancellation of a condo purchase contract.

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