After Real Estate Bust, a Legal Remedy for Buyer’s Remorse
By: Christine Haughney
October 20th, 2010
Rebecca Schlanger used her life savings for a down payment on an apartment in Miami. Now she is suing to get her money back, under a 1968 federal law intended to protect buyers from unscrupulous developers and brokers.
In May 2008, a few months before the financial industry’s meltdown, the shipping executive Vasilis Bacolitsas signed up to buy a $3.4 million apartment at the Brompton, a luxury condominium tower being built on the Upper East Side.
The building went up as the real estate market went down, and Mr. Bacolitsas and his wife sought a $600,000 reduction in the purchase price. When they did not get it, they decided they did not want the apartment anymore. Their contract, like virtually all real estate contracts, required that they surrender the $510,000 deposit.
But last month, a judge ruled that the couple could walk away with their money. It was one of a series of recent rulings in New York and other states that have enraged developers and given an escape hatch to buyers who signed contracts at the worst possible time, before one of the biggest real estate meltdowns in decades.
The 1800 Club building in Miami. Ms. Schlanger and other buyers are suing Aslan Palachi, the developer.
Ms. Schlanger signed a contract at the 1800 Club.
The buyers – some wealthy, some not – are successfully using a 1968 federal law intended to protect buyers of out-of-state land from unscrupulous developers or brokers. But in many of these cases, the properties have been built as advertised.
Instead, lawyers for the buyers are finding fault in wording that technically violates the law in contracts or other paperwork – language that few developers or lawyers paid much attention to during the long real estate boom. Lawyers have won back deposits for errors as simple as failing to give buyers a legal description of the property or to register the building with the Department of Housing and Urban Development, a basic requirement that many companies nonetheless overlooked.
“The statute was never designed for purchasers of luxury condominiums in urban areas to get out of contracts because of changes in the economy,” said Bruce H. Lederman, a lawyer defending developers in two such cases out of Long Island City, Queens. “It was designed to protect unsophisticated out-of-state purchasers like Jackie Gleason in ‘The Honeymooners’ from Florida swampland schemes.”
But lawyers who represent buyers argue that this use of the law legitimately helps people who, because of changing conditions, conclude that buying such an apartment is no longer advisable.
“The crash of the market resulted in people losing their jobs, No. 1, and No. 2, the tightening of the credit market meant they couldn’t get the loans they needed to buy the property,” said Adam Leitman Bailey, who represented Mr. Bacolitsas and a number of other buyers in cases involving the law, known as the Interstate Land Sales Full Disclosure Act, or ILSA. “We had to find some law to help these people, and that’s what ILSA did. Desperation inspired creativity.”
In July, a federal appeals court reinstated a lawsuit filed by eight buyers who had deposited $25,000 to $80,000 on new homes in Falls Church, Va., ruling that the wording of the developer’s contracts did not comply with the law. Two decisions over the summer in Florida – including one allowing a New Jersey couple to win back a $50,000 deposit on a townhouse in Port St. Lucie – favored buyers.
In August, a federal judge in Manhattan ruled in favor of three buyers who had placed about $300,000, combined, in down payments for apartments at 111 Fulton Street, a building known as the District. Late last month, Judge Paul A. Crotty of Federal District Court in Manhattan ruled that two buyers of a condominium conversion at 20 Pine Street may get their deposits back if they can prove that they would have pulled out earlier had the developer informed them about their rights under ILSA, according to the buyers’ lawyer, Lawrence Weiner.
In Mr. Bacolitsas’s case, the court ruled that his contract violated the law because it stated that the contract could not be filed with the city register, where property transactions are recorded. The law requires contracts to be recordable in city or county registries.
Mark Walfish, a lawyer representing the developer in that case, the Related Companies, said it would appeal. The apartment in question sold in April for $2.8 million – $600,000 less than the original price.
Lawyers on both sides said that if the ruling stood, it could open the floodgates to more buyer lawsuits because many contracts contained similar language. In New York, typically, only actual sales – in the form of deeds or co-op stock transfers – are recorded, not contracts.
“The phone is ringing off the hook,” said Mr. Bailey, who represented Mr. Bacolitsas.
The ILSA law came about in response to the midcentury land boom in states like Florida and Arizona. Developers and brokers in boiler rooms not unlike the office depicted in the David Mamet play “Glengarry Glen Ross” would market properties, sight unseen, to Northern buyers. President Lyndon B. Johnson told Congress in 1967 that he hoped the legislation would “give our investors better protection in their purchases of undeveloped land.”
Despite its name, the law applies to properties in the same state and city, too. It generally lets buyers cancel their contracts within two years and sue within three years if the contract does not include specific legal language. Developers can avoid the law’s requirements if they complete their projects in two years and are building fewer than 100 units.
Robert M. Chasnow, a partner at Holland & Knight who has been advising developers on ILSA for 30 years, said that, at first, courts were not receptive to buyers’ claims. Nationwide, until the last couple of years, roughly 10 to 20 ILSA court decisions came out per year, he said, but last year there were 69, and there have been 50 this year. “There’s been an explosion of ILSA cases,” he said.
In December, an analysis by The Real Deal, a New York real estate publication, found that buyers of at least 131 New York City condominium apartments worth $132 million were seeking to use ILSA to back out of their deals. A couple of early decisions favored developers, but more recent rulings in New York have sided with buyers.
Some developers have settled out of court, often with a confidentiality clause preventing buyers from discussing the agreement. Rebecca Schlanger, 34, who had used her life savings for a down payment on a $515,000 two-bedroom apartment in Miami, is suing under the law to get her money back. She said she could not obtain a mortgage because the developer had not purchased flood insurance.
“I did everything right,” Ms. Schlanger said. “I saved my money. I did my due diligence.”
But like many buyers before the bust, she did not have a contingency clause in her contract that allowed her to back out if she could not obtain a mortgage.
Robert Cooper, who represents Ms. Schlanger and 17 other buyers in the Miami building, said that she had grounds to sue under ILSA because the developer did not include a legal description of the unit in the contract. Mr. Cooper said the developer also made misrepresentations about Ms. Schlanger’s ability to resell the property.
Aslan Palachi, the developer of the Miami building, known as the 1800 Club, said he had no plans to settle Ms. Schlanger’s case. He said her claims were “unfounded.” He added, “We have met every requirement” of ILSA.
“When the project was completed and the time came to close, they discovered it was not as good an investment,” he said. “They tried to find every possible way to get out of their contracts.”