Upon the economic downturn, buyers of preconstruction condominiums have been looking for arguments to revoke their contracts and recover their deposit. Condominium developers have been trying to force buyers to close on the units they agreed to purchase through the contract or, alternatively, if the buyers are unwilling to close, keep the deposit money as compensation for their damages. In many instances, it is the buyer that initiates a lawsuit in order to recover their deposit and establish that the developer/seller breached the contract.
Two recent Florida appellate decisions involving preconstruction contracts touch upon creative arguments that buyers raise to recover the deposit money and establish that the developer/seller breached the preconstruction contract. In the first case, the buyer prevailed arguing that the seller failed to specifically comply with the terms of the contract. In the second case, the seller prevailed and the buyer lost his argument that the contract violated the Interstate Land Sales Full Disclosure Act, 15 U.S.C. §1701, et seq. (the “ILSFDA”), which is a federal statute designed to prevent fraud in the sale of property by requiring full disclosure of material information.
In the first case, Lowe v. Winter Park Condominium Partnership, 36 Fla. L. Weekly D1522a (5th DCA 2011), the buyer entered into a preconstruction contract on April 17, 2006 to purchase a condominium unit and tendered a substantial initial deposit. The contract required the seller to close on the unit within two years from April 17, 2006 (or April 16, 2008). The contract contained the following pertinent provisions pertaining to the closing date:
“[Paragraph 4.] Seller will notify Buyer at least thirty (30) days prior to the date that the consummation of the sale of the Unit to Buyer shall take place (“Closing Date”). If Buyer fails to close on or before the Closing Date, then Seller may treat such failure as a default subject to the terms of…Addendum No. 1…or Seller may, in its sole discretion, determine to extend the Closing Date upon payment to Seller by Buyer of an extension equal to $350.00 per day, but in no event shall such extension extend beyond the twenty-four (24) month period….
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[Paragraph II(B) of Addendum No. 1.] If Buyer asserts the existence of any…defect in title which renders title to the Unit unmarketable and which Buyer does not waive (all of which are called “Defects of Title”), Buyer shall give written notice of such Defects of Title to Seller within five (5) days after its receipt of the [title] Commitment or at least five (5) days prior to the Closing Date….If Seller attempts to remove or cure such Defects of Title, Seller shall be entitled to a postponement of the Closing for a period of up to thirty (30) days in which to remove or cure such Defects of Title….If Seller is unable or unwilling to remove or cure all Defects of Title within such period, Buyer may elect to waive such Defects of Title or to terminate this Agreement by written notice to Seller within five (5) days after the earlier of (i) the expiration of such thirty (30) days, or (ii) the date of notice from Seller to Buyer stating that Seller is unable or unwilling to cure any such Defects of Title.”
The facts in Lowe were not in dispute. The seller notified the buyer on November 1, 2007 that closing would take place on December 6, 2007. The buyer realized that the seller never recorded the Declaration of Condominium (the legal instrument that creates the condominium and renders the units marketable) and notified the seller on November 29, 2007 that title was defective. The seller recorded the Declaration of Condominium on December 20, 2007 and notified the buyer that closing would now take place on February 3, 2008. The buyer, however, refused to close arguing that the seller breached Paragraph II(B) of Addendum No. 1 by failing to close within thirty days after receiving notice that there was a defect in title. The seller, conversely, argued that it had the unilateral right to set the closing date pursuant to Paragraph 4 of the Contract and, therefore, Paragraph II(B) of Addendum No. 1 never came into effect.
The Fifth District Court of Appeal held that although the seller had the absolute right to set the closing date through April 16, 2008, once the seller notified the buyer of its intent to close on a set date, Paragraph II(B) of Addendum No. 1 came into effect. Because the buyer notified to seller after the closing date was set that there was a defect in title, the seller was required to comply with the terms of Paragraph II(B). In this case, the seller failed to comply with these terms because it failed to close within thirty days from receiving the buyer’s notice. Accordingly, the Fifth District held that the buyer is entitled to recover his deposit and recoup attorneys’ fees as the prevailing party pursuant to the contract.
In the second case, Boynton Waterways Investment Associates, LLC v. Bezkorovainijs, 2011 WL 2694522 (4th DCA 2011), the buyer sought to revoke the preconstruction contract and recover his deposit by arguing that the seller violated the ILSFDA . Specifically, the buyer argued that because the preconstruction contract failed to include the appropriate legal description of the condominium unit it violated §1703(d) of the ILSFDA, which provides:
“Any contract or agreement which is for the sale or lease of a lot . . . which does not provide
(1) a description of the lot which makes such lot clearly identifiable and which is in a form acceptable for recording by the appropriate public official responsible for maintaining land records in the jurisdiction in which the lot is located…
may be revoked at the option of the purchaser or lessee for two years from the date of the signing of such contract or agreement.”
Regarding the identification of a condominium unit, §718.109 of the Florida Condominium Act provides, “Following the recording of the declaration, a description of a condominium parcel by the number or other designation by which the unit is identified in the declaration, together with the recording data identifying the declaration, shall be a sufficient legal description for all purposes.” Fla. Stat. §718.109.
The buyer argued that because the contract did not contain any recording data for the unit, the contract did not clearly identify the unit in a form acceptable for recording under the ILSFDA.
The seller argued that §718.109 does not apply to a preconstruction contract that predates the recording of the Declaration of Condominium. (In this case, no different than most preconstruction condominium transactions, the buyer did receive an unrecorded copy of the Declaration included in the prospectus.)
The Fourth District Court of Appeal, agreeing with the Middle District in Taplett v. TRG Oasis (Tower Two), Ltd., L.P., 755 F. Supp. 2d 1197 (M.D. Fla. 2009), averred that Florida allows the sale of condominium units prior to the recording of the Declaration; thus, §718.109 does not apply until the recordation of the Declaration. Since the Buyer received an unrecorded copy of the Declaration with the prospectus which just so happened to be incorporated into the preconstruction contract, the condominium unit was clearly identifiable and in a form acceptable for recording.
These cases exemplify some of the arguments that are raised by buyers to revoke preconstruction and purchase-sale contracts. These cases, however, are a snipet of the many cases involving arguments from buyers to revoke their contracts and recover their deposits. Before a buyer makes a decision to revoke the contract to recover their deposit, the buyer should discuss their options and arguments with an attorney. Based on the amount of the deposit (and/or loss of value in the unit from the date of contract), discussing the arguments based on the specific facts of your transaction may be worthwhile. Sellers should also be cognizant of these arguments in order to protect their interests and preserve their right to the deposit.
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.