29 April 2010

Sellers of Undeveloped Residential Lots to Individual Purchasers may Face Serious Consequences for Violation ILSFDA and Similar State Statutes

The Interstate Land Sale Full Disclosure Act (ILSFDA or the act) and similar state registration and disclosure requirements impose criminal and civil penalties for non-compliance with their requirements.
United States Real Estate and Construction
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The Interstate Land Sale Full Disclosure Act (ILSFDA or the act) and similar state registration and disclosure requirements impose criminal and civil penalties for non-compliance with their requirements. Thus it is crucial that any developer selling or advertising undeveloped residential lots (including condominium units and overseas properties) to individual purchasers across state lines or via the U.S. Postal Service or by any interstate means, review the terms of ILSFDA, and strictly comply with its requirements and the requirements of similar state statutes.

Although the ILSFDA has gone largely unrecognized to date, as the economy worsens, the act has been used by increasing numbers of purchasers to rescind residential contracts in condominiums and subdivisions.

Since 1968, ILSFDA has required that any developer selling more than 100 non-exempt subdivided residential lots as part of a common promotional plan file a statement containing certain disclosures. These disclosures include the material conditions of the property, infrastructure developments, the legal status of the developer, forms of conveyance, financial statements, and encumbrances with the Department of Housing and Urban Development (HUD) (the registration requirement).

Details of sales that otherwise qualify for an exemption under the provisions of the act are discussed below. Developers of such projects with more than 25 non-exempt lots must also provide property disclosure materials to any prospective purchaser prior to the execution of any contract of sale, either by conspicuous inclusion in the contract of sale or the provision of a stand alone disclosure (disclosure requirement).

HUD has jurisdiction over the act from the commerce clause of the U.S. Constitution. The act does not apply to sales that do not use any means or instruments of transportation or communication in interstate commerce such as the U.S. Postal Service. Any means of communication, including radio, television, e-mail, or Internet advertising, used in the promotion of the sale will cause the property to be subject to the act. Therefore, for sales of 25 or more units, which are not otherwise exempt, only truly local offerings, e.g., word of mouth or sales only through an unadvertised local sales office, are likely to be exempt from compliance with ILSFDA.

The act applies to the sale of real property only. It expressly does not apply to reservations or sale of undivided interests in real property. A "sale" occurs when a purchaser acquires an equitable interest in the property. Execution of a contract of sale qualifies as a sale under the act.

A number of exemptions exist for ILSFDA. However, the statutory exemptions are not available if a method of disposition is adopted in order to circumvent the act, such as establishment of multiple entities to conduct a portion of the sales so that each sale falls into an exemption.

Property Sales Exempt from Disclosure & Registration Requirements

  1. Sale of lots in a subdivision containing fewer than 25 lots where residential development is permitted.
  2. Sale of land, improved by the presence of a building, or a sale or lease where the seller is obligated to erect a building on the lot within a period of two years.
  3. Sale of debt or interest in a REIT, sales to a government agency, sale of cemetery lots, and the sale of lots to another developer/builder.
  4. Sale of lots for industrial or commercial development, where such development is zoned for industrial or commercial development or subject to a similar recorded restrictive covenant limiting its use/development.

Property Sales Exempt from Registration Requirement but Subject to Disclosure Requirement

  1. Sale of lots in a subdivision containing fewer than 100 lots.
  2. Sale of fewer than 12 lots in any given 12-month period. This exemption cannot be recaptured once more than 12 lots are sold in a given period.
  3. Scattered site development where non contiguous parts of the subdivision contain fewer than 20 lots each, and the purchaser makes a personal on-the-lot inspection. To be considered non contiguous, the lots must not have been part of the same subdivision, sold as part of a common promotional plan, or located on the same site. Lots are considered contiguous even though contiguity may be interrupted by a road, park, small body of water, recreational facility or any similar object. An example of this type of development would be a developer that buys five scattered farms which will be subdivided into five different developments – each with fewer than 20 lots – which will be listed and sold without reference to any of the other sites.
  4. Sale or lease of lots larger than 20 acres.
  5. Sale of lots for construction of only single-family residences, subject to qualification requirements for the subdivision and the lots, including only single-family zoning. Lots qualifying under this exemption must meet two separate subdivision requirements and eight separate lot eligibility requirements. (Requirements will be discussed in a subsequent article.)
  6. Sale of mobile home lots.
  7. Intrastate sales including sales restricted to residents of the state unless non-resident sales are otherwise exempt from the registration and disclosure requirements under the provisions outlined above or under exemptions 6 or 8 of this section.
  8. Sales restricted to residents of the Metropolitan Statistical Area where the subdivision is located, provided the subdivision contains fewer than 300 lots.

Property Sales Exempt from Registration Requirement but Subject to Disclosure Requirement

  1. Sale of inexpensive lots (sale price less than $100).
  2. Leases of limited duration (less than five years) without automatic renewal.
  3. Sale of adjoining lots.
  4. Lot sales to a government entity.
  5. Sale of leased lots (usually mobile home lots).

For any sales exempt from the registration requirements but not the disclosure requirements, the developer must incorporate the disclosures into its contract of sale, or provide a stand alone disclosure prior to the "sale" of the lot.


The act provides purchasers and HUD with civil remedies, including the right of revocation, and may impose criminal penalties on developers who do not comply.

Civil remedies include a suit at law or equity for violation of the act in which the court may consider the value of the lot and time of purchase and time of suit in determining damages if any and also enforce the revocation rights under the act. There is a three-year statute of limitation for an individual purchaser's civil actions. HUD may additionally impose a "civil money penalty" up to $1,000 per violation, with a maximum penalty of $1 million for violations by any person in a one-year period. There is no stated limitations period for HUD civil actions.

Federal criminal penalties for a willful violation of the act, including willfully making an untrue statement of material fact or making material omissions, may include a fine of up to $10,000 and/or imprisonment for up to five years. There is no stated limitations period for criminal acts.

In addition to the ILSFDA, a number of states – including South Carolina – have parallel registration and disclosure laws that mirror the requirements of the ILSFDA. These laws require sellers to register the proposed sale of out-of-state subdivisions with the state and federal government if the offering is in the state or to South Carolina residents. HUD will accept the state filings from four states – Arizona, California, Florida and Minnesota – in lieu of the standard federal filing.

To assist developers with compliance, HUD will issue advisory opinions regarding the compliance requirements of any particular development upon request.

Even if a project qualifies for an exemption, developers must carefully evaluate if changes in a marketing plan or delivery schedule will cause a particular project to lose its exempt status and result in a violation of ILSFDA. Failure to comply may constitute a default by a borrower under existing project financing agreements and therefore jeopardize the project financing. If you have any questions about the provisions of these statutes or exemption requirements, please contact a real estate attorney.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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