Part II – Review of your Form Purchase Agreement
In this Part II, we continue our review of some important items to review in your form purchase and sale agreements.
Interstate Land Sales Act
The Interstate Land Sales Full Disclosure Act (ISLA) is a federal law originally enacted to protect buyers of out-of-state home-site lots, but has since been held to also apply to sales of preconstruction condominiums and single-family homes.
A thorough discussion of ISLA is beyond the scope of this article, but be aware that ISLA is the flavor of the month for unhappy purchasers of preconstruction who are attempting to get out of their contractual commitments, It’s important that developers fully comply with ISLA or take advantage of one of its statutory exemptions. Due to ISLA’s onerous, costly and time-consuming registration requirements, most developers take advantage of certain exemptions under ISLA.
One of the most commonly used exemptions for larger projects is the Improved-Lot Exemption (often referred to as the “24-month exemption”), which generally provides that a developer doesn’t need to register its project under ISLA if the developer provides a contractual commitment to complete construction within two years after the date the purchaser signs the purchase agreement subject to delays for force majeure (French for greater force).
The 24-month exemption is problematic because the law is unsettled as to what remedies need to be offered to purchasers in the event construction isnt completed within the two-year period. Courts in some states have agreed with HUD’s position requiring that developers offer purchasers the right to specific performance in order to qualify for the 24-month exemption.
It’s clear that developers need flexibility in response to changing market conditions. They typically don’t want to be obligated to construct within tight deadlines. A poorly drafted purchase agreement may result in a developer losing its exemption under the 24-month exemption.
If the development is found not to qualify for the 24-month exemption, then a purchaser would have the right to terminate without penalty subject to ISLA’s other terms and conditions. Your form purchase agreement could expressly provide that the seller will complete construction of the property and cause settlement to occur within two years after the date of the agreement, but if settlement doesn’t occur within this deadline, purchasers will have the option of requesting a return of their deposit or they can settle on the unit when it is completed.
Virginia courts have accepted this language as giving purchasers the rights needed to properly exempt the development from ISLA registration.
Lastly, please make sure the purchase agreement is dated and fully signed by all parties, with all blanks to the document completed and all exhibits attached. It is surprising how many executed purchase agreements are incomplete.
Additionally, the seller should make sure it has complied with all the requirements set forth under its organizational documents — be it a corporation, a partnership or a limited liability company — and that it is in good standing in Virginia.