Fighting buyer mutiny

<i>With fortunes at stake, developers wrangle with hundreds of purchasers over contracts, awaiting decisions on whether deals are valid </i><br>

While most developers are feeling the pain of the downturn, some are feeling it more than others.

This month, The Real Deal looked at the new condo buildings that have seen the most buyers trying to renege on their contracts since the real estate market took a nosedive last year.

The analysis found buyers asking for their deposits back on nearly 400 units within 20 buildings. In one case, more than 50 percent of the buyers in a building, the 505 in Hell’s Kitchen, filed lawsuits in federal court asking for their deposit back.

The Real Deal obtained a list of escrow disputes from state Attorney General Andrew Cuomo’s office via a Freedom of Information Law request, searched published archives and court databases for lawsuits against developers, and consulted with attorneys who are working on these cases.

While there is no comprehensive list of contract disputes, the result of the research is the accompanying list of the 20 buildings citywide that our analysis found had the most wrangling over contracts (see “Where are buyers backing out?”).

Some buildings may not have made The Real Deal‘s list because the AG’s office only provided information on 123 disputes, while 410 have been filed this year alone, according to spokesman Matthew Glazer.

The Rushmore by Extell Development was one of the buildings that was not mentioned by the AG, but which is on The Real Deal‘s list because sources said the AG’s office was deciding it.

Attorney Richard Cohen, who is representing buyers there, said 34 disputes are filed against the developer with the AG’s office for contracts worth a combined $110.7 million.

He said Extell missed its promised closing date of September 2008. Although Extell declined to comment, the company has publicly said the date was a typo intended to read “September 2009.”

Other buildings may not appear on the list because contract disputes are often settled outside of court and contain confidentiality agreements. And at least 22 of the court cases listed in the accompanying chart are closed.

Despite repeated requests, the AG’s office would not disclose whether the disputes they listed have already been decided and, if so, in whose favor.

While developers like Extell and their litigious buyers now anxiously await decisions, the number of people actually filing claims to break contracts have waned in recent months.

Between 100 and 150 escrow disputes were filed with the AG office each quarter during the first three quarters of this year, but only 10 were filed in October and the first half of November. Similarly, only a handful of court cases have been filed during those months.

For those who have pending cases, though, significant fortunes are at stake on both sides.

Fine-print claims

While many buyers looking to break contracts are basing their claims on missed closing dates or material defects, these days, the most popular offense involves fine print. It comes in the form of a federal law that most developers claim they didn’t know existed, the Interstate Land Sales Full Disclosure Act, also known as ILSA.

ILSA requires developers who have divided land into 100 or more parcels to register a property report with the U.S. Department of Housing and Urban Development (HUD). Developers are then required to provide buyers with a copy of this report before their contracts are signed.

The 1968 law was intended to protect out-of-state consumers from being swindled into buying homes on worthless tracts of land in subdivisions, but it was formally extended to condo developers in the 1970s. The law only applies to properties subdivided into more than 100 parcels being sold before they are habitable, so completed buildings are exempt.

Several New York developers have attempted to exempt themselves from the law by amending their offering plan or filing for a special exclusion from HUD long after the first buyers have signed their contracts.

At least 131 disputes that The Real Deal found on units worth a combined $132.2 million in 12 buildings listed on the accompanying chart of 20 condos hinge primarily on the court’s interpretation of ILSA. Cases covering at least 13 of these units have been voluntarily dismissed (some by buyers who ended up closing on their units), while the rest await trial.

A number of these pending cases center on whether an ILSA exemption needs to be spelled out in the offering plan at the time the buyer signs a contract, and whether an exemption can be retroactive.

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“It seems to me that almost all of these claims are buyers who have buyer’s remorse,” said Steve Kliegerman, executive director of Halstead Property Development Marketing, which is marketing buildings involved in some of these cases. “Now all of a sudden they don’t want to buy, which seems a bit disingenuous.”

The remorse may stem from the fact that buyers don’t want to pay precrash prices in a postcrash world. In addition, some of them are finding that the financing they had hoped to obtain is not available, or their 10 percent down payments don’t cover the 20 percent now required by most banks.

“Ninety percent of developers in New York never even knew ILSA existed,” said Lew Futterman, co-founder of Uptown Partners, the developer of 5th on the Park in Harlem. “Ignorance of the law is no excuse … but there is yet to be a case in this jurisdiction confirming the application of ILSA in New York.”

No New York guarantee

Last month, the developer of the 68-unit Soho Mews, Al Laboz, told The Real Deal that the AG’s office ruled in his favor on all six of the disputes it was deciding.

Laboz said buyers “fabricated” issues in the complaints, like missed closing dates or defects in the building, because they were unable to finance their purchase. Ultimately, he said the AG’s office awarded him all six deposits, and two of the buyers closed on their units.

Overwhelmingly, attorneys interviewed said the backlog at the AG’s office encourages developers and buyers to settle disputes amongst themselves.

Unfortunately for developers, on the ILSA front a review of decisions in other states indicates that courts have often interpreted the law in buyers’ favor, with one notable recent exception.

While there are no guarantees New York courts will follow suit — mainly because state law requires more stringent disclosure in condo offering plans than what would appear in the federal report — buyers’ attorneys argue the out-of-state interpretations will likely be upheld here.

The building 5th on the Park, which has ILSA claims on contracts worth a combined $7.6 million, is expected to be among the first batch of cases to be decided on this spring.

Many developers of buildings larger than 100 units are still relying on the “100-lot exemption,” arguing that they qualify for an exemption because fewer than 100 units were sold before the building was complete, or that they did not need to go through ILSA registration until after their first 100 units were sold.

Attorney Bruce Lederman, who is defending Simone Development Companies against ILSA claims at One Hunters Point in Long Island City, said HUD exempted the 131-unit building from the law in July — nine months after the first closing in October 2008 — because fewer than 100 units were sold by the time the building was done.

This argument would imply that a weak sales effort could retroactively exempt a building from the law.

The 505 in Hell’s Kitchen had ILSA claims on contracts for 55 of the building’s 108 units at its peak. Six of those cases have since been dropped, and some of those buyers have closed on their units.

Parkview Developers amended the condo’s offering plan in April, more than a year after most of the contracts were signed, saying two units had been combined and another eight were being reserved for the sponsor, leaving only 99 units in the initial offering plan being sold before they were finished.

The developer’s attorney, Evan Schieber, said this exempts Parkview from ILSA disputes. However, attorney Lawrence Weiner — who is representing buyers at One Hunters Point, the 505, 5th on the Park and several other buildings — pointed to a recent Florida court ruling against developer 200 East Partners, which used a defense similar to the 505.

The court ruled in the buyers’ favor, saying the exemptions had to be in effect and disclosed “at the time the purchaser executed their purchase and sales agreement.”

Many developers consider a more recent case, Stein v. Paradigm Mirasol, as a ray of hope because the court ruled in favor of the developer. That opinion opened by noting that buyers are more motivated by the real estate bust than by the fraud the law is intended to protect against.

However, the case deals with an exemption few New York developers are claiming, called the “two-year completion exemption,” whereby a developer excludes himself from ILSA by promising to complete the unit within two years of the contract signing.

If New York courts rule in the buyers’ favor, Lederman said he will argue that developers shouldn’t be forced to fully refund the deposit.

“New York has what we believe is the strictest regulation of condo sales,” he said. “So there’s no basis for plaintiffs claiming fraud because of a failure to provide a HUD disclosure statement, because it has less information than what we’ve actually provided.”

Weiner disagreed. “There is liability for a violation of any section of ILSA regardless of intent. … If developers want the law changed, they should be seeking amendments to ILSA from the state legislature, not the courts.”