From left: Related CEO Stephen Ross, Greek shipping executive Vasilis Bacolitsas and the Brompton
Lawyers for Related Cos., the developer of the Upper East Side’s Brompton condominium , asked the U.S. Circuit Court yesterday to overturn a lower court ruling under the Interstate Land Sales Full Disclosure Act that critics charge would stifle new condo development by forcing sponsors to record sales contracts with city agencies even before a building is constructed.
In September 2010, Related, led by billionaire Stephen Ross, lost a closely watched ILSA case from Greek shipping executive Vasilis Bacolitsas and his wife, Sofia Nicolaudou, one of several buyers that filed suit in 2009 to get their escrow deposits returned at the building, at 205 East 85th Street, after the real estate market crashed.
The judge ordered Related to refund a $510,000 deposit to the buyers, saying the sales contract was never notarized and that ILSA law requires contracts to be in a “recordable” format that can be filed with the Office of the City Register, which is the agency that records mortgages, deeds and other land documents.
“Because the contract was not in recordable form, it does not qualify under the disclosures required under ILSA,” said Adam Leitman Bailey, attorney for the buyers.
But experts familiar with the case argue that the city does not allow contracts for newly constructed to be recorded, because in order for a document to be recorded, the unit must be ready for occupancy, which is why a sales contract cannot close until a temporary certificate of occupancy is issued. They say that banks will not allow the practice either, because recording a contract will effectively prevent them from being able to secure the asset in the case of a default.
“There isn’t a construction lender on earth that would permit a lender to record contracts,” said a source familiar with the case.
The ruling was considered so controversial that Preet Bharara, the U.S. Attorney for the Southern District of New York, filed a brief on behalf of the federal Consumer Financial Protection Bureau, which recently took over jurisdiction of ILSA from the federal Housing and Urban Development Administration, arguing that the lower court ruling was an incorrect interpretation of the statute.
“Specifically the United States argued that the plain language of… [the law that covers recordable description of lots] requires that only the lot description in a covered contract, and not the contract itself, be in a recordable form,” lawyers said in an Oct. 13 brief.
Lawyers for Related say they believe the panel was receptive to their arguments.
“The judges clearly understood all of the issues and Related looks forward to a positive outcome,” said attorney Mark Walfish, who represented the developer.
The case has been so closely watched that a number of experts claim it would put a chill on any pre-construction sales in New York City and 13 other states where there are similar laws banning the recording of contracts. A number of legal experts, including the corporate counsel for Extell Development, attended yesterday’s court hearing. A spokesperson for Extell declined comment.
Attorney Andrew Weltchek, who was not involved in the case, said that such an interpretation of ILSA, while tough on developers, could be legally enforced.
“You could conceivably record a condo declaration first early on, assign a separate tax lot to each of the condos and include [them] in each purchase agreement,” Weltchek said. “It would be very difficult, but that’s not to say it’s impossible.”