Virginia Lawyers Weekly

The developers of condominiums in the Merrifield Town Center in Northern Virginia prevailed before one federal judge in their efforts to keep deposits to buy the units after the purchasers refused to close on them.

But they lost last week before another federal judge who found that they had violated the Interstate Land Sales Full Disclosure Act (ILSFDA) in the sale of another group of condos.

The condos, priced at $500,000 to $900,000, looked like a great deal in June 2005, and the 279-unit project sold out within six weeks. With the collapse of the housing market, the deal was much less attractive when settlement was due this summer.

Many of the purchasers walked away from the contracts and filed suit to recover deposits of 7 percent for buyers who intended to occupy the units and 12 percent for those bought them as an investment. A major contention in those efforts is that the developers did not file with the Department of Housing and Urban Development the registration and disclosure statements required by ILSFDA.

The law, however, has two major exceptions. The statements are not required if the development involves less than 100 units or if the dwelling is completed within two years of the sales contract. The law permits a project to be divided into two groups, with one exemption applying for units that might not be occupied within two years, and the second for those to be occupied within that period.

The case decided last month by Judge Gerald Bruce Lee, Bartley v. Merrifield Town Center Limited Partnership (VLW 008-3-434), involved the 99-unit exception, and Lee concluded that it applied. Lee also rejected claims asserted by Fairfax attorney Alexander Laufer that the purchasers could rescind their purchase agreements because the developers had failed to provide the purchasers an offering statement required under the Virginia Condominium Act.

Laufer has asked Lee to reconsider the ILSFDA ruling in light of an argument he raised but Lee did not address. When a developer attempts to take advantage of both exceptions, the 99-unit exception is valid only if the developer meets the requirements for the two-year exception, Laufer argued.

The second case, Ahn v. Merrifield Town Center Limited Partnership (VLW 008-3-489), decided by Judge T.S. Ellis III, involved the two-year exception. The developers acknowledged that the units were not ready for occupancy for almost three years after the purchasers signed the agreements in June and July 2005.

But they relied on a provision in the contract that it would not be binding on the developers until they ratified and executed the agreement. That did not occur until mid-2006 when the purchasers signed a document acknowledging their selection of paint colors, appliances and other amenities in the units.

In his opinion, Ellis acknowledged that ILSFDA “does not specify when the mandatory two-year building requirement begins to run.” He therefore looked to the intent of Congress in enacting the law in the 1960s: ensuring that a buyer has the information needed to make an informed decision before purchasing certain types of real estate.

That intent “provides a compelling reason to conclude that the triggering event for the two-year period is the buyer’s signing the sales contract and incurring of obligations under the contract.”

In this case, “Plaintiffs signed the [unit purchase agreements] in June and July 2005, at which point they each immediately paid a deposit and incurred other obligations pursuant to their respective UPAs,” Ellis wrote. “At that point, plaintiffs, as purchasers, had already made the decision to buy the condominiums.

“Yet, the UPAs did not obligate Merrifield to construct the condominiums within two years of the purchasers making that decision, but instead allowed Merrifield to determine, unilaterally, when the two-year clock would begin to run,” he said. Such a provision is inconsistent with congressional intent, Ellis concluded.

Laufer, who also represented 29 purchasers involved the in the case before Ellis, said he believes the judge’s ruling will reinforce his argument in the case before Judge Lee that the 99-unit exception should not be applied because the developer failed to meet the requirements for the two-year exception.

Efforts to reach Edward W. Cameron, the attorney for Merrifield, were unsuccessful.

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