Opinion ID: 685627
Heading Depth: 2
Heading Rank: 3

Heading: Land Sales Act

Text: 91 As part of their complaint, the Becherer plaintiffs raised a claim under the Land Sales Act, 15 U.S.C. Sec. 1701 et seq. This statute makes it unlawful for any developer or agent to defraud or deceive a purchaser with respect to the sale of a non-exempt lot. The initial dispute in this case is whether the hotel units marketed by Merrill Lynch are exempt from the requirements of the Act. 92 The Act provides an exemption for, among other things, the sale or lease of land under a contract obligating the seller or lessor to erect such a building thereon within a period of two years.... 15 U.S.C. Sec. 1702(a)(2). The District Court found that the two-year period started running on February 15, 1985, with the closing of the interim escrow account, as it was only then that the parties became legally bound under the Unit Sale Agreements. Because the plain language of the Unit Sale Agreements required SSG to erect the hotel within two years of that date, the District Court found that this transaction was exempt from the terms of the Land Sales Act. 93 On appeal, the Becherer plaintiffs argue that this conclusion was in error. According to them, the two-year time period began running from when the first investor signed a Unit Sales Agreement in February 1984. To support this interpretation, they refer to a HUD regulation, 24 C.F.R. Sec. 1710.5(b), discussing exemptions from the Land Sales Act. 94 This argument cannot succeed. First, there is substantial doubt about whether this regulation applies to the present transaction. The language on which the Becherer plaintiffs rely was added as part of an August 6, 1984 amendment. It is not clear whether this amendment is retroactive. Second, even if the amended regulation applies, it speaks of presale clauses that are legally binding. As the District Court found, none of the parties to the present transaction became legally bound until the closing of the interim escrow account on February 15, 1985. 95 Although the District Court reached the correct result on the two year question, it incorrectly thought that the analysis stopped there. It is not enough to find that the contract requires completion of the hotel in two years. Under the terms of the statute, the contract must obligate the developer to complete construction in two years. According to the Becherer plaintiffs, SSG was not obligated to build the hotel, as the Unit Sale Agreements contain a clause limiting possible remedies for a breach by excluding the possibility of damages. 96 While the statute does not elaborate on the meaning of obligation, the regulations do. In the Code of Federal Regulations, HUD discusses possible contractual limitations on buyers' remedies: 97 HUD's interpretation of what constitutes a two-year obligation to construct a building relies on general principles of contract law in deciding whether or not the seller has, in fact, an obligation to erect a building within two years. Provisions for purchaser financing and remedies clauses are matters to be decided by the parties to the contract under the laws of the jurisdiction in which the construction project is located. 98 However, the contract must not allow nonperformance by the seller at the seller's discretion. Contracts that permit the seller to breach virtually at will are viewed as unenforceable because the construction obligation is not an obligation in reality. 99 . . . . . 100 24 C.F.R. Pt. 1710, App. A, subpt. IV(b). As part of this subsection, HUD also notes that state law may affect the outcome of various cases under this statute: 101 Because of the variations in applicable contract law among the states and the many different provisions that are used by sellers in construction contracts, HUD may condition its advisory opinions under this exemption on representations by local counsel as to the current status of state law on the relevant issues. For example, in the Florida case of Dorchester Development, Inc. v. Tema Burk, Schwartz & Nash, 439 So.2d 1032 [Fla.Ct.App.1983], the court held that there must be an unconditional commitment to complete the condominium units within two years and that the remedies available to the purchaser must not be limited. Although the opinion's language was broad, it is HUD's position that the court's concern regarding limitations on remedies was confined to the right to specific performance. However, developers, especially those in Florida, should be aware of this decision and how it may be treated by higher Florida courts, as well as courts in other jurisdictions. 102 Id. It is thus apparent that the meaning of obligation is tied to the relevant state contract law. 103 As we have stated before, Florida provides the relevant state law for interpreting the contract at issue. Since the promulgation of the above-quoted regulations, the Florida Supreme Court has directly addressed this question and ruled that no contractual obligation exists unless the contract provides for the possibility of damages. Samara Dev. Corp. v. Marlow, 556 So.2d 1097, 1101 (Fla.1990). A contract that provides only for the possibility of rescission or specific performance is not sufficient. Id. 104 In the case at bar, section 8 of the Unit Sale Agreement provides: 105 Seller shall be in default hereunder if Seller fails to close the sale pursuant to Section 5 within two years after the date this Agreement becomes binding on Purchaser.... Purchaser's remedy against Seller for Seller's default hereunder shall be either to obtain a refund of all deposits made pursuant hereto ... or to seek specific performance of this Agreement, at the Purchaser's election. 106 U.S.A. Sec. 8 (emphasis added). Thus, it would appear that the express language of the contract does not allow for the possibility of damages. Neither the parties nor the District Court, however, have provided us with any guidance as to whether Florida law would read a damages remedy into such a contract. In other words, if specific performance is impossible and is the primary contractual remedy, will Florida nevertheless award damages to the injured party? Because the parties have not focused on this question, they have supplied us with no guidance, and we are reluctant to address it. Accordingly, we remand this issue to the District Court. 107 In addition, this exemption is not the only one available. Merrill Lynch also argues that the Land Sales Act does not apply to the instant transaction because the hotel interests are not lots under the Act, as investors do not have exclusive use of their units. We decline to reach this argument as it is not entirely clear just what plaintiffs were purchasing. We believe the issue should be addressed in the first instance by the District Court upon remand.