Sellers of Undeveloped Residential Lots to Individual Purchasers may Face Serious Consequences for Violation ILSFDA and Similar State Statutes

The Interstate Land Sale Full Disclosure Act (ILSFDA or the act) and similar state registration and disclosure requirements impose criminal and civil penalties for non-compliance with their requirements. Thus it is crucial that any developer selling or advertising undeveloped residential lots (including condominium units and overseas properties) to individual purchasers across state lines or via the U.S. Postal Service or by any interstate means, review the terms of ILSFDA, and strictly comply with its requirements and the requirements of similar state statutes.

Although the ILSFDA has gone largely unrecognized to date, as the economy worsens, the act has been used by increasing numbers of purchasers to rescind residential contracts in condominiums and subdivisions.

Since 1968, ILSFDA has required that any developer selling more than 100 non-exempt subdivided residential lots as part of a common promotional plan file a statement containing certain disclosures. These disclosures include the material conditions of the property, infrastructure developments, the legal status of the developer, forms of conveyance, financial statements, and encumbrances with the Department of Housing and Urban Development (HUD) (the registration requirement).

Details of sales that otherwise qualify for an exemption under the provisions of the act are discussed below. Developers of such projects with more than 25 non-exempt lots must also provide property disclosure materials to any prospective purchaser prior to the execution of any contract of sale, either by conspicuous inclusion in the contract of sale or the provision of a stand alone disclosure (disclosure requirement).

HUD has jurisdiction over the act from the commerce clause of the U.S. Constitution. The act does not apply to sales that do not use any means or instruments of transportation or communication in interstate commerce such as the U.S. Postal Service. Any means of communication, including radio, television, e-mail, or Internet advertising, used in the promotion of the sale will cause the property to be subject to the act. Therefore, for sales of 25 or more units, which are not otherwise exempt, only truly local offerings, e.g., word of mouth or sales only through an unadvertised local sales office, are likely to be exempt from compliance with ILSFDA.

The act applies to the sale of real property only. It expressly does not apply to reservations or sale of undivided interests in real property. A...