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Disappointed Speculative Florida Real Estate Investors May Have a Way Out

Summer 2008Cole Schotz DocketAttorney: Carl A. Rizzo

Many local investors joined in on the speculative craze of South Florida’s “pre-construction” boom gobbling up contracts for the purchase of condominium units in the hopes of scoring quick profits.  Unfortunately, with the severe downturn in the real estate market, the ability to “flip” these properties has evaporated.  To make matters worse, an increasing number of new condominium units were built, further diluting any profit potential.

As a consequence, many investors are being forced to close title or forfeit their down payment monies and walk away from their contracts.  When coupled with the credit crunch resulting from the subprime mortgage fiasco, many investors are finding it increasingly difficult to obtain financing even when they seek to close these transactions.  There may, fortunately, be a solution.

The Interstate Land Sales Full Disclosure Act (“ILSFDA” or “Act”), may provide a ready avenue of relief.  ILSFDA places strict disclosure requirements on developers seeking to market the sale of certain properties (e.g., condominiums) on an interstate basis.  The Act, however, affords developers an exemption from its requirements where the sale is “under a contract obligating the seller to erect [a condominium] thereon within a period of two years.”  Consequently, most developers opt to take advantage of this exemption and include the two-year provision in their contracts with investors.  In many cases, this two-year completion provision has relieved investors of their closing obligations.

Florida courts have strictly applied the two-year limit, stating that the “contract must unconditionally obligate the developer to complete construction within two years.”  Florida courts have also consistently invalidated provisions excusing nonperformance where the contract provisions attempt to avoid the requirements of ILSFDA.  Accordingly, where the developer fails to complete and/or is arguably not ready to close the transaction within two years of the initial contract date, the investor may avoid their closing obligations, hold the developer in default and seek the return of their deposit monies; a most attractive option in a declining market.  

With the present downturn in the market and the frequency of hurricane-related events over the last several years, many developers have been unable to complete their projects on a timely basis.  While developers will likely counter any claim of untimely performance with assertions of the so-called “impossibility of performance” defense due to acts of God (hurricane events), the law may very well be on the investors’ side.  Unless the contract was carefully drafted to expressly recognize such contingencies, Florida courts may not make such a defense available to the developers.

Florida law recognizes that a supervening event, resulting in an impossibility of performance of a contractual obligation, does not excuse the promisor [here the developer] from failure to perform where the contract failed to provide for such a contingency and that the contingency was foreseeable.

The question, then, is whether the occurrence of hurricanes in Florida can be considered unforeseeable, thereby supporting an impossibility of performance defense.  Several courts have weighed in on this critical issue, recognizing that hurricanes are indeed foreseeable in this context.  Along these lines, a Florida court has specifically recognized that:  “an act of God, such as will excuse nonperformance of a legal contract, must be an act or occurrence so extraordinary and unprecedented that human foresight could not foresee or guard against it, and the effect of which could not have prevented or avoided by the exercise of reasonable prudence, diligence, and care or by the use of those means which the situation of the party renders it reasonable that he should employ.… Accordingly, a seasonable event, one which is likely to happen and which common prudence would provide for, is not such an extraordinary event as will constitute an act of God excusing nonperformance.”

Because hurricanes have battered the Florida peninsula in about three out of every five years during the twentieth century and almost 40% of all U.S. hurricanes make landfall in Florida, advancing the argument that hurricanes are “seasonal events” which are regularly expected and foreseeable would be more than tenable.

Accordingly, individuals who are parties to contracts with a two-year completion provision may be in a strong position to recoup their investment where the developer has failed to comply with its terms.

It is, therefore, critical that disappointed investors consult their legal professional in these circumstances so that all viable options may be properly considered.

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