“A little fact is worth a whole limbo of dreams.”
~ Ralph Waldo Emerson
“The cause is hidden. The effect is visible to all.”
Ordinarily I would not provide an entire court opinion in a blog entry. However, in this case I will make an exception. Out of context, this opinion seems innocuous enough with only one paragraph of explanation. However, the dramatic effect of the Terra-Adi Intern. Bayshore, LLC v. Georgarious, 2009 WL 3365493 (Fla. 3d DCA 2009) on developers and condo buyers is not reflected by the text of this opinion. When purchase contracts are subject to the Interstate Land Sales Act (“ILSA”): 15 U.S.C. Sec.1703(d) contains a provision that defines the developer’s damages in the event the buyer defaults. Generally speaking 1703(d) requires the developer to place this limitation of damages in every sales contract. These are the underlying facts that preface this opinion. So without further interference from me, please read on to the entirety of the Terra-Adi opinion.
SCHWARTZ, Senior Judge.
*1 The appellant-seller challenges an interlocutory order in an action involving a failed real estate deal in which the parties disputed which side had defaulted. The order released to the appellees-buyers the portion of the real estate deposit to which they were unconditionally entitled even if they did not prevail in the litigation, that is, even if they were the ones in default.FN1 Considering this proceeding as an authorized non-final appeal under Rule 9.130(a)(3)(C)(ii), from an order determining the right to the immediate possession of property, the portion of the deposits in question, see Malek v. Bright, 7 So.3d 598 (Fla. 3d DCA 2009), the order is affirmed on the authority of Pianeta Miami, Inc. v. Lieberman, 949 So.2d 215 (Fla. 3d DCA 2006).
FN1. Paragraph 13 of the purchase agreement provides, in part:
If Buyer defaults after fifteen percent (15%) of the Purchase Price, exclusive of interest, has been paid, Seller will refund to the Buyer any amount which remains from the payments Buyer made after subtracting fifteen percent (15%) of the Purchase Price, exclusive of interest….
FN2. Any stay of the order is vacated, effective immediately.
In many states an opinion of this type would be of no effect, as the purchaser is not required to place a deposit in excess of fifteen percent with the developer. In Florida, the standard deposit amount is twenty percent of the purchase price. Hypothetically, if you signed an ILSA pre-construction contract for a condominium with a purchase price of $500,00.00 you would be entitled to a return of $25,000.00, even if you refused to close. Now imagine that this is a condominium complex with three-hundred units, and you begin to see the picture. A seven and a half million dollar picture. Combine that with the fact that most escrow agreements provide that the developer is entitled to the interest the money earned while in escrow, and the pain to a developer becomes evident.
Assuming the developer is able to keep this money in escrow for two years beyond the closing date at five percent interest she stands to gain $750,000.00 on this money. As you might imagine, purchasers simply trying to retrieve this money have not had the best luck in negotiating their five percent back. Most developers take the stance that until they hold you in default, you are not entitled to a return of any portion of your deposit. Some developers even have the intestinal fortitude to make this claim to the court even after they have been sued by the buyer. If suing you for return of the deposit does not give notice of an unwillingness to close, what does? In any case, there is more lurking just beneath the surface upon examination of the applicable statutory law.
The heart of this matter begins with 15 U.S.C. Sec. 1703(d) that provides:
Any contract or agreement which is for the sale or lease of a lot not exempt under section 1702 of this title and which does not provide— * * *
(3) that, if the purchaser or lessee loses rights and interest in the lot as a result of a default or breach of the contract or agreement which occurs after the purchaser or lessee has paid 15 per centum of the purchase price of the lot, excluding any interest owed under the contract or agreement, the seller or lessor (or successor thereof) shall refund to such purchaser or lessee any amount which remains after subtracting
(A) 15 per centum of the purchase price of the lot, excluding any interest owed under the contract or agreement, or the amount of damages incurred by the seller or lessor (or successor thereof) as a result of such breach, whichever is greater, from
The obvious question this raises is, “What are the the damages to the developer?” Can’t the developer show the original contract price and a current appraisal that demonstrates actual damages far in excess of the twenty percent deposit? Section 1703(d)(3)(A) seems to say that the developer can subtract actual damages from the the amount owed to the purchaser. Yet I am not aware of any case where a developer has taken this approach. At first, I was somewhat mystified by this. Then I realized that a developer would essentially have to admit a buyer’s measure of damages for an ILSA violation. Under 15 U.S.C. Section 1709(a), it says the court should consider “the fair market value of the lot or leasehold at the time relief is determined; and the fair market value of the lot or leasehold at the time such lot was purchased or leased” when determining the appropriate damages to the buyer for an ILSA violation. If the developer loses on their own contract claim and the buyer prevails under ILSA, it would seem that they have proved the damages for the buyer. However, this fails to explain the Terra Adi decision.
The Terra-Adi Court does not explain how the purchaser was entitled to the release of the funds (“which they were unconditionally entitled even if they did not prevail in the litigation”) in light of the developer’s apparent ability to offset the return of the deposit for actual damages. The answer arises from the fact that this provision is subject to the interpretation by HUD and the marriage between state and federal law.
24 C.F.R. § 1715.4(b) states:
Damages incurred by the seller or lessor means actual damages resulting from the default or breach, as determined by the law of the jurisdiction governing the contract. However, no damages may be specified in the contract or agreement, except a liquidated damages clause not exceeding 15 percent of the purchase price of the lot, excluding any interest owed.
Under Florida law, a contract can not provide for both liquidated damages and actual damages. Lefemine v. Baron, 573 So. 2d 326, 328 (Fla. 1991). Therefore, a developer may not ask the court for 15% liquidated damages under the contract, and seek the additional five percent of the purchase price as actual damages. I have seen another tactic taken by developers trying to circumvent this rule. Let’s say I send a letter to the developer stating my client is not going to close and demanding a return of five percent of the purchase price. The developer then sends a letter back setting a closing date. The buyer does not show up to close. Under the contract, it says the developer is entitled to a certain amount of interest as late fees for every day the purchaser is late in closing. The developer does not declare the buyer in breach of the contract. Instead, the developer resets the closing date about three months in the future, or when the late fee interest equals five percent of the purchase price. Then the developer notifies the purchaser of default. In this manner the Developers attempt to shoehorn the “excluding interest owed” into keeping the entirety of the deposit. Another approach, (which was taken by the Developer in Terra-Adi) is to claim that they are entitled to specific performance from the buyer if the purchase contract provides for the same. In other words: if the developer is entitled to specific performance thereby forcing the purchaser to close, then the buyer would not be entitled to a return of any of the deposit. Although not discussed, the Terra-Adi Court’s ruling implicitly rejects this notion.
While the exact underpinnings of Terra-Adi are somewhat hidden, the effect is not. I have seen at least thirty orders from Florida state trial courts ordering the return of the monies in excess of fifteen percent in the first few weeks following the Terra-Adi ruling. Until now countless buyers have been forced to wait months or even years for the return of five percent of the purchase price. The simple message of the Terra-Adi decision is that the developer created limbo has come to an end.
This article, and the comments posted in response, do not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.