Thursday, January 17, 2008

Three judgments in Condo Buyers vs Developers lawsuits

I have found some very interesting information in a business law publication.

Daily Business Review January 17, 2008

By: Polyana da Costa

Is there a way out? That's a question many buyers under contract to purchase condominium units in South Florida asked their attorneys as closing time approached.

In an overwhelming number of cases, attorneys said yes to their clients and filed suits against the developers, but now the question is — will that work?

Few court orders — that might serve as precedent to other cases after the appeal process — have come out since a wave of lawsuits alleging breach of contract for many different reasons were filed.
Out of three recent judgments in Florida, one favored the developer and two others favored the buyers:

• D&T Properties v. Marina Grande Associates Ltd. — Palm Beach Circuit Judge Jonathan Gerber issued a final judgment after a nonjury trial in July stating the buyer was not entitled to cancel the contract based on an increase in condo assessments because the buyer could afford the increases. The case is being appealed in the 4th District Court of Appeal.

• Pugliese v. Pukka Development — U.S. Magistrate Judge Frank Lynch Jr. issued a summary judgment in October that found the buyer was entitled to be refunded the deposit because the project was not exempt from the federal Interstate Land Sales Full Disclosure Act.

Meridian Ventures LLC v. One North Ocean LLC — U.S. District Court Judge Daniel T.K. Hurley in December issued a summary judgment favoring the buyer in a similar case. Projects with fewer than 100 units were believed to be exempt from the federal act. The federal court found the two projects were exempt from some but not all provisions in the act.

The two cases favoring buyers also are being appealed and have raised concerns among some attorneys and developers.

Gary Saul, a Greenberg Traurig attorney who represents developers, wrote on the firm's Web site in October that the Pukka case was significant and was being aggressively appealed.

"If the Pukka order is upheld by the federal appeals court, it likely will have a significant impact on the ability to enforce contracts presently utilizing the One Hundred Lot exemption," Saul wrote.

Saul said in a phone interview that the "Pukka decision was contrary to existing Florida case law and the opinion of the director" of the Department of Housing and Urban Development.

Saul said the firm has won many summary judgment hearings and motions on behalf of developers. He said they were "little victories" and declined to name or discuss the cases in general.

Although the cases being decided will help shape future decisions, it's too early to tell the outcome of hundreds of other lawsuits.

Most likely, buyers will have a difficult time trying to win condo cases, said Tom Ringel, a partner with Markowitz Davis Ringel & Trusty in Miami.

"Most contracts are very one-sided contracts," he said. "They were written for developers and are there to protect developers. While some buildings may have special circumstances, in general it is very difficult to litigate this issue."
Ringel said he has received several phone calls from buyers wanting out of their contracts, but in most instances he does not take the case.

"I don't want to take a case and make them pay if I know they won't win," he said.

Bart Houston, an attorney at Adorno & Yoss in Fort Lauderdale, agrees with Ringel but said there is room for negotiation with developers.

Rather than taking the cases to court, he has recently helped some buyers work out settlement agreements with developers.

The agreements can't be disclosed, but he said they involved buyers accepting refunds less than the full deposit or developers agreeing to give the buyer a discount on the unit.

"It's a case-by-case basis, but I advised them to settle based on my review of the complaint, an estimation of what it would cost to litigate and the amount of the deposit," Houston said.

Fighting to get out of a condo contract can cost buyers anywhere from $10,000 in simpler cases to $60,000 in cases with deposits of about $300,000 to $400,000 at stake, according to attorney Jared H. Beck of Beck & Lee Business Trial Lawyers in Miami. On a contingency basis, most attorneys would charge about 30 percent to 40 percent of the refunded deposit, he said.

The litigation process on most of the condo contract lawsuits is likely to be lengthy — about two or three years if filed in state court and longer in federal court, Houston said.

"The litigation parties that are smart are going to get into mediation pretty quickly," he said.

Developers will be hurt the most by the delay because they won't be able to sell the units while they are being disputed in court, which will make lenders impatient and ask to be repaid, Houston said.

Lenders also have gotten in the way of developers and buyers who want to settle, said Robert Cooper, an Aventura attorney who has filed dozens of lawsuits on a contingency basis for condo contract holders against developers.

"I have talked to a major developer who wants to go to mediation, and the contract requires mediation before a suit is filed, but he said he can't negotiate because of the lender," he said.

Cooper did not disclose the developer's name.

Lenders have assignment rights to contracts as they have rights to the real estate, Cooper said.

"They can't do anything without the lenders' approval, and from what I've heard the lenders are not giving them the cooperation they need to deal with this market," he said.

Cooper has settled about 20 cases, which he considers a small portion of the lawsuits involving multiple buyers that he has filed.

Most of the developers willing to settle are those who have closed on about 70 percent of the units in a building because the main construction loan has been paid off, he said.

Cooper is more optimistic about condo lawsuit outcomes.

Developers' contracts are indeed written in language that favors the developer, Cooper said. But in many cases "developers overreached in trying to protect themselves so much that they created unenforceable contracts."

"I call them illusory contracts, meaning the developer used overreaching language and put in a provision that said they could change anything they wanted including square footage, finishes, colors, anything," he said.

Leading luxury condo builder Related Group used a contract like that in most if not all of its South Florida developments. Based on his review of dozens of local contracts, Cooper said other developers have used the same contract in their developments. He declined to name others.

Other attorneys who did not want to be identified said some projects are known to have "bad" contracts and "good" contracts.

The "good" contracts, in the eyes of attorneys, were well-written to protect the developer without overreaching and make it difficult for a buyer to get out. Among them are the Edgewater, a 307-unit development in West Palm Beach; Vintage at Lighthouse Point, a townhouse community by WCI Communities; Orchid Grove, a development in Pompano Beach by Tarragon; and the Paradiso condo in Miami Beach.

Attorneys say they are being selective despite the large number of lawsuits being filed.

Beck said he is handling several cases on behalf of buyers who want out. But only 10 percent of the numerous inquiries he gets each week represent a viable claim.

"A lot of the cases that don't represent valid claims may end up in court," he said. "But you are also going to see a number of cases where buyers are successful — primarily in areas where something substantial was altered in the project and those that were not delivered in time."

Among the most common claims used in contract cancellation lawsuits are:

• Material and adverse changes — buyers can cancel contracts when "material and adverse changes" were made to condo documents filed with the state. It's up to the courts to decide whether a change was "adverse." Lawsuits claim changes that vary from square footage to condo association fee increases.

In the Marina Grande ruling, the judge found the change was not adverse to the buyer because the buyer could afford to pay.

"Marina Grande will be a very important decision," said Beck, who has been watching the cases closely. "Regardless of whether the courts uphold the result or not, I don't think the buyer's personal situation should have much to do with the decision."

Cooper agreed.

"It's basically the same as leasing a car and having a bill sent to you for twice the amount and being required to pay because you can afford it," he said.

Interstate Land Sales Act — A 1968 federal law to protect land buyers. The law has been applied to condos and has several provisions including fraud related to misrepresentations in the contract, a requirement to give the buyer 20 days written notice in case the buyer is in default and a requirement to file certain property documents before construction. Developers are exempt from the act under certain circumstances, including a commitment to deliver a unit within two years.

"It's very risky to promise a building in two years, and many of those are being challenged in court," Beck said.

In some cases, developers have found their way around the two-year commitment.

"Developers were looking further ahead," Houston said. "If they knew they wouldn't complete the unit, they sent out a letter to the buyer saying 'we've decided to give you an upgrade but we need an extension' and buyers would sign accepting the extension."

One could argue that's deceptive trade, and buyers would have a good chance of winning the case, Houston said.

Many of the lawsuits being filed revolve around the complex federal act and its exemptions.

Some developers believed they were exempt from the act and didn't comply with some aspects of it. Now many attorneys are relying on that to get their clients out of contract.

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