Ballard Spahr LLP: Colorado Court of Appeals Finds “Fractional Interests” Not Lots under the Interstate Land Sales Full Disclosure Act

Ballard Spahr LLP: Colorado Court of Appeals Finds “Fractional Interests” Not Lots under the Interstate Land Sales Full Disclosure Act

by Christopher W. Payne and Joseph E. Lubinski

The Colorado Court of Appeals has issued the first state appellate decision on the Interstate Land Sales Full Disclosure Act (ILSFDA) since the global economic downturn began. In PFW, Inc. v. Residences at Little Nell Development, LLC [enhanced version available to lexis.com subscribers], the court was confronted with the issue of whether one-eighth fractional interests constitute individual "lots" under the ILSFDA. As more fully described below, the court determined in a decision issued on August 16, 2012, that such fractional interests are not lots under the law and as a result, purchasers of those fractional interests were not permitted the continuing rescission rights afforded under the ILSFDA. The decision represents a rare win for a developer in a climate that has seen long-held understandings and interpretations of the ILSFDA overturned in favor of interpretations permitting contract rescission.

In PFW, Inc., a recalcitrant contract purchaser sought rescission of its preconstruction purchase and sale agreement for a one-eighth floating fractional interest in the Little Nell Residences in Aspen, Colorado. The purchaser also sought return of its $450,000 earnest money deposit. Under an arbitration clause in the purchase and sale agreement, all of the plaintiff's non-ILSFDA claims were resolved through arbitration, leaving only the ILSFDA claims for the district and appellate courts to consider. The plaintiff argued that each fractional interest in the project constituted a separate lot under the ILSFDA, meaning that the 42-unit condominium project actually contained more than 200 lots for purposes of the ILSFDA. Under this theory, the project did not fall within the ILSFDA's exemption for projects containing less than 100 units, and the plaintiff argued that the developer's failure to provide an ILSFDA property report entitled the plaintiff to rescind the purchase and sale agreement. 

Referring to the definition of "lot" set forth in 24 CFR §1710.1(b), one of the regulations interpreting the ILSFDA, and the HUD Guidelines, the trial court focused on the requirement that to be a lot, a property interest must include the "right to the exclusive use of a specific portion of the land." The Residences at Little Nell project documents confirmed that all fractional interests must participate in the rotating priority reservation system that gave owners a right to use specific types of units, but not to use any particular unit. Accordingly, the trial court determined that the fractional interests did not provide exclusive occupancy rights and therefore were not lots under the ILSFDA. On appeal, the Colorado Court of Appeals relied on the same regulations and Guidelines in affirming the trial court's analysis. The court's standard for determining whether a particular fractional interest constitutes a lot for purposes of the ILSFDA requires a case-by-case evaluation that depends on the particular use rights and restrictions set forth in the project's governing documents. In addition, note that as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, administration of the ILSFDA was moved from HUD to the Consumer Financial Protection Bureau. The HUD Guidelines have not been adopted by the Bureau. Judgment at the trial court level was entered prior to the Bureau taking over administration of the ILSFDA.

The case is notable for a number of reasons. First, it provides vital judicial support and precedent consistent with a 1992 advisory opinion issued by HUD to a South Carolina developer for the principal that floating interest timeshare projects are not subject to the ILSFDA. Second, in addition to the specific fractional interest holding described above, the case confirms that in Colorado, condominium units generally constitute separate lots under the ILSFDA as currently interpreted, and the determination of whether the ILSFDA applies must be based on the facts at the time the purchaser executed its purchase and sale agreement (rather than at any later date or based on events that could occur in the future).

Ballard Spahr's Real Estate Resort and Hotel Group is nationally recognized for its in-depth legal, industry, and market knowledge of vacation ownership plans and timeshare resorts as well as of the intricacies of the Interstate Land Sales Full Disclosure Act. The group advises timeshare and resort clients on regulatory compliance throughout the United States. If you would like more information about this decision and its application, please contact Christopher Payne at 303.299.7345 or payne@ballardspahr.com, or Joseph Lubinski at 303.299.7359 or lubinskij@ballardspahr.com.


Copyright © 2012 by Ballard Spahr LLP.
www.ballardspahr.com
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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