Suing to rescind condo and hotel purchases under the Federal Securities Act
The Wall Street Journal recently published an article provocatively titled, Rooms with a bubble view: Condo and hotel buyers see investments sour as market weakens. The article characterizes condo-hotels as “one of the most dangerous investments of all,” and then briefly discusses some of the lawsuits filed against condo-hotel developers in places like Las Vegas, Singer Island, and Clearwater. The basis for all of these lawsuits is that the properties were marketed in such a way as to qualify as “securities” under federal and/or state law, but were not registered as a securities offering, thus the buyers were entitled to a refund. of your deposits. If the allegations can be proven, then the remedy is indeed potent: as a lawyer quoted in the Wall Street Journal article accurately states: “Repossession rights are much better if they can be said to be a value.”
It is correct to focus on securities laws as a potentially powerful weapon for condo-hotel buyers to seek termination of their purchase agreements. For the most part, however, it is difficult to predict the course condominium and hotel litigation will take, and how the courts will view and adjudicate these cases. Case law addressing the issue of the conditions under which a condo-hotel constitutes an offering of securities and must be registered as such is scant, indeed non-existent, for all intents and purposes. The most important guidance comes from a 1973 Securities and Exchange Commission (SEC) statement entitled Guidelines on the Applicability of Federal Securities Laws to Offerings and Sales of Condominiums or Units in a Real Estate Development (SEC Statement No. 33 -5347 ).
The Notice sets out three broad factors, the presence of any of which could make a condo-hotel a securities offering, which would trigger a buyer’s right to seek termination under securities law. These factors are:
1. Condominiums, with any leasing regime or other similar service, are offered and sold with emphasis on the economic benefits derived for the buyer from the managerial efforts of the promoter, or a third party appointed or contracted by the promoter, of the unit rental.
2. The offer to participate in a common rental agreement; Y
3. The offer of a rental or similar arrangement whereby the buyer must keep his unit available for rental during any part of the year, must use an exclusive rental agent, or is materially restricted in his occupancy or rental of his unit.
The Communiqué itself contains some, but not much, elaboration on what these three factors mean in practice. For example, a rental group is defined as a rental system in which “[t]rents received and attributable rental expenses for all units in the project are combined and the individual owner receives a pro rata share of the rental income, regardless of whether their individual unit was actually rented.” However, for more details useful, one should refer to the SEC’s “No Action Letters” on the subject of what constitutes a security for regulatory purposes.
The SEC’s position (ie, whether or not it would recommend enforcement action with respect to the preferred facts) is only binding as to the specific investigation brought before it. While No Action Letters provide some guidance on how a court might rule if faced with similar or even identical issues, it is important to note that the SEC’s stated position as to a given set of facts would be persuasive, but not binding. in a short
Beyond the SEC’s release and no-action letters, when it comes to legal analysis of the most prominent issues related to how securities law interacts with condo-hotel offerings, almost all of the analysis comes from developer-side lawyers looking to advise their clients. how to structure your projects to minimize the risk of coming under SEC scrutiny, or postulate how local authorities can enact zoning regulations that lessen securities regulation risks for condo-hotel developers.
Given the impending wave of condo litigation that we can surely expect in the coming months as buyers seek to recover their deposit money (and in parallel with the tsunami of lawsuits from “plain” condo buyers), the perspective of Developer-side lawyers will surely be helpful in predicting what twists and turns such litigation might take. But to get a true picture of what’s on the horizon, it will be necessary to look carefully and critically at the relevant no-action letters, as well as the case law that addresses the issue of what may constitute value, broadly speaking, in para identify pressure points that may exist for hotel condominium buyers (and their attorneys) to lobby to litigate rescission cases.