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Can You Protect Yourself from ILSA?

And I don’t mean Ilsa Lund (Ingrid Bergman’s character in Casablanca).  I mean the Interstate Land Sales Full Disclosure Act.  A Federal court just let someone out of a deal just because the sponsor didn’t file a property report with HUD and give it to the purchasers with seven days to rescind.  First, if you are building a project with 100 or more condominium units, then by all means, file a property report with HUD, give it to all your purchasers before they sign, include seven days to rescind in your purchase agreement, and make the other disclosures required by ILSA.  It’s just not worth the trouble not to do that – and it won’t cost much compared to what you already have to spend on a NY offering plan.  But second, and perhaps even more importantly, if you are building a project with 25 or more condo units, be very careful to disclose everything you are supposed to in that NY offering plan – especially any special risks and construction issues.  Because ILSA also makes a developer strictly liable for any misstatement or misrepresentation of material fact.  That means purchasers can sue and collect damages and attorney’s fees – for latent construction defects, for instance, without regard to your knowledge or intent.  They do this even if they didn’t rely on the supposed misrepresentation when they bought, but only came up with it later.  But for ILSA, under NY law it would be difficult, if not impossible, for condo purchasers to recover such damages.  ILSA makes it much easier.  So, you have to be much more careful not to make any mistakes or leave anything out of your NY offering plan.  And, what about insurance?  You can buy completed operations coverage, but it is normally riddled with exceptions.  You can try to make your contractors and their sub-contractors buy errors and omissions insurance, even if they normally don’t and it has its own coverage gaps.  But finally, your best protection is full disclosure.

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