Suing to rescind condominium and hotel purchases under the Federal Securities Act
Recently, the Wall Street Journal 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 that they qualified as “securities” under federal and/or state law, but were not registered as a security offering, for which the buyers were entitled to a refund. of your deposits. If the allegations can be proven, then the remedy is indeed potent: as one lawyer quoted in the Wall Street Journal article accurately states: “Repossession rights are much better if you can say it’s 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. To a large extent, however, it is difficult to predict the course that condominium and hotel litigation will take, and how the courts will view and rule on these cases. The jurisprudence that addresses the issue of the conditions under which a condo-hotel constitutes an offer of securities and must be registered as such is scarce, in fact, non-existent, for all purposes. The most important guidance comes from a 1973 Securities and Exchange Commission (SEC) release entitled Guidelines on the Applicability of Federal Securities Laws to Offers and Sales of Condominiums or Units in a Real Estate Development (SEC Release No. 33 -5347 ).
The Release sets forth three broad factors, the presence of any of which could make a condo-hotel a securities offering, triggering a buyer’s right to seek rescission under securities law. These factors are:
1. The condominiums, with any rental system 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 of a third party designated 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 their unit available for rent during any part of the year, must use an exclusive rental agent, or is materially restricted in their occupancy or rental of their 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 expenses attributable to rent for all units in the project are combined and the individual owner receives a proportionate share of the rental income, regardless of whether their individual unit was actually rented.” However, for more details helpful, one should turn 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 preferred facts) is only binding as to the specific investigation brought before it. While the 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 on 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 salient issues related to how securities law interacts with condo-hotel offerings, nearly all of the analysis comes from developer side lawyers looking to advise their clients. how to structure their projects to minimize the risk of coming under SEC scrutiny, or posit how local authorities can enact zoning regulations that lessen securities regulation risks for condo-hotel developers.
Given the looming wave of condominium litigation that we can surely expect in the coming months as buyers seek to recover money from their deposits (and in parallel with the tsunami of lawsuits from “simple” condo buyers), the outlook for Lawyers on the developer’s side will surely be helpful in predicting what twists and turns such litigation might take. But to get a true picture of what lies on the horizon, it will be necessary to look closely and critically at the relevant no-action letters, as well as the case law that addresses the issue of what may constitute a value, broadly speaking, in para. identify pressure points that may exist for hotel condo buyers (and their attorneys) to push to litigate rescission cases.