Who should pay?

As a homeowner, I am more than concerned with the falling house prices.  I am acutely aware of the limitations to sell or refinance.   While banks are offering modifications for homeowners on the brink of default, most of us can only gather our patience and wait for the recovery.  Some real estate investors, however, are not interested in waiting.  They are looking to another alternative: sue the developer. 

In South Florida, where the condominium market has experienced a significant contraction, some investors are suing to get their pre-construction deposit refunded. 

‘Beck, a Harvard Law School graduate who has filed suit for buyers of about 500 South Florida condos seeking deposit refunds, said the cases are part of the market correction.

“We’re going to have lots of litigation as long as there’s a disconnect between what people are under contract to pay and what the market actually is,” Beck said.

“During the boom, developers and lenders were falling all over themselves to get projects up and sold as soon as possible, applicable statutes and disclosures be damned,” he said. “The law took a back seat. The only time laws are going to be enforced is when the market’s bad. That’s what we’ve got here.”’

While the motivation may be market correction and minimizing ones losses, the legal strategy is to identify partial or misleading disclosures.

In one case, the buyers claim that they are entitled to a refund of their deposit since they were lead to believe that Trump was closely involved with the project, when in fact he was involved “in name only.”  “Trump brand added $200 a square foot to the project’s value, the suit said.”  The assistant general counsel of the Trump Organization in New York said that “The main point is that we are not the developer of this project. We are just the brand which licensed the use of the Trump name,” Garten said. “Trump didn’t enter into contracts with any of the buyers or receive deposits from any of the buyers.”

In another case, the buyers are claiming that they were mislead about the floor of their unit, which would constitute a breach of the purchase agreement.  “The plaintiffs never knew that units 3301 and higher are actually 10 floors lower than what the developer represented,” the lawsuit argues. “For example, unit 3706, plaintiff Sanchez’s unit, is actually located on the 27th floor.” The developer responded that the units are numbered to “reflect the building height rather than the number of floors.”  So far, this case has not held up- two counts of the complaint have been dismissed by a judge.

 

We are likely to see more and more cases like this, especially if the plaintiffs become more successful.  The real challenge for the courts will be to uphold current contract and disclosure legislation without encouraging speculative activity that has created some of the turbulence in the real estate market to begin with.

If I worked in the insurance industry though, I think I would be tempted to offer homeowners and developers another, and perhaps less costly, alternative to a law suit-- home price insurance anyone?

 

Source: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7s0rpuaOw50