Can the Current Financial Crisis Be a Blessing in Disguise for Condo Contract Holders Scheduled to Close?
February 4, 2009 by Lucas Lechuga
I know, I know...preconstruction condo contracts clearly state that performance is not contingent upon financing. However, a recent federal ruling in Hoosier Energy Rural Electric Cooperative, Inc. v. John Hancock Life Insurance Co., contains language that may assist condo contract holders who are scheduled to close in the near future.
Here's some background on the federal case, as provided by Jared Beck's recent blog post entitled, "Federal Court Endorses Financial Crisis As Basis For Relief From Pre-Existing Contractual Duties; Could Real Estate Contracts Be Affected?":
The background is somewhat complex but essentially involves the owner of an electrical generating plant in Indiana, Hoosier Energy, which in 2002 entered into a complex lease-back arrangement over some of its assets with an insurance company, John Hancock, aimed at creating a tax shelter for John Hancock. As part of the deal, Hoosier Energy was required to obtain what amounted to a line of credit from Ambac, a financial institution called a “swap provider.”
Until 2008, Hoosier Energy made all of its scheduled payments under the agreement. Then, global financial crisis ensued, and the credit rating of Hoosier Energy’s swap provider sunk like a stone. Hoosier Energy was unable to find another swap provider with a suitable credit rating who could be substituted in a timely manner. John Hancock declared Hoosier Energy to be in default and demanded a large termination payment, shortly after which Hoosier Energy filed suit, requesting a protective injunction.
Mr. Beck went on to say in his blog post that "Hoosier Energy argued that the extraordinary freeze in the global credit markets at least partially excused it from performing under the contract as an instance of 'commercial impracticability,' mitigating the default declared by John Hancock". The court agreed with Hoosier Energy's argument.
Mr. Beck concluded his post with the following:
How could this newly articulated doctrine be more broadly applied? One possibility rests with the large number of individuals who signed preconstruction real estate contracts several years ago, with the intention of obtaining mortgage financing once the project was finished. Now that many of those projects have been or will soon be competed, those buyers are unable to close because, owing to the global credit crunch, banks will no longer extend mortgage financing for certain new real estate construction at 2004 or 2005 prices.
While many of these purchase contracts were drafted with clauses stating that they were not contingent upon the buyer qualifying for a mortgage, it could be argued, on the basis of the reasoning set forth in Hoosier Energy, that the deals were signed under both parties’ reasonable assumption that financing would actually be available from somewhere once construction was completed. To quote the Southern District of Indiana in Hoosier Energy, “The crisis was not anticipated by the most senior economists in the country.” If that is true, why should the defense of commercial impracticability, based on the lack of accessible credit, be any less available to the individual real estate buyer seeking to mitigate the effect of a pre-existing contract then it would be to an electrical generating plant operator dealing at arms length with a multibillion dollar insurer? (To some degree, the question overlaps the analysis of whether “bailout” principles should apply equally to financial institutions and individual homeowners, both of whom are victims of their own inability to foresee the mortgage crisis).
The newly revised Fannie Mae guidelines, which went into effect on January 15, state that the government-controlled entity will no longer fund loans for new Florida condos if at least 70 percent of the total units in the development have not be conveyed or under a bona fide contract for purchase to either principal residence or second home purchasers. Contract holders who require financing and are scheduled to close in coming months are basically out of luck. It'll be interesting to see how the courts handle this argument in 2009.
Excellent points made, Lucas. However, I believe the practical impact of Hoosier will not necessarily give complete relief to the vast majority of folks who want to renege on their contracts with developers. The remedy that the developers are seeking — specific performance — is not in the realm of the possible unless the buyers have deep enough pockets to seal the deal in cash. Most of the buyers are merely attempting to salvage a portion of their deposit. Likewise, most developers are merely attempting to NOT refund the deposit — both parties realize that specific performance is impossible without financing — which of course, is non-existant for most buyers, in most buildings that we’re talking about. No judge will allow use the Hoosier defense to COMPLETELY exonerate the buyers from their contractural obligations — the loss of a 20% deposit seems a good compromise, I would think (as opposed to the other two scenarios: specific performance or force the cash-strapped developer to refund 100% of the deposits…
The legalities of escaping an investment contract may be of greatest importance to the very liquid, sushi eating investor crowd but what about the little guy?
I just read a Sun Sentinel article about the Deerfield Palms condo association.
Only 28 of 168 units pay maintenance and they now have an outstanding $90,000 water bill. People in mortgage default are living in their units but refusing to pay their assessment too (why not, right?). These are not $700K units we are talking about but $150-200K units.
The 28 people living there since the condo conversion have been paying their mortgages and dues faithfully but will nonetheless be ruined because of the sheer wall of economic distruction headed our way. This will happen to decent, responsible people again and again. Repeatedly.
I just now realized the scope of this. This is just the beginning. I am now officially scared.
Lucas, as someone who I respect, but who nonetheless helped so many hapless owners get into these ridiculous contracts, it comes as little surprise that you would align yourself with an attorney whose job it is to help folks get out of the same contracts.
And in that way it’s a perfect circle. You guys feed off each other, creating a cottage industry of fees until the ponzi scheme peters out.
Exhibit A: What’s Wrong With America.
george said “a bargain whatever price lol because I am IN tel aviv at the monent and nice apts on ocean are app 1000 US$ per sq ft and UP -no kidding”.
That is why I laugh when some nincompoops on this blog predict 125 or 85/sf.
Some of the typical ignorant and clueless guys who give a bad name to all the Americans! Who can fault when Europeans and the rest of the World laugh at us for our stupidity.
I have just visited Lima, Bogota, Mexico City, Bombay and Kaulalumpur.
Average yearly salry in all these places is $3,000.
A decent 2/2 in a decent building and a decent location in these cities costs $250,000 and up. Note the key word decent. Not even luxury like Miami or waterfront locations or great views like in Miami.
So average wage = $3000, cost of flat 75 times to 100 times yearly salary.
Miami av wage is $30,000. A flat in a luxury building in a first class city in a superb location, costing 10 times the average wage is too much? These clueless guys are tripping over themselves with stupid arguments. Such typical frogs in a well.
So keep convincing yourselves.
Lucas
Nice promotional tie-in for the business lawyers of Beck & Lee.
In any event, Jared’s argument is baseless. In short, to apply the doctrine of impracticability, performance of the contract has to be so difficult/expensive with the reason causing such difficulty not being assumed by either of the contracting parties. The typical case comes up in the construction context, e.g., I agree to do X, and in the interim, some event occurs that simply, from an objective standpoint, won’t allow me or anyone else to do X.
Here, as Jared conceded, all of these contracts explicitly state they are not subject to a financing contingency. Thus, all the purchasers agreed to buy a condo for a certain price, regardless of whether they could get financing to help make that purchase. Thus, the purchasers assumed the risk of an event occurring (i.e., that they could not get a mortgage) and can’t (in good faith) now raise impracticability. Any decent lawyer would knock this out in a motion to dismiss (assuming you didn’t get a crazy state court judge). If you’re in district court, you would get crushed on this.
BTW Lucas, why did you delete my Icon post from a few days ago? I’m not sure why you censored me…Is Related breathing down your neck now as well?
Agreed, jcrimes, the improvised “get out of contract free” theories that plaintiffs’ lawyer have been concocting over the past few years are increasingly inane, illogical and — let’s be honest — desperate. Not that there aren’t some issues in a few of the contracts. But the idea that a contract is no longer binding because the economy shifted is a dangerous and deluded one. Ain’t gonna work.
jcrimes is correct. A key point to the doctrine is that the cause of the impracticability (which differs from impossibility under contract law) can not be attributable to the acts of the party claiming such impracticability. With the contract specifically stating that the purchase is not conditional upon financing, then I don’t see how this doctrine applies…that is, the buyer can always be a cash buyer (as agreed upon, essentially) and that the buyers lack of cash can’t be used for impracticability purposes….next.
– I too have had posts “not post”. I changed my email addressed used and then they post. So some sort of filtering is going on. I haven’t checked back to see if any posts that I know posted were ever deleted though.
There is no economic crisis. Economies will flow from positive to negative environments. Some would even use the term “cycle” to describe what is taking place.
moretroops,
You assume incorrectly. Only 2 clients of mine got into preconstruction contracts. One of those was at Capital at Brickell which hasn’t even gotten off the ground yet.
jcrimes,
I don’t remember deleting any of your comments. What did you write about Icon? When a comment doesn’t post it goes to pending status where it stays until I approve it. Usually when there are too many links the spam filter picks it up and places it there.
i didn’t write anything offensive lucas…that’s why i was surprised. i think i asked why the icon link no longer appears on your list of condo buildings, or something to that effect.
jcrimes,
Your comment is still there. It’s #27 under the last post about Quantum. To answer your question, I still need to have my website developer re-add Icon Brickell to the list. He’s been on vacation since last week though and won’t be back until the 9th.
http://www.propertyshark.com/mason/components/blogcenter/pdf_report.mas?id=44
Some interesting statistics for all of you to review
Miami dade county clerk (the official source of Miami-Dade foreclosures) begs to differ Lara. That report is utter crap. I read an article about these different foreclosure stats providers having vested interests and highly inaccurate data.
Also Lara, if you think foreclosures are dropping, you have another thing coming. We all know you have quite a few properties. I give it a year before you completely give up.
Off-point but jcrimes asked: “Is Related breathing down your neck now as well?”
You seeing those black Chevrolets parked across from your residence? “Big Brother” Gourge is watching YOU!!!
If they catch up with you, tell them you are AJ from Bombay…..
Let them eat cake, served up by The Smart Money of course.
The Smart Money.
OT
I’m glad to see AJs back, I was worried.
🙂
lucas
you’re a better man than me…my tech savviness is utterly below par
Why is LAra wrong? Lara did not create this report. Lara found it interesting and posted.
Why would I give up my properties? I mean anything can happen. This life is unpredictable but even if market goes to hell why would I give them up. Whoever wrote their comments did not even post his/her name. Try to be positive it will be easier for you to live. Do not envy, try to achieve something.
i belive that a better argument can me made agianst the devloper stating that because of the developers actions or inaction (bulk sales, undersatimating the maint fees, etc) the building does not qualify for financing making it imposible to close.
AJ,
Reeal estate is ultimately a local market, so comparing what’s happening in Tel Aviv to Mexico City, Bombay, Miami or wherever is a flawed argument… its not a like comparison. Yes, the world is becoming smaller, financing is global, etc, but hard assets have to be valued according to the location to which they’re attached. Money flows across a border because it has a market and is liquid but try picking up and moving a building…. not as easy. The reality of this local, hard-asset market is that there is housing oversupply, some places to the order of 9x what a normal market should have. Demand is also severely limited, thanks to the new Fannie Mae restrictions & the massive worldwide asset devaluation and layoffs from the financial crisis. According to Econ 101, we have both a demand shock and a supply shock, lowering both curves, and lower supply and lower demand results in plummeting prices.
http://en.wikipedia.org/wiki/Supply_and_demand
Now I can’t predict the future, but I am decent at sorting through noise and seeing real conditions, which is why I think may still yet see $150/ft for average buildings, or less in outlying areas.
AJ,
You are very much mistaken in comparing Miami to a place like Tel Aviv, etc. I personally know Rio de Janeiro very well, and that is another place where relative to incomes, apartments cost much more than Miami per square foot but that is a function of a local market where it is almost impossible to build new construction, and I suspect some of the markets you describe are like that. So it really is supply and demand. In Rio, a dump on the beach can cost more per square foot than luxury waterfront in Miami, but that doesn’t mean that Miami is cheap. Don’t be stupid. Almost nobody needs to own a condo in Miami whereas in markets such as Tel Aviv and Rio, those are primary residences. Prices in Miami can and will fall much farther down because nobody needs to own those condos, and almost nobody wants to right now.
Whoopee! Another litigation nightmare and it doesn’t involve the self-proclaimed “Donald Trump of the Tropics”!!! (You reading this AZ88??)
To think, I actually looked at buying here (when it hits bottom). Oh, the horrors!
Condo Meltdown
Buyers say developer misled them into thinking condo was a Canyon Ranch resort
January 29, 2009 By: Paola Iuspa-Abbott
Reinaldo and Edith Gonzalez got their first taste of the Canyon Ranch Living brand while vacationing aboard the Queen Mary II.
It was such a great experience, that shortly after returning from the cruise to Miami, the couple visited the site of a condo project in Miami Beach that featured the Canyon Ranch brand. They made a $236,000 deposit and signed a contract for a $1.18 million unit.
“We were planning to retire so we went to check the place,” Reinaldo Gonzalez said. “We wanted to enjoy the Canyon Ranch lifestyle.”
Gonzalez, whose Miami company sells engine parts, didn’t mind paying a premium for the condo. After all, he thought, he was buying his retirement home at Canyon Ranch Living — Miami Beach. Tucson, Ariz.-based Canyon Ranch resorts are a favorite destination for people seeking fitness, nutrition, preventive health care and spiritual awareness programs. Canyon Ranch’s reputation sealed the deal for the Gonzalezes.
But as the project neared completion, the couple began receiving letters from the developer and soon realized they hadn’t bought a condo at a Canyon Ranch resort. Instead, they had bought a unit at the Carillon North Beach tower, which had an agreement with Canyon Ranch to provide spa services.
Gonzalez said he felt misled. He now wants his money back and the contract terminated.
The couple, and about five other buyers, have filed individual suits alleging the developer, WSG Development, falsely advertised the project at 6801 Collins Ave. as a Canyon Ranch resort.
The developer denies the allegations made in the lawsuit, the latest effort by condo buyers trying to get out of deals to buy units after the real estate market collapsed.
The buyers claim WSG promoted the project as “part of the Canyon Ranch brand and family” when in reality, the “Canyon Ranch brand is merely temporary,” according to the complaint.
“This was a classic bait-and-switch,” said Miami Beach attorney Aaron Resnick, who represents the plaintiffs. He said he expects to file 10 similar complaints by next week.
In a statement, WSG executives said the lawsuit was “frivolous and without merit and will be vigorously defended.”
Resnick claims WSG violated Florida’s Deceptive and Unfair Trade Practices Act. Under that state law, the plaintiff only need to prove deception or misrepresentation on the part of the developer and not that they relied on the developer’s statements.
The outcome of these suits could create a precedent in the condo litigation field.
Letter regarding reservation deposits
Letter regarding CRL Miami Beach
“We are in a gray area, and the courts are going to have to sort out what crosses the line in terms of how do you really sell these projects,” said Miami attorney Jared Beck, with Beck & Lee Business Trial Lawyers. “The courts are going to have to decide what constitutes a deceptive practice in the marketing of a condo. To my knowledge, there is no case law on this issue.”
So far, plaintiff attorneys have been unsuccessful in getting their clients out of contracts. Previous suits filed under both state and federal laws have been tossed at the trial and appellate levels.
In the Canyon Ranch suits Resnick avoided claims under the U.S. Interstate Land Sales Act. That approach didn’t work in August, when U.S. District Judge Patricia Seitz in Miami dismissed 29 lawsuits against Opera Tower near downtown Miami. She ruled that buyers should not rely on written or oral misrepresentations that were contradicted by a subsequent purchase agreement.
The project has been delayed eight months.
Secrecy fuels uncertainty
Several other buyers are suing WSG to recover their deposits, arguing the developer didn’t complete the project on time.
With closings delayed by more than a year, the developer’s loans were coming due forcing WSG to look for financing in the midst of a credit crunch. WSG was able to extend its deadline by one year to pay off nearly $400 million in construction loans.
Shortly after the loan extension, WSG’s bankrupt lender, Lehman Brothers Holdings, pledged the loans as collateral to borrow from hedge fund Fortress Investment Group of New York.
For more than a year Gonzalez has unsuccessfully tried to obtain a copy of the agreement between WSG and Canyon Ranch. He wanted to understand the Canyon Ranch’s role in the managing of the property before closing the deal.
Gonzalez fears Canyon Ranch will pull out of the project at anytime, hurting the tower’s reputation and character. The buyers contend that would diminish the value of the condos, already deflated by a housing crash.
Values in some of South Florida’s neighborhoods have dropped more than 50 percent since the peak of the housing market in mid 2005. Sale prices dropped precipitously as buyers pulled out of deals, foreclosures mounted and banks stopped lending.
Resnick says he has been unable to get consistent information about the “phantom” agreement from the developer and Canyon Ranch.
In a letter to Resnick, WSG representatives claimed they aren’t required to release the document because it “is not a management agreement,” but a contract to provide spa-related services. But Canyon Ranch told buyers the agreement provides for affiliate Canyon Ranch CR Miami LLC to “manage and operate” the hotel, the spa and the two condo towers, according to a Nov. 12 letter by Gary Milner, Canyon Ranch vice president of legal and development.
“We have Canyon Ranch telling us one thing and the developer telling us another,” Resnick said.
Representatives from WSG and Canyon Ranch requested questions by email. Canyon Ranch did not respond and WSG issued a short statement but did not address the specific questions.
During the boom years, condo developers often associated their buildings with high-profile celebrities, vacation resorts and high-profile hotel flags to add value to their projects.
Click play to listen to Philip Biber
Trademark names often increase market values between 20 to 25 percent, said appraiser Philip Biber, managing partner of Watermark Valuation Services in Pompano Beach.
“[Trademark names] are a big draw card,” he said. “But a lot of these developers have nothing to do with Trump or Canyon Ranch. They are really trademarking [the name] out.”
As the housing downturn lingers, more buyers like Gonzalez may begin to revolt against developers with trademark agreements.
In June, buyers of 80 condos at the Trump Towers complex in Sunny Isles Beach sued the developer — a partnership including the Related Group and Dezer Development — with similar allegations. They argue the developer used the celebrated Donald Trump name to attract buyers. Yet, the billionaire’s name can only be used temporarily for promotional purposes and may be changed once the units are sold. That suit is pending in Miami-Dade Circuit Court.
“These [purchase] contracts are so grossly overly one-sided,” said Robert Cooper, the Aventura attorney representing the Trump Tower buyers. “Contracts said that whatever the developer promised doesn’t matter and you can’t rely on it and he can do whatever he wants. Buyers thought they were going to make giant profits and everybody was so excited that they basically ignored what they were signing.“
During the condo craze, developers made a lot of promises that in some instances they were unable to fulfill, Beck said. He represents three owners who bought units at a condo-hotel project in Miami Beach because they believed the property would be managed by Regent International Hotels — as advertised by the developer.
But since closing in 2006, the hotel has been plagued by mismanagement and broken promises, Beck said. In late 2007, Regent pulled out and was replaced by Spanish operator Vincci Hotels, which lasted three months. The defendant is now managing the hotel under the name of Hotel De Soleil at 1458 Ocean Drive in South Beach.
Gonzalez said there are no guarantees the North Carillon Beach won’t suffer a similar fate.
“As long as Canyon Ranch is associated with [the project], owners will be fine,” Biber said. “But what will happen when Canyon Ranch pulls its name out? Owners will be hurt.”
Paola Iuspa-Abbott can be reached at (305) 347-6657.
Lucas,
I find the Beck & Lee legal argument interesting. It may or may not hold water, but it’s thought provoking so i thank you for presenting it.
As an aside, i really enjoy this blog, and i appreciate your efforts to document the condo market and apply quantitative rigor to your analysis. I know you have strong opinions, but i never feel as if those opinions are tainted by an attempt to “make a buck” or bash competitors, which is refreshing.
The Mondrian on South Beach has a similar issues as with Canyon Ranch. Apparently, the developer did not disclose the management agreement. The management company,which I hear is really the developer, has the licensing trademark agreement with “Mondrian.” Neither the management agreement and the licensing agreement will the developer disclose to the buyers. This is troubling. The unit owners basically held hostage to the management company because if the condo assoc decided to fire the management company the name “Mondrian” would most definitely be gone. Also, the developer maintains tremendous control since the name Mondrian is what gives value to the project. West Avenue on Miam Beach is not the most desirable location and certainly does not command the prices that the Mondrian are selling the units for. The only attorney I know that has filed a number of lawsuits (I heard maybe 20 or so) and has reseached this project is David Philips, Esq. He is one of the attorneys was first with his whole condo deposits cases back in 2007 and really knows his stuff. I have friends that have nothing but very positive things to say about his performance. Unlike Robert Cooper he selective with his cases and obtain great outcomes. I will be interested to see what he does with the Mondrian. I bet the Mondrian developers must be concered since David Philips entered the scene.
I HAVE TWO UNITS IN ICON BRICKELL VICEROY AND ONE UNIT IN TRUMP TOWERS III AND I WANT TO RECUPERATE ALL DEPOSITS . NO SCHEDULED CLOSING YET. PLEASE ADVISE. THANK YOU
I’m not sure why Lucas selects Jared Beck. I am sure that he is a good attorney. But the fact that he’s a “Harvard” lawyer is more of a marketing ploy than its worth. I believe its very telling that someone whom must use is law school to promote himself maybe good not does not equate to results. I’m a real estate broker and went to Dartmouth College. That does not make me any better than other brokers, nor do I promote my education solely to “attrack” business. And these articles are interesting, from educational perspective. Once again, what about results. What about the other excellent attorneys like Micheal Schlesigner, David Philips, Aaron Resinkck, Jorge Fernandez, Tim O’neil and others. All these attorneys, that I’ve given clients, are botton-line oriented and do not get into the promotial BS. I personally do not know Jared Beck but we should all be cognizent that “Harvard” does not equate to anything more than marketing and obtaining as many clients as possible. I just tired of hearing about certain attorneys are great promotors while there are other attorneys are are just great attorneys. This is only my opnion and take it for what’s it’s worth.
I guess correct use of the English language and correct spelling is not an impediment to getting a degree from Dartmouth College!