July 18, 2019

Colorado Court of Appeals: Fractional Ownership Interests in Real Estate Development Do Not Constitute “Lots” Under HUD Definitions; Arbitrator’s Award Affirmed

The Colorado Court of Appeals issued its opinion in PFW, Inc. v. Residences at Little Nell Development, LLC on August 16, 2012.

Contract Rescission—Interstate Land Sales Full Disclosure Act—Arbitration Award.

PFW, Inc. (PFW) appealed the trial court’s judgment in favor of Residences at Little Nell Development, LLC (Little Nell) on its rescission claim arising under the Interstate Land Sales Full Disclosure Act (ILSFDA). PFW also appealed the trial court’s order denying its motion to vacate an arbitration award in favor of Little Nell on other non-ILSFDA claims. The judgment was affirmed.

In 2005, Little Nell began developing a private residential complex comprising eight hotel units, eight affordable housing units, three commercial units, and twenty-six condominium units at the base of Aspen Mountain. Little Nell sold one-eighth interests in the condominium units.

By December 2006, a one-eighth interest in a condominium unit sold for $3 million. Miller entered into a purchase agreement with Little Nell for such an interest at that price. He tendered $450,000 in escrow as earnest money. In May 2008, Miller assigned his rights under the purchase agreement to PFW, of which he is owner and president.

The construction completion deadline and closing date were in December 2008. The price had fallen due to the downturn in the economy. Before completion, PFW sent Little Nell a notice of its intent to rescind the agreement based on ILSFDA violations and contract breaches, and demanded release of its earnest money. PFW sued Little Nell, asserting eleven claims, including breach of ILSFDA and the Colorado Consumer Protection Act, breach of contract, and fraudulent inducement.

PFW alleged the same claims in arbitration pursuant to the arbitration clause of the agreement. The arbitrator found PFW in default under the agreement and entered interim and final awards in favor of Little Nell on all counts. PFW moved to vacate the award in May 2010; the motion was denied. Following a hearing, the trial court entered judgment in favor of Little Nell on the two ILSFDA claims in July 2011. PFW appealed.

PFW argued it was error to deny its statutory claim to rescind solely because the court held that Little Nell’s condominium project was exempt from ILSFDA’s registration and disclosure requirements. The Court of Appeals held that the fractional interests in the project’s twenty-six condominium units are not “lots” under the ILSFDA and therefore were exempt from registration and disclosure requirements. The Court looked to the ILFSDA and regulations promulgated by the U.S. Department of Housing and Urban Development (HUD) to determine whether an interest is a “lot.”

The ILFSDA’s registration and disclosure requirements do not apply to “the sale or lease of lots in a subdivision containing fewer than one hundred lots.” The term “lot” is not defined. HUD’s implementing regulations define “lot” as “any portion, piece, division, unit, or undivided interest in land located in any State or foreign country, if the interest includes the right to the exclusive use of a specific portion of the land.” HUD’s interpretive rules also provide further guidance.

The purchase agreement was for an “undivided [one-eighth] fee simple ownership interest as a tenant in common” in a four-bedroom “fractional ownership unit.” The Declaration further elaborated on the ownership interest. PFW argued that the twenty-six condominium units, each divided into eight fractional interests, constitute 208 “lots” under ILSFDA. The trial court disagreed, finding “no right of exclusive possession attaches to . . . ownership” of the fractional interests. Therefore, the development was exempt because it contained fewer than one hundred lots. PFW argued this was error because the fractional ownership interests in the Little Nell units are like ownership of traditional condominiums, which the Secretary of HUD has treated as lots.

The Court disagreed, noting that HUD’s regulations expressly require that an ownership interest “include[] the right to exclusive use of a specific portion of the land.” Here, the fractional ownership interest allowed for exclusive use of a designated unit type for four weeks every year, but not a specific unit. The owners do not obtain exclusive use of any portion of the project. It was not error for the trial court to deny PFW’s ILSFDA claims.

PFW then argued it was error not to vacate the arbitration award on the non-ILFSDA claims because the award was procured by fraud. The Court disagreed. PFW contended that Little Nell procured the arbitration award by fraudulently concealing that it had not properly registered with the Colorado Division of Real Estate (Division) when it executed the purchase agreement and therefore the agreement was “voidable by the purchaser and unenforceable by the developer.” The Court held that this was an issue for the arbitrator. Because it was not raised during the arbitration, it was not properly before the trial court. Therefore, the trial court correctly denied PFW’s motion to vacate the award.

Summary and full case available here.