A new Virginia law that goes into effect in July will severely restrict the practice of selling unimproved recreational homesites by installment contract.
The legislation provides safeguards for buyers who purchase land through a sales contract, a device that has led to abuses when developers had financial problems and couldn't give clear title to purchasers - even though payments were faithfully made.
The new Subdivided Land Sales Act will govern sales in existing and future subdivisions of 100 or more lots where purchasers are charged an assessment fee for amenities. Virginia is the first local jurisdiction to substantively regulate the sale of unimproved lots.
A committee appointed by the Virginia Real Estate Commission to study recreational land development in the state, headed by Helen A. Kent, a real estate commissioner from Waynesboro, has estimated that the law could affect between 300 and 400 subdivisions within the state, and many more outside the state that sell to Virginians.
Currently, sales of unimproved lots in Virginia are regulated solely by the federal government under the Interstate Land Sales Full Disclosure Act. That law requires developers to file a document with the U.S. Department of Housing and Urban Development and to deliver a disclosure booklet called a property report to purchasers, but it offers no substantive "do's and do-not's" for developers.
Under the new Virginia law, developers of covered subdivisions must file a notice of their intention to sell or lease land with the state's real estate commission. The notice must include a listing of any violations, bankruptcies or disciplinary actions in which the principals and officers have been involved in the last 15 years.
The state law will require developers to set up methods to protect installment buyers from losing any money paid for lots before deed is delivered. Most of these contracts require the purchaser to make monthly payments for a specified period of time, often 5 to 10 years, with a promise from the developer to deliver a deed only after the last payment is made.
Typically, a land sales installment contract purchaser has only and equitable interest in the lot during the time he or she is making monthly payments to the developer, and this interest can easily be defeated by the developer's mortgagees and creditors.
The real estate committee was unanimous in the opinion that land sales installment contracts are often an unreliable method of purchasing land.
The most significant safeguard in the law is the requirement that the developer either escrow purchase money until a deed is delivered to the buyer or the purchaser or developer defaults. Otherwise the title can be placed in trust under an agreement acceptable to the commission or a bond or irrevocable letter of credit can be posted - payable to the commission.
It is likely that none of these options will be particularly appealing to developers and that sales by installment contracts will be effectively curtailed.
The law also requires that a developer of a covered subdivision establish a property owners' association prior to selling his first lot. Certain steps are required to be taken regarding the control, management and ownership of the association and the common facilities.
Most significant is the requirement that the developer transfer to the association the ownership of all common facilities for which a use or maintenance fee is charged and that this transfer be without additional charge to the association. Under the law, the property owners' association is to be given title either when 75 percent of the lots are sold or when all the amenities are completed, whichever comes first.
The Virginia law gives the real estate commission broad investigatory and enforcement tools, including to power to issue cease-and-desist orders and to initiate court action to enjoin violations of the law.
Sales to home builders and sales of a lot with a home to be completed on it by the seller within a two-year period are not covered by the law. The sale of a condominium unit registered under the Virginia Condominium Act is also exempt.
Jon A. Kerr is a Washington lawyer.