Recently, a lot purchaser in the panhandle of Florida legally challenged such a build-out provision in its sales contract. In the case of Sandpiper Development and Construction Inc. v. Rosemary Beach Land Company, decided July 29, 2005, the 1st District Court of Appeals upheld the trial court's decision on the challenge.
In this case, Sandpiper Development and Construction Inc. (Sandpiper) entered into a contract to purchase a lot for $95,000 from Rosemary Beach Land Company (Rosemary Beach). The contract required the owner to commence construction of a home on the lot within three years from closing and to complete construction within six years. If the owner failed to do so within the time frames, the contract said Rosemary Beach could repurchase the lot for the original purchase price plus the actual cost of any improvement constructed on the lot.
When the home was not built in the required time, Rosemary Beach sued Sandpiper seeking specific performance of the contract to require Sandpiper to transfer the lot back to Rosemary Beach. Sandpiper defended, asserting that the contract provisions violated the rule against unreasonable restraints on the alienation of property. The trial court entered summary judgment ruling in favor of Rosemary Beach to get the lot back.
In reviewing the trial court decision, the 1st District Court of Appeals went through past similar Florida court decisions in determining whether the contract provisions violated the rule against unreasonable restraints on alienation of property.
The 1st District Court of Appeals said that: "In general, restrictions and encumbrances on the alienation of property are disfavored, subject to certain exceptions recognized by the courts. When determining the validity of restraints on alienation, courts must measure such restraints in terms of their duration, type of alienation precluded, or the size or class precluded from taking"
The District Court then referred to a Florida Supreme Court case where the Supreme Court said it "recognized that an option restraint is generally accepted as reasonable if the option price is at market or appraised value regardless of the duration of the option. Additionally, it is generally accepted that a fixed price repurchase option of unlimited duration is an unreasonable restraint because it discourages any improvements of the land by the existing property owner."
The District Court then said that the contract provisions in this case can be fairly interpreted to encourage improvements, if the buyer can comply. However, Sandpiper argued that the contract language discourages investments because once a buyer decides it is impossible to commence timely construction, it is useless to make improvements because the buyer will only recover its direct costs on the improvements.
The District Court noted that Sandpiper could have greatly profited if it had commenced and finished a home within six years as the lot values had dramatically increased but that such increase is not per se evidence of any unconscionable practice or result.
Sandpiper then argued that the provision unreasonably restrained its ability to alienate the property because Rosemary Beach prevented Sandpiper from selling the property to ensure that Rosemary Beach obtained the property through the repurchase provision. Therefore, the restraint on alienation prevented Sandpiper and prospective buyers from increasing the value of the property and did not serve to encourage property improvements.
The District Court said that although the contract restraint provides for a fixed price option of "limited" duration, it does not compel a finding that the restriction is reasonable. "While the option is of a short duration, the provision eliminates Sandpiper's ability to alienate the property for a fair market price for up to 6 years. The option here completely restrains the buyer from alienating the property. Sandpiper received ever increasing offer to purchase the lot, including an offer of $550,000 (over five times the original purchase price). Sandpiper attempted to convince Rosemary Beach to match the offer, to no avail. Rosemary Beach insisted on its repurchase rights. Thus, the repurchase option restrained the alienation of the property to anyone other than Rosemary Beach."
Sandpiper then argued that once the three years passed and the home was not commenced, it had no incentive then to improve the property as it would only get its direct improvement costs and original lot price back, thus discouraging improvements and preventing alienation.
In conclusion the District Court found that: "On balance, we do not find that the repurchase option here is an unreasonable restraint on the alienation of property . . . The purpose of the option here is legitimate, the duration is of a reasonably short period, and the price alone does not invalidate the overarching legitimate rationale to control the pace of development of the community."
Thus, buyers with such build-out provisions in their contracts (especially investor buyers) must beware: build it or lose it (the equity).
Rob Samouce, a principal attorney in the Naples law firm of Samouce, Murrell, & Gal, P.A. concentrates his practice in the areas of community associations including condominium, cooperative and homeowners' associations, real estate transactions, closings and related mortgage law, general business law, estate planning, construction defect litigation and general civil litigation. This column is not based on specific legal advice to anyone and is based on principles subject to change from time to time. Those persons interested in specific legal advice on topics discussed in this column should consult competent legal counsel.