New-Home Contracts Tend to Favor Developers
A new-home developer’s sales contract could be “pretty onerous” and protect the builder over the buyer. A closing date may be stated but not guaranteed, for example. Buyers should read the fine print and consider asking a lawyer to look it over before signing.
MIAMI – Purchase contracts with developers are typically one-sided in favor of the developer, and homebuyers must be aware of what they are agreeing to before they sign any contract, attorneys say.
Buyers who signed deals for houses or planned houses in Coconut Grove with Drive Development’s Doug Cox and his partner Nicole Pearl through their company, Send Enterprises LLC, have been stuck in a holding pattern for years as Cox has postponed closing dates and failed to acquire certificates of occupancy so they can move in.
“It is not unusual for developer contracts to be pretty onerous and contain protections for the developer over the buyer,” said Dennis Eisinger, managing partner at Eisinger Law in Hollywood. As an expert in real estate law, he represents buyers, homeowners’ associations and developers. “It is a contractual relationship that is apples and oranges different from buying a resale within 45 days. These skewed contracts can open the door for bad faith.
“That’s not to say buyers have zero options, but they must be cautious before signing a deal with a developer.”
The language in a contract, or purchase agreement, such as the one Cox’s customers signed, can leave little recourse for a buyer who has a conflict with a developer. If the buyer can’t seek specific performance by the developer, there can be unlimited leeway for delays.
“It’s not unusual for the developer to include anticipated closing dates but provide no guarantee,” Eisinger said. “Case law only says that date must be ‘reasonable.’”
Although Cox’s buyers are “boxed into an unfortunate situation,” Eisinger said, a group of buyers engaged with a developer can always “join forces to take action, minimize legal fees and see what claims can be made to defeat any possible conduct unbecoming of a developer.”
Steps to take to protect yourself
- First thing a buyer needs to do is research the developer. What is their track record? What is their contractors’ record? Ask about their financing. Discuss definite deadlines. Make sure the developer shows you previous projects. Talk to those homeowners.
“I tell buyers they have a better shot at a fair deal and reliable closing date with a big-name developer who has a history of delivering,” said Eisinger, who also teaches courses on condo and community development law at the University of Florida.
- If the house is in the city of Miami, go onto the city’s iBuild website, create an account, and check reports on the developer’s other projects. Other cities have similar websites.
- Have a lawyer review the contract. Don’t be fooled by dense boilerplate language.
- Never get too attached to a house, or the stunning plans for one. That is easier said than done, but think of the house as an investment, possibly the biggest investment of your life. You’re making a business transaction, not starting a romance.
A Send Enterprises purchase agreement filed as Exhibit A in lawsuits against the company was examined by the Herald and real estate attorneys. One buyer, Jonathan Schonfeld, waited two years for his $1.38 million townhouse at 2986 Coconut Ave. to be delivered after putting down a $415,000 deposit and signing a contract on July 8, 2020. The contract set a completion date of Sept. 1, 2020, and an “outside date” for a certificate of occupancy and closing within six months, or by March 1, 2021. At the time he signed, the house “was constructed, with only the finishing touches remaining,” the suit states.
Schonfeld sued Send Enterprises and Cox on July 8, 2022, for breach of contract because, he argued, Send and Cox “repeatedly lied” by promising to complete the house “imminently,” and “refuse to finish construction, obtain proper permitting from the city of Miami, and set a closing date,” Miami-Dade court records show.
In the suit, Schonfeld asked for damages, including rent “in one of the most expensive home rental markets in the country,” storage costs and the loss of a mortgage interest rate of 2 percent that had increased to 6 percent. He alleged “fraudulent inducement.” He demanded that Send “specifically perform all its obligations.” He requested that a lien be placed on the property.
But the lawsuit was dismissed and sent to mediation, as required in the contract. No one can discuss how it was resolved because they had to sign non-disclosure agreements.
Contract clauses to watch out for
Note the following key points in the Send Enterprises agreement, which was written in the developer’s favor, lawyers say:
The buyer waives his rights. The contract protects the seller, not the buyer. When the buyer surrenders the right to seek specific performance, the buyer cannot compel the developer to deliver the finished house. Completion dates, closing dates and deadlines that appear in the contract are rendered meaningless.
Any dispute must go to mediation. Neither seller nor buyer may seek a jury trial or damages.
“Dispute must first go to mediation for no more than 90 days and if not settled it will be settled by binding arbitration before a single arbitrator. In no event shall the arbitrator have the authority to make any award that provides for punitive or exemplary damages.”
Said Eisinger: “Mediation is fine but if it doesn’t resolve the dispute, the buyer should have the option of litigation as a default remedy if the developer doesn’t close within a reasonable time.
“It is typical for the developer to say ‘No trial.’ He does not want to go before a jury that would be sympathetic to the buyer and not the big, bad developer.”
Deposits may be spent by the seller. Pearl and Associates, the law firm run by Nicole Pearl, Doug Cox’s business partner and girlfriend, holds the buyer’s deposit as per an escrow agreement with Cox. But that invites a conflict of interest. The buyer’s deposit would be more secure if it were held in escrow by an independent third party.
“Deposits may be utilized by the Seller … All interest earned on Buyer’s deposits shall accrue solely to the benefit of Seller.”
Said Eisinger: “The developer often wants to use deposits for construction. I caution my buyers to require that the first 10 percent be put in escrow. You never know what might happen with the developer or the economy.”
The buyer comes second in line behind the seller’s lenders. The seller’s first obligation is to his lenders, and to paying off his mortgages. The seller must release those debts to clear the title. The buyer agrees to be “subordinate.”
“Buyer agrees that any and each Developer’s Lender will have, until closing, a mortgage on or other interest in the Property, with greater priority than any rights or interest Buyer may have therein, if any, pursuant to this Agreement or under any principal of equity or otherwise. At closing, Seller shall cause the then applicable mortgages to be released as an encumbrance against the Property and may use Buyer’s closing proceeds for such purpose … Buyer’s rights and interest under this Agreement (and the deposits made hereunder) will be subordinate to all mortgages, mezzanine and any other forms of financing … affecting the Property …”
Eisinger said: “That provision is necessary for the developer’s lender. In a developer’s sale, the lender isn’t going to give a loan without that language in the contract.”
The buyer can’t place a lien on the property.
“Buyer agrees not to seek to impose any type of lien or claim upon the Property and any such right is waived by the Buyer.”
Said Eisinger: “I’m not sure that provision is enough to prohibit placing any claim against the real estate, which would prevent the developer from selling it. You would be denying some basic rights to pursue a grievance.”
One provision Eisinger tells his clients to insist upon is the right of the prevailing party to recover attorney’s fees from the losing party in any dispute.
“It puts the buyer on stronger legal footing with the developer,” he said. “It evens the playing field.”
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