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Enfield v. FWL Inc.

Decided: March 14, 1991.


Callinan, J.s.c.



The issue before the court is whether the remedy of rescission of a contract for the failure of the developer to provide to the buyers of a condominium unit a Public Offering Statement as required by N.J.S.A. 45:22A-26(a)(2) is compulsory under N.J.S.A. 45:22A-21 et seq. "The Planned Real Estate Development Full Disclosure Act". The court, recognizing that rescission is an enunciated remedy under New Jersey law in specific instances, holds that rescission is neither mandated by the statute, nor the appropriate remedy under the facts in the instant case. The unjustified and unexplained passage of time that transpired before initiating suit, together with the statutory bias toward money damages, bars rescission here. The appropriate remedy would be to award double damages to successful plaintiffs pursuant to N.J.S.A. 45:22A-37(a) for failure to provide a Public Offering Statement in violation of N.J.S.A. 45:22A-26(a)(2). The critical question, however, in the instant matter is whether plaintiffs' action for statutory damages other than rescission is barred by laches. This court holds that plaintiffs are not precluded.

The plaintiffs, Eugene A. Enfield, Sr. and Ada A. Enfield, husband and wife, are the contract purchasers of Unit # 210 of the Four Winds Condominium located in Wildwood Crest, New Jersey. The defendants are FWL, Inc., a New Jersey Corporation which is the developer of the Four Winds Condominium and Mr. Furey W. Lerro, president secretary, sole director and registered agent of FWL, Inc.

The transaction, which is the basis for this lawsuit, began with a visit by the plaintiffs to the condominium site in May of 1986, at which time plaintiffs inspected the property. Upon returning to their home located in Edison, New Jersey, the plaintiffs agreed, by telephone, to purchase the subject unit for

$68,000.00. Defendants-sellers took back a purchase money mortgage in the amount of $61,000.00. The entire transaction, including the closing which took place on July 10, 1986, was conducted by telephone or through the mail.

At the time this action was initiated plaintiffs had paid a total of $30,112.61 through December 31, 1989 in connection with unit # 210 representing the downpayment, closing fees, payments on the mortgage and carrying expenses. The unit or what is locally described as a "condotel unit" was advertised and sold by defendants as an investment property. After purchase, the unit was owned and maintained by plaintiffs as an investment property and reported on plaintiffs' Federal Income tax returns as a depreciable asset of a business called "E & A" Rentals. (The $30,112.61 in expenditure previously referred to represents net loss after deducting income.) Although the defendants have not conceded this sum, they are unable to contest the amount. This total would be a proper element of damages to be considered in the event the proofs support the thesis that plaintiffs losses were occasioned by the violation of statute. That connection, however, was not established.

It is clear that plaintiffs intended both to use the unit for residential purposes and to rent it out to others at times when they were not using it themselves. They did this in order to defray the costs of this shore property second home. It is easy to conclude that the property was not intended nor operated as a profit-making venture. Some unit owners don't rent at all. It's a matter of preference.

Defendants question whether the Act even applies to plaintiffs' unit. "Unit" as defined in the Act is "any apartment or structure intended primarily as a residence." (emphasis supplied.) N.J.S.A. 45:22A-2(c). The definition requires the unit to be used "primarily as a residence." The unit was used by both plaintiffs and renters as a residence. The fact that the unit was rented does not result in it losing its character as a

residence. The Act does not speak to the use of the unit as a "primary" residence and being a consumer protection statute, it should not be so narrowly construed.

During the fall of 1988, plaintiffs discovered they were entitled to receive a Public Offering Statement detailing the terms and conditions of ownership of a Four Winds condominium unit. The complaint initiating this action was not filed until one year later on November 6, 1989. The developer, it appears, had retained a unit for himself which unit the plaintiffs had thought to be a "manager's office". Plaintiffs main complaint is that the failure to inform the plaintiffs that the manager's office of the condotel was not a common element is a material nondisclosure and they now seek to rescind the contract. Pursuant to N.J.A.C. 5:26-6.6(a)(7), plaintiffs claim they have the absolute right to rescind the agreement, as well as the right to double damages and attorney's fees.

The body of law governing the sales of condominium units within the State of New Jersey is N.J.S.A. 45:22A-21, et seq., cited as "The Planned Real Estate Development Full Disclosure Act" (hereinafter referred to as "the Act"). The specific provision of the Act relevant here is N.J.S.A. 45:22A-26(a)(2), which provides:

No developer may dispose of any lot, parcel, unit or interest in a planned real estate development, unless he . . . delivers to the purchaser a current public offering statement, on or before the contract date of such disposition.

N.J.S.A. 45:22A-28, together with the Administrative Code, N.J.A.C. 5.26-4.2 and N.J.A.C. 5.26-9.1, enumerates the information which must be contained in the Public Offering Statement to fairly apprise the prospective purchaser "of the development and the lots, parcels, units or interests therein offered, and . . . all unusual or material circumstances or features affecting the development." N.J.S.A. 45:22A-28(a). In addition to the specific items to be included in the Public Offering Statement, N.J.A.C. 5.26-6.6(a)7 requires that every agreement for the purchase of an interest in a planned real estate development

contain a statement wherein the purchaser acknowledge that they received a copy of the Public Offering Statement.

Defendants are unable to produce an agreement acknowledging the receipt of the Public Offering Statement. Plaintiffs, therefore, request that the purchase of Unit # 210 from defendants be rescinded, pursuant to N.J.S.A. 45:22A-37(b) which provides:

b. The court may, in addition to remedies provided herein, frame such other relief as may be appropriate under the circumstances. If the purchaser shall fail in establishing a cause of action, and the court further determines that the action was wholly without merit, the court may award attorney's fees to the developer.

Defendants concede that they have no clear recollection of the transaction involving plaintiffs and rely upon the assertion that it was their practice to present every prospective purchaser with a copy of the Master Deed and Public Offering Statement upon the receipt of a refundable deposit, or failing that, upon the execution of the purchase agreement.

In argument, as well as in their submissions, defendants have focused on the appropriateness of the remedy rather than contesting the inadvertent violation of the Act. Plaintiffs' assertions are definite. The defendants' lack of specific recollection in conjunction with their inability to produce any document containing plaintiffs acknowledgment of the receipt of the Public Offering Statement compels the conclusion that a Public Offering Statement was not provided to plaintiffs.

Defendants' counter-arguments to excuse their failure to comply with the Act are briefly noted here. Defendants counter that it was plaintiffs' failure to conduct this transaction in a customary manner that resulted in the nonreceipt of the Public Offering Statement. Additionally defendants contend that if plaintiffs had referred to the Master Deed, referencing both their unit deed and title policy, they would have learned the status of the manager's office. The "ifs" multiply. If the plaintiffs had executed a purchase agreement, they would have seen that they were entitled to receive a Public Offering

Statement. If plaintiffs had paid their deposit in person, they would have received a Public Offering Statement. Instead plaintiffs, relying upon Mrs. Enfield's experience as a real estate agent, completed the settlement through the mail without the assistance of legal counsel. Simply stated, the court rejects any defense predicated on plaintiffs' alleged lack of due care. The Act was clearly meant to be consumer-oriented and therefore these defenses merit little consideration.

Statutes mandating or requiring the delivery of a Public Offering Statement by a developer to a purchaser in connection with the sale of a unit in a subdivision, condominium or planned real estate development are consumer oriented and remedial in nature. DiSandro v. Makahuena Corp., 588 F. Supp. 889, 893 (D.Hawaii 1984); Rockefeller v. High Sky, Inc., 394 F. Supp. 303, 304 (E.D.Pa.1975); Dorchester Development, Inc. v. Burk, 439 So. 2d 1032, 1035 (Fla.App.1983); Schatz v. Jockey Club Phase III, Ltd., 604 F. Supp. 537, 542 (S.D.Fla.1985); Kruse v. Holzer, 34 Ohio App. 3d 356, 518 N.E. 2d 961, 963 (1986). These statutes should be construed to carry out their legislative purpose. Riotto v. Van Houten, 235 N.J. Super. 177, 561 A.2d 1168 (App.Div.1989) aff'g, 235 N.J. Super. 162, 561 A.2d 691 (Law Div.1988).

Regardless of how the transaction was completed, defendants argue that rescission is not an appropriate remedy relying upon N.J.S.A. 45:22A-37(a) which provides:

a. Any developer disposing of real property subject to this act, who shall violate any of the provisions of section 6 hereof, or who in disposing of such property makes an untrue statement of material fact or omits a material fact from any application for registration, or amendment thereto, or from any public offering statement, or who makes a misleading statement with regard to such disposition, shall be liable to the purchaser for double damages suffered, and court costs expended, including reasonable attorney's fees, unless in the case of an untruth, omission, or misleading statement such developer sustains the burden of proving that the purchaser knew of the untruth, omission or misleading statement, or that he did not rely on such information, or that the developer did not know and in the exercise of reasonable care could not have known of the untruth, omission, or misleading statement.

Also defendants rely on the decision in Ray v. Beneficial Finance Co., 92 N.J. Super. 519, 224 A.2d 143 (Ch.Div.1966), wherein the court held that if it is determined that rescission is the appropriate remedy in an action, the parties must be returned to status quo ante. Defendants maintain that they cannot be returned to status quo ante. The formula to put the parties back in that position would have to take into account the use and enjoyment and the tax benefits derived by plaintiffs over the past three and a half years. These calculations involving the recapture of depreciation and recalculation of tax liabilities would be painfully complex. Defendants suggest that the dramatic turn of events that has occurred in the real estate market over the past year also mitigates against rescission being employed by a court of equity. More to the point, defendants correctly assert that the plaintiffs have produced no evidence to enable the court to complete those calculations.

The legislative history of the act is relevant. The act as originally introduced as Senate Bill # 148 reads:

In addition to any other remedies and at the discretion of the court, the purchaser, under the preceding subsection, may recover the consideration paid for the lot, parcel, unit, or interest in the development together with interest at the rate of 6% per year from the date of payment, property taxes paid, costs, and reasonable attorneys fees less the amount of any income received from such lands upon tender of appropriate instruments of reconveyance.

The Senate State Government, Federal Interstate Relations and Veterans Affairs Committee amended this provision to read:

The court may, in addition to other remedies provided herein, frame such other relief as may be appropriate under the circumstances. . . .

An explanatory comment accompanied the bill. It states in pertinent part:

This bill, sponsored by Senator Fay, is designed to be a companion measure to P.L. 1975, c. 235 (C.45:15-16.3 et seq.) the 'Land Sales Full Disclosure Act'. The 'Land Sales Full Disclosure Act' regulates the sale of land through promotional plans outside the State of New Jersey. The bill presently under

consideration would regulate disclosure of the disposition of real estate within the State of New Jersey.

The bill provides for recovery of damages and penalties. The recovery of damages section was amended so that rather than a detailed rescission formula as specified in the original language, a purchaser who brings a successful action would be awarded double damages. . . ." 45 N.J.S.A. 1990 Supplement p. 102.

The Land Sales Full Disclosure Act mentioned above provides in N.J.S.A. 45:15-16.21(a)2:

No person may dispose or participate in the disposition of any interest in subdivided lands unless a current public offering statement is delivered to the purchaser and the purchaser is afforded a reasonable opportunity to examine the public offering statement prior to the disposition. Failure to deliver such public offering statement shall result in automatic rescission of any contract entered into at the discretion of the purchaser.

The Land Sales Full Disclosure Act also provides that in addition to any other appropriate legal or equitable remedy the court shall award double damages and attorney's fees. N.J.S.A. 45:15-16.23a. The Assembly Committee recommended a reduction of the 10-day "cooling off" period in Section 6b to 7 days in order to make the bill consistent with the "Land Sales Full Disclosure Act." 45 N.J.S.A. 1990 Supplement p. 103.

The comments to Senate Bill # 148 state that the New Jersey Planned Real Estate Development Full Disclosure Act is patterned after the [Model Land Sales Practices Act, 7A Uniform Laws Annotated 669 (1985)] and the Retirement Community Full Disclosure Act, N.J.S.A. 45:22A-1 et seq. Specifically, Section 21 of the Act, N.J.S.A. 45:22A-41, extends its provisions to any retirement subdivision or community as defined by the Retirement Community Full Disclosure Act, N.J.S.A. 45:22A-1 et seq. The ...

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