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Florida Appellate Court Upholds Ruling that Budget Change Does Not Allow a Buyer to Cancel Contract

June 12, 2008

Florida Appellate Court Upholds Ruling that Budget Change Does Not Allow a Buyer to Cancel Contract

June 12, 2008

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Court Adopts Objective Test to Determine Material Changes

On June 11, 2008, Florida's Fourth District Court of Appeal in D & T Properties, Inc. v. Marina Grande Associates, Ltd. affirmed the trial court's ruling that a purchaser of a condominium unit did not have a right to cancel a purchase agreement as a result of a 36% increase in the condominium association budget, although the appellate court rejected the trial court's reasoning and adopted an objective test to determine whether changes to a condominium offering are material and adverse, entitling a purchaser to cancel a contract.

The Florida Condominium Act permits a purchaser of a condominium unit to cancel a purchase agreement within 15 days of receiving from the developer "any amendment [to the condominium documents] which materially alters or modifies the offering in a manner that is adverse to the buyer." Upon receipt of an amended condominium association budget that increased annual expenses by 36% as a result of an increase in insurance, utility and cable costs, the purchaser of a condominium unit sought to cancel its purchase agreement on the basis that the change in the budget was a material and adverse change. The trial court held that the purchaser did not have a right to cancel the purchase agreement as a result of the increase in the condominium association's budget, basing the decision on the fact that the buyer had the financial ability to pay the increased assessments and, therefore, the increased budget and associated increase in condominium association assessments was not a material and adverse change. The appellate court affirmed the trial court's decision that the buyer did not have a right to cancel the purchase agreement, but held that the subjective test employed by the trial court that examined the financial ability of the buyer to pay the increased assessments was incorrect and adopted an objective standard to determine if an amendment amounts to a material alteration or modification allowing a purchaser to cancel a purchase agreement. The objective test announced by the court is whether a "reasonable buyer under the purchase agreement [would] find the change to be so significant that it would alter the buyer's decision to enter into the contract?"

Recognizing that the 2007 legislative change to the Condominium Act relating to changes in the budget was a clarification of existing law, the appellate court held that increases in insurance and utility expenses which are beyond the control of the developer are not "amendments" under the Condominium Act that give rise to a purchaser's right to cancel a purchase agreement. In addition, the court applied the objective test to determine that the increased cable costs that were the result of a change in the cable package from basic cable service to a multimedia system including cable, Internet and phone service and increased the buyer's costs by $90 per month was not a material change. In determining that the increased costs related to cable were not a material change, the court recognized that the increase in cable costs was only approximately 18% of the original monthly assessment amount, and that the annual budget increase amounted to only .21% of the purchase price of the unit.

The court's holding recognizes that the developer does not bear all the risk of escalating expenses that are outside the developer's control where the original budget was prepared in good faith and reflects accurate estimated amounts.

A copy of the court's decision in D & T Properties, Inc. v. Marina Grande Associates, Ltd. can be found at http://www.4dca.org/opfrm.html and by clicking on 6-11-2008.

For Further Information

If you have any questions about this Alert or would like more information, please contact Jeffrey R. Margolis, any other member of the Real Estate Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.