An individual or a company can obtain approvals from local and state authorities to subdivide a piece of land, to build upon the lots and then sell residential homes. In many, but not all instances, the person or entity who obtains the approvals is the same person or entity that builds on and sells the house lots. However, if the original developer steps away from the development before all of the lots are sold to consumers, then anyone who buys the subdivision to develop it and sell the residential lots needs to understand the role which the Consumer Protection Bureau of the New Hampshire Attorney General’s Office (“the Bureau”) plays in the regulation of the subdivision.
The purpose of the Land Sales Full Disclosure Act (“the Act”) is to prevent fraud in the sale of house lots in New Hampshire. Specifically, the Act calls for subdividers who have more than fifteen (15) lots to seek approval from the Bureau before offering or disposing of the lots. The Bureau review leading up to the approval will examine, among other things, whether the developer has adequate funding to construct improvements such as roads and whether the promotional plan provides full and fair disclosure to a buyer of a lot. The New Hampshire Supreme Court, in a case decided on October 16, 2018, provided some guidance on the role of the Consumer Protection Bureau, but buyers of the subdivision still need to exercise caution before proceeding with the sale of house lots.
The case, San-Ken Homes, Inc. v. New Hampshire Attorney General Consumer Protection Bureau is a factually complicated case, but a synopsis of the case is as follows:
- In 2006, after obtaining the relevant approvals from the Town, 112 Chestnut LLC (“Chestnut”) sought approval from the Bureau to develop a sixteen (16) lot subdivision. The Bureau approved the proposal.
- Chestnut represented to the Bureau that a private roadway would be constructed to access the house lots, that the road would be constructed to town standards and secured by a letter of credit and that the obligation to construct the roadway would survive the closing on the lots sold to the consumers.
- Subsequent to receiving its approval from the Bureau, Chestnut did construct the road, but the road did not meet town standards. Also, seven (7) of the house lots were sold, and the letter of credit securing the road construction expired.
- Chestnut defaulted on its mortgage and the remaining nine (9) lots were acquired by the bank.
- In 2014, San-Ken Homes, Inc. (“San-Ken”) purchased the nine (9) lots from the bank. After some negotiation with the Town and after the Town eliminated its original requirement that the road construction be bonded to ensure it was constructed to town standards, San-Ken ultimately agreed to construct the remainder of the road and it received building permits for the nine (9) lots.
- San-Ken then sought approval from the Bureau to sell the lots. The Bureau refused to approve the sale of lots, citing that because a road bond was required as part of the original town approval and, because of the Bureau’s interpretation of its own administrative regulations, that the absence of a road bond was fatal to the request to approve the sale of the remaining lots. The Bureau indicated that to do otherwise would be unfair to the seven homeowners who bought their homes pursuant to a promise that the road would be constructed to town standards. The Bureau also noted that it would not have granted the original approval to Chestnut had a road bond not been in place.
- San-Ken did post the bond and ultimately proceeded with construction, but reserved the right to contest the Bureau’s action.
- The dispute between San-Ken and the Bureau was brought to the Superior Court.
- The Superior Court found that San-Ken was a successor subdivider to Chestnut, meaning that it required Bureau approval to market the lots consistent with the original developer’s approval. The Superior Court further found that the Bureau had the authority to require that a road bond be posted by San-Ken prior to receiving Bureau approval to sell the lots.
- The Supreme Court reviewed the Superior Court decision, and assumed but did not decide that San-Ken was a “subdivider” as that term is defined under RSA 356-A. However, the Supreme Court held that San-Ken was not a successor subdivider and that San-Ken’s obligations under the statute run prospectively to future home buyers of the nine (9) lots which San-Ken bought from the bank.
The decision is helpful in that it provides clear guidance that the obligations of the original developer cannot automatically be imposed on the new developer because it is not a “successor subdivider.” However, questions remain on how the Bureau’s approval process is intended to work.
The Court assumed but did not find that San-Ken was a subdivider and therefore subject to the same level of review done by the Bureau for the Chestnut proposal. Further disputes may arise as to who actually is a subdivider, particularly where the original developer only sells off one or two lots at a time for further development. Given that the underlying purpose of the Land Sales Full Disclosure Act is to provide information to consumers and to prevent consumer fraud, it is reasonable to expect that the question of the definition of “subdivider” and thus the extent of Bureau’s authority, will be determined based on the facts of individual cases.
If you are a builder or developer, you may wish to contact an attorney to determine whether you need Bureau approval for your proposed activity.