Condo Rental Programs Are Not Investment Contracts
In an intriguing case out of the United States District Court for the Western District of Missouri, a plaintiff’s purchase of condominium units with an option to participate in the rental program did not involve an investment contract under either the federal or Missouri securities laws. The court, thus, dismissed the plaintiff’s securities claims.
The court believed that the purchases of these condos with rental options did not rise to the level of an investment contract requiring adherence to the securities laws. In particular, the court considered if the transaction qualified as an investment contract, analyzing if there was an investment of money, common enterprise, and the reasonable expectation of profits to be derived from the efforts of others, among others things. The court focused on the uncertainties of both vertical and horizontal commonality required under the common enterprise element test. In determining that there was a lack of horizontal commonality, the court found that the plaintiffs were not sold securities. The court also noted that there was no requirement to participate in the rental program as well.
As such, this interesting case has effects in both the real estate and securities markets that have suffered greatly during the recession. This decision may lead to an increased use of these types of programs.