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Hotel Condominium Not a Security

August 30, 2013

The Ninth Circuit Court of Appeals has affirmed the dismissal by a lower court of a lawsuit which claimed that the sale of condominium units in a hotel, together with a “rental management agreement,” constituted the sale of securities. An Amici Brief filed by the Real Estate Roundtable and NAR was cited by the Court in its decision.  The lawsuit was brought by purchasers of condominium units at the Hard Rock Hotel San Diego against its developer, operator, and real estate broker. The suit claimed that the purchase of a condo and a rental management agreement constituted a sale of securities or an investment contract, and was not in compliance with federal and state securities laws.

The District Court held, and the Appellate Court affirmed, that the Plaintiffs failed to show that the purchase contracts and rental management agreements were offered as a package, and also failed to prove their assertion that the only use for the condominium units was as investment properties.  Investment contracts depend on the “economic reality of [a] transaction,” stated the court, further explaining that “so long as money is invested in a common enterprise with profits anticipated by virtue of others’ work,” one may exist.  Plaintiffs failed to show this was the case.  As a result, the condominium unit sales are not securities, and the lower court’s dismissal of the suit was proper. 

For a fuller analysis, please read the NAR Legal Department article on the ruling.