Construction Defect

Branches Decision Overturned as it Violates Public Policy

Published on: June 9, 2020 | by Steven J. Tinnelly, Esq.

*New Case Law

In the case of Aldea Dos Vientos v. CalAtlantic Group, Inc., the Second District Court of Appeals overruled the Fourth District’s previous holding in Branches Neighborhood Corp. v. CalAtlantic Group, Inc. The Branches case found that homeowners associations forfeit their rights to pursue construction defect claims unless their members first vote to approve such legal action in accordance with their CC&Rs. The Branches decision was overturned upon the finding that developers cannot use the CC&Rs to veto claims made against them. The Court of Appeals held that such use of the CC&Rs not only violated public policy, but also Senate Bill No. 326, as codified by California Civil Code, section 5986(b).

Factual Summary

A condominium project in Thousand Oaks, Aldea Dos Vientos (“Association”), brought suit against CalAtlantic Group, Inc., the successor to the developer of the Project (“Developer”). The trial court stayed the lawsuit on the parties’ agreement to participate in mediation and then arbitration. When mediation was unsuccessful, the Association subsequently filed a demand for arbitration. After the demand was filed, the Developer cited to the Association’s CC&Rs at Section 7.01B to raise a defense. Section 7.01B required the Association to first obtain a membership vote in excess of fifty-one percent (51%) prior to commencing arbitration. The Association admitted it had not obtained the required vote.

In response, the arbitrator stayed the arbitration to allow the Association to petition the trial court to review this issue of arbitrability. In the meantime, the Association obtained membership approval to continue with arbitration from over ninety-nine percent (99%) of its members. The trial court denied the Association’s motion on the grounds that arbitrability was a matter for the arbitrator to decide. The Developer then filed a motion to dismiss with the arbitrator for the Association’s failure to comply with the CC&Rs at Section 7.01B. The arbitrator summarily dismissed the original demand for arbitration, and the trial court concluded that the arbitration constituted a final determination of the rights of the parties, so judgment was entered in favor of the Developer and against the Association.

Public Policy

In the Aldea Dos Vientos case, the Second District Court of Appeals vacated the lower court’s decision on the basis that the arbitrators exceeded their powers by issuing an award that contravenes an explicit legislative expression of public policy. More specifically, the Court of Appeals found that Section 7.01B of the CC&Rs violates public policy because it gives the Developer the unilateral power to bar an action against itself even though the Legislature clearly intended for housing to be free of substantial construction defects.

Furthermore, the Court of Appeals held that Section 7.01B of the CC&Rs, and any similar provision, is not just unreasonable but unconscionable. The Court stated, “[i]t gives the Developer veto power over the Association’s claims in spite of the members’ vote to proceed with the arbitration.” In sum, such a provision amounts to a trap for the unwary set by the Developer to bar claims against it. For these very reasons, the Second District Court of Appeals declined to follow its sister court’s ruling in Branches.

Senate Bill 326

The Court of Appeals also acknowledged that the Legislature has already found provisions, like Section 7.01B, to be unconscionable. Senate Bill 326 was enacted on August 30, 2019 and took effect on January 1, 2020. The bill added Civil Code, section 5986, subdivision (b) to the Davis-Stirling Act, which prohibits an association’s CC&Rs from limiting a Board’s authority to initiate legal proceedings against its Developer. The Civil Code applies retroactively to any CC&Rs with such limiting language.

The Second District Court of Appeals reversed the judgment in Aldea Dos Vientos on the additional grounds that the arbitrator’s decision to dismiss the original demand for arbitration was not on the merits, nor was the trial court’s judgment final. Furthermore, the arbitrator’s decision expressly stated that it did not directly impact the Association’s second demand for arbitration. Therefore, the Court of Appeals held that the arbitrator’s decision could not have resulted in a final judgment against the Association in the Aldea Dos Vientos case.

The Aldea Dos Vientos ruling is beneficial for homeowners associations across the state because it preserves their rights to bring construction defect lawsuits against developers regardless of language in the CC&Rs requiring prior membership approval. In any event, homeowners associations should always seek legal advice from attorneys that specialize in HOA law before commencing construction defect lawsuits to ensure their compliance with both state law and their governing documents.

-Blog post authored by TLG Attorney, Sarah A. Kyriakedes, Esq.

SB 326 Signed! Balconies, Branches, and Builder Defect Actions

Published on: October 10, 2019 | by Steven J. Tinnelly, Esq.

*New Legislation

Senate Bill 326 (“SB 326”) was recently enacted by the California Legislature and will take effect January 1, 2020. The bill accomplishes 3 main objectives: 1) it requires associations to conduct mandatory inspections for exterior elevated elements, such as decks, balconies, and walkways; 2) it invalidates and prohibits provisions in an association’s governing documents that restrict the board’s authority to initiate a legal proceeding against a developer for substandard construction; and 3) it requires an association to discuss with the membership the potential impacts of a construction defect action against the developer prior to the initiation of such an action.

Exterior Elevation Inspections

SB 326 introduces Civil Code Section 5551, which sets forth brand new requirements for associations with three or more multifamily dwelling units. For these associations, all exterior elevated elements that are supported in substantial part by wood or wood-based products, such as decks, balconies, stairways, and walkways, must be visually inspected every nine (9) years by a licensed structural engineer or architect (“Inspector”). The inspections are intended to determine whether the exterior elevated elements are in a generally safe condition and performing in accordance with applicable standards. These new requirements follow in the wake of a catastrophic balcony failure that resulted in a number of tragic deaths.

While the concept of visual inspections may sound fairly straightforward, the mechanics of the required inspections under Civil Code Section 5551 track unique and complex extrapolation protocols commonly employed in construction defect litigation. As a preliminary matter, not all elevated elements are required to be inspected. Rather, a statistician must be enlisted to prepare a randomized list of all the elevated elements qualifying for inspection (i.e. the total universe of those components that extend beyond the exterior walls of the building to deliver structural loads to the building from decks, balconies, stairways, walkways, and their railings, that have a walking surface elevated more than six feet above ground level, and that are supported in whole or in substantial part by wood or wood-based products). The randomized list must be prepared in such a way that the results of the inspections are representative of the project as a whole, within a margin of error of five (5) percent. This protocol allows for limited visual inspections (which will be a significant savings for the association), but provides confidence that those inspections are representative of the global onsite conditions.

Court of Appeal Upholds Pre-Litigation Arbitration Clause

Published on: July 2, 2019 | by Steven J. Tinnelly, Esq.

*Unpublished Opinion

We recently blogged about the importance of the the plain language of an association’s Declaration when following pre-litigation requirements to a construction defect claim. On March 18, 2019, the California Court of Appeal ruled that trial courts should not deny a homeowner of his right to submit a case to arbitration pursuant to the CC&Rs when there is a disagreement about whether the homeowner complied with the pre-litigation requirements. Instead, the dispute should be submitted to an arbitrator to make the final decision on whether the conditions precedent to arbitration have been satisfied. (See Baldwin v. Woodside 05s, LP, Case No. E06827 (Cal. Ct. App. March 18, 2019).)

In the case of Baldwin v. Woodside 05s, LP, several homeowners filed a lawsuit against a developer on construction defect claims. According to the development’s CC&Rs, homeowners were required to satisfy certain pre-litigation conditions before they were permitted to initiate lawsuits against the developers. For example, before filing a lawsuit, the CC&Rs stated that:

homeowners were required to give notice of the dispute to the developer;
homeowners were required to give the developer an opportunity to inspect and take corrective action;
the parties were permitted to agree to voluntarily mediation;
the parties were permitted to submit the dispute to binding arbitration; and
if mediation and arbitration failed, the parties were required to submit the dispute to a judicial reference.

In the Baldwin case, the homeowners did not satisfy the pre-litigation requirements. The homeowners filed a lawsuit against the developer, without providing notice or an opportunity to inspect, and then tried to compel arbitration and judicial reference through motions to the court. In response, the trial court denied both of the homeowners’ motions, and the homeowners appealed.

The Court of Appeal held that the homeowners were not permitted to appeal the trial court’s ruling in relation to their request for a judicial reference because the Code of Civil Procedure, section 906 only permits appellate courts to review verdicts that involve the merits of the case or that substantially affects the rights of a party. The Court of Appeal found that the decision to grant or deny a judicial reference does not involve the merits of a case. Therefore, the homeowners had no right to appeal and lost their opportunity to submit the matter to a judicial reference.

However, the Court of Appeal found that the trial court erred when it denied the homeowners’ motion to compel arbitration. The Court of Appeal held that while trial courts should determine whether parties agreed to be bound by an arbitration clause in the first place (i.e., the question of arbitrability), only arbitrators should rule on procedural questions, like whether a condition precedent to arbitration has been fulfilled.

Since there was no question that the Baldwin parties agreed to be bound by the arbitration provision in the CC&Rs, and the underlying construction defect claims fell within the scope of the arbitration provision, the trial court was required to grant the homeowners’ motion to compel arbitration. Although the trial court should have left the question of whether the homeowners satisfied the conditions precedent to arbitration to the arbitrators.

This case serves as a reminder that the California Supreme Court has a long-standing policy of upholding arbitration agreements. If the CC&Rs contain an arbitration provision, a homeowners association should have its legal counsel carefully review the related contractual requirements before commencing litigation in order to save significant legal fees and costs.

-Blog post authored by TLG Attorney, Sarah A. Kyriakedes, Esq.

Arbitrator Not Found to Exceed its Powers

Published on: November 6, 2018 | by Steven J. Tinnelly, Esq.

arbitration-judge It is well settled that an association’s CC&Rs (“Declaration”) establishes and controls, among other things, a board’s authority to govern an association provided that the CC&Rs do not conflict with California law and regulations (i.e., Davis-Stirling Act). In such cases, the plain language of the CC&Rs control. (Franklin v. Marie Antoinette Condominium Owners Assn. (1993) 19 Cal.App.4th 824, 829.) This was the case in Branches Neighborhood Corporation v. CalAtlantic Group, Inc. (2018), where Branches Neighborhood Corporation’s (“Association”) Declaration required the same to obtain a membership vote of fifty-one percent (51%) or more prior to the initiation of its construction defect claim (“Claim”) against CalAtlantic Group., Inc. (“Developer”).

In Branches, the Association properly followed all procedural requirements under California law in the initiation of the Claim, however, failed to obtain the prerequisite vote in accordance with its Declaration. Approximately two years after the initiation of the Claim, the Association obtained a membership vote in excess of fifty-one percent (51%), approving and ratifying the Claim. Taking into consideration these undisputed facts, the arbitrator assigned to the Claim granted Developer’s motion for summary judgment, holding that the “after the fact expression of consent cannot be transmuted into the prior consent required by the CC&Rs…when such a result would adversely impact the rights of a party to the agreement by which the CC&Rs were created…[t]he Developer is such a party.”

In its opposition to Developer’s motion to confirm the award, the Association based its argument on the theory that the arbitrator exceeded its powers under Code of Civil Procedure (“CCP”) § 1286.2(a)(4), which requires a court to vacate an arbitrator’s award if it determines that the arbitrator has exceeded its powers. Specifically, the Association argued that the arbitrator exceeded its powers by (1) depriving the Association of its unwaivable statutory right to affirmatively ratify the Claim, and (2) overriding public policy in favor of ratification. Both trial and appellate courts (collectively, “Court”) confirmed the arbitrator’s award.

The Court predicated its decision on the established foundation of the “Rule of Finality,” which in short, provides extreme deference to an arbitrator’s decision, subject to limited exceptions such as CCP § 1286.2(a)(4).

In support of its first argument, the Association provided the Court with several sections of the Davis-Stirling Act (“Act”) that provided the Association with the ability to retroactively ratify its actions, claiming that it is its “statutory right.” As such, the Association asserted that the provision in the Declaration that requires membership approval prior to the initiation of the Claim (“Provision”) is unenforceable as it waives said right. The Court quickly disposed of this argument because all the statutes mentioned by the Association provided the right to ratify only if a provision of the Act required an action to be approved by a majority vote. (See Civil Code §§ 4065, 4070.) Here, the Court found no provision of the Act that required the Association to obtain a majority vote prior to the initiation of the Claim, holding that “absent a specific requirement in the Act to hold an election, the association’s governing documents control.” Branches, at 6.

The Association then went on to argue that public policy supports its position due to the Legislature’s “clear pronouncement of public policy favoring ratification.” Branches, at 8. The Court disagreed with this proposition, stating that the Act was created to regulate the governance of homeowners associations, placing a system of checks and balances (“System”) against the Association and its board of directors (“Board”). The Court noted Civil Code § 6150 (requiring an association to provide notice to its members 30 days prior to the filing of a claim, unless such requirement would cause the statute of limitations to run) as an example of the System the Act is intended to establish. The Court found the Provision to go a “step further” by requiring the Association to obtain membership approval prior to the initiation of the Claim, as opposed to the mere requirement of providing notice of same. Id.

Retroactively approving the Claim went against public policy as it stripped Association members of their ability to “check” the authority of the Board (i.e., provide authorization to file the Claim); even if the members had the ability to disapprove the Claim, the Association would suffer damages in the form of legal costs and expenses already expended in the Claim, going further against the System, Act, and Declaration. Accordingly, the Court found no violation of public policy and thus, no violation committed by the arbitrator.

Branches emphasizes the importance of the plain language of an association’s Declaration. So long as the Declaration does not conflict with existing law (i.e., Act) and/or goes against public policy, the plain language of the Declaration controls, to which a homeowners association must strictly abide by.

It is of crucial importance for a homeowners association to thoroughly interpret, analyze and understand its authority under its governing documents, in particular, its CC&Rs, prior to the taking of any action in order to avoid unnecessary consequences. For the same reason, it is of equal importance for homeowners associations to obtain general legal counsel that specializes solely in HOA law and related matters to provide unfettered and sound legal advice from an objective perspective. Law firms that specialize in multiple areas of law (e.g., HOA and construction defect) may overlook certain provisions of an association’s governing documents and inadvertently guide associations in a direction that may prove to be detrimental, such as the outcome in Branches. For more information and guidance related to the interpretation and/or amending of CC&Rs and other governing documents, please contact us.

-Blog post authored by TLG Attorney, Andrew M. Jun, Esq.

Clarifying Attorney-Client Privilege in HOA Construction Defect Litigation

Published on: April 23, 2014 | by Steven J. Tinnelly, Esq.

*New Case Law

Civil Code Section 6150 requires that a homeowners association (“HOA”) make various disclosures to its membership in the context of construction defect litigation. The HOA is further required to hold a meeting of its membership to “discuss problems that may lead to the filing” of a construction defect action, as well as the options available to the members to address those problems.

Such a meeting will likely involve communications between the HOA’s construction defect attorney and individual members of the HOA whom are not the attorney’s direct clients. Therefore, the extent to which those communications are protected by the attorney-client privilege may be uncertain. Fortunately, the recent case of Seahaus La Jolla Owners Association v. La Jolla View LTD addressed this issue and clarified the privileged nature of communications between a HOA’s attorneys and its membership in the context of construction defect litigation…

Turning up the Heat on Residential Design Professionals

Published on: February 4, 2013 | by Steven J. Tinnelly, Esq.

*New Case Law hoa law firm residential design professionals architects.jpg

California’s 1st District Court of Appeal recently ruled that “design professionals” may be liable under both common law and Senate Bill No. 800 (“SB 800”) to third party purchasers for construction defects.

In Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP et al., the defendants (the “Architects”) had performed architectural and engineering services, as well as construction administration and construction contract management, for a 595 unit condominium project located in San Francisco. The plaintiff homeowners association (the “HOA”) alleged that multiple construction defects in the project were caused in part by negligent architectural and engineering design. Included in those defects was the presence of “solar heat gain” allegedly caused by the Architects’ approval of cheap and non-functional windows paired with a defective design that failed to provide for adequate ventilation within the units. During periods of high temperatures, the solar heat gain had rendered many of the units “uninhabitable, unhealthy and unsafe.”

The Architects successfully argued at the trial court level that they could not be held liable for the alleged defects because, under common law, the Architects owed no duty of care to third parties (to the HOA or its members). The trial court agreed, holding that the Architect could not be held liable for negligent design and that the HOA was required to show that the Architects had “control” in the construction process; the Architects had to have “assum[ed] a role beyond that of providing design recommendations to the [developer].” Accordingly, the trial court sustained the Architects’ demurrers and the HOA then appealed…

Legislative & Case Law Update (2013) Now Available!

Published on: January 7, 2013 | by Steven J. Tinnelly, Esq.

hoa laws Our annual “Legislative & Case Law Update” newsletter for the year 2013 is now available in our library!

The Legislative & Case Law Update provides an overview of the new legislation and case law impacting California Homeowners Associations (“HOAs”) as we head into 2013. The new legislation includes, among other items, bills that impact Bank foreclosures, the re-organization of the Davis-Stirling Act, EV Charging Stations and fees charged by HOAs in producing certain records. The new case law includes rulings that may impact the architectural restrictions placed on the installation of solar panels, arbitration provisions for construction defect disputes, “no-cost” HOA collections contracts, election disputes and defamation claims. The Legislative & Case Law Update also addresses some new Fannie Mae and FHA regulations impacting condominium insurance and certification requirements.

Click here to read our Legislative & Case Law Update (2013)

Have questions on any of the new legislation or case law? Click here to send us a question online.

Arbitration Provisions Rise Again in Construction Defect Disputes

Published on: August 17, 2012 | by Steven J. Tinnelly, Esq.

*New Case Law hoa law firm

On August 16, 2012 the California Supreme Court announced its decision in a case that will undoubtedly impact homeowners associations (“HOAs”), developers, owners and insurers in disputes arising from construction defects. The ruling in Pinnacle Museum Tower Association v. Pinnacle Market Development (US) LLC sets the stage for construction defect disputes to be resolved via binding arbitration as opposed to jury trials.

The Court’s ruling in Pinnacle reverses the lower courts’ decisions which previously hampered the enforceability of arbitration provisions contained in recorded Declarations of Covenants, Conditions and Restrictions (“CC&Rs”). Central to the Court’s ruling was its recognition that CC&Rs constitute a contract and that there is strong public policy favoring arbitration/alternative dispute resolution over litigation–a public policy which is embodied in various Civil Code provisions pertaining to HOAs.

In reaching its conclusion, the Court reasoned that “the Davis-Stirling Act ensures that [CC&Rs]–which manifest the intent and expectations of the developer and those who take title to property in a [HOA]–will be honored and enforced unless proven unreasonable. Here, the expectation of all concerned is that construction disputes involving the developer must be resolved by the expeditious and judicially favored method of binding arbitration.” Accordingly, unless an arbitration provision contained in the CC&Rs is deemed “unreasonable,” a developer is entitled to rely on the terms of the contract and the enforcement of the arbitration provision.

The ruling in Pinnacle will create far-reaching and immediate impacts in the HOA industry. Depending on the terms of the CCRs, HOAs and owners seeking to pursue claims against the original developer may now be contractually obligated to forego litigation for binding arbitration. However, Developers wishing to compel binding arbitration may be precluded from doing so to the extent that the binding arbitration provision at issue fails to meet the “reasonableness” test implied by the Court.

Association Repair and Renovation Loans

Published on: March 19, 2012 | by Steven J. Tinnelly, Esq.

hoa attorney *New Resource

As communities mature, the need for major repairs or renovations can become a major concern. Often because of unforeseen problems or insufficiently funded reserves, community associations (associations) are not capable of funding the necessary repairs immediately. In order to avoid a piecemeal repair effort in such situations, or the possibility of additional problems arising from the postponement of the repairs, it may become necessary for an association to borrow money. Fortunately, many banks have recognized this need and are willing to lend to associations for major repairs and renovations.

This blog post addresses some of the more frequently asked questions and important issues relating to association borrowing, such as the common reasons for borrowing, what a bank uses for collateral, and what effect the loan has on individual homeowners.

Our HOA attorneys have also published this information in our new resource entitled “Association Repair and Renovation Loans”, available for download from our library.

Enforceability of Arbitration Provisions in Disputes with Developers

Published on: January 10, 2011 | by Steven J. Tinnelly, Esq.

Binding arbitration provisions contained in a HOA’s CC&Rs may not be enforceable in a construction defect action against the HOA’s developer…

In Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, 187 Cal.App.4th 24 (2010), a HOA sued its developer for construction defects. Both the HOA’s CC&Rs and the homeowners’ purchase and sale agreements required binding arbitration instead of a jury trial. These documents were prepared by the developer and could not be modified without the developer’s consent.

In response to the developer’s motion to compel arbitration of the case, the court held that the binding arbitration provision of the CC&Rs was not enforceable to the extent of denying a jury trial, because the CC&Rs did not constitute an “agreement” to waive the HOA’s fundamental right to a jury trial. Though CC&Rs typically have the force of contract, the court asserted that the developer is the only actual “party” to the agreement when disputes arise between the HOA and the developer.

Though this case is being appealed, if the ruling stands it will effectively invalidate most binding arbitration provisions contained in CC&Rs with respect to HOA disputes with developers.

**Note: The ruling in Pinnacle has been expanded by the even more recent case of Villa Vicenza HOA v. Nobel Ct. Dev. LLC (2011). To read our blog post on this new development, click here.

To read the full text of the holding, click here.