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Arbitration provision contained in developer’s CC&Rs is not binding contract term…

Villa Vicenza Homeowners Association v. Nobel Court Development, LLC
(2011) WL 72200

OPINION, BENKE, Acting P.J.

*1 In this case the developer of a condominium project recorded a declaration of covenants, conditions and restrictions (CC & R’s) which required that a homeowners association arbitrate any construction defect claim the association might have against the developer. As we explain more fully below, we find CC & R’s are not an effective means of obtaining an agreement to arbitrate a homeowners association’s construction defect claims against a developer.1

Although both federal and state law favor the enforcement of arbitration agreements, neither federal nor state law countenance imposition of arbitration where no agreement to waive judicial remedies exists. Admittedly, in other circumstances our cases and Civil Code section 1354 treat CC & R’s as equitable servitudes which bind homeowners and homeowners associations with respect to claims they may have against each other. This treatment of CC & R’s is not based on any determination the parties bound by them are in privity of contract with either their co-owners or a homeowners association. Rather, CC & R’s are made binding in disputes between homeowners or between homeowners and a homeowners association because of their shared and continuing interest in the equitable and efficient operation of common interest developments. Here, the recorded CC & R’s, standing alone, are not a contract between the developer and the homeowners association, which only came into existence after the CC & R’s were recorded. Thus here there has been no showing the association entered into a binding arbitration agreement. Accordingly, the trial court did not err in denying the developers’ motion to compel arbitration.

FACTUAL AND PROCEDURAL BACKGROUND

Nobel Court Development, LLC (Nobel), purchased the 418 apartments, common areas, and common facilities which make up the Villa Vicenza project in 2004 and converted the apartments to condominiums in 2005. In the course of making the property a condominium project, Nobel recorded CC & R’s under which the Villa Vicenza Homeowners Association (the Association) came into existence upon the sale of the first condominium. By deed Nobel also transferred ownership of the common areas and common facilities to the Association. No consideration was provided by the Association to Nobel and the Association did not execute any documents in favor of Nobel in connection with the deed transferring the common areas and common facilities to the Association. In pertinent part, the CC & R’s require that both condominium owners and the Association arbitrate any claims they have against the developer.

Because following the first sale Nobel controlled the board of directors of the Association and because the initial condominium buyers noticed defects in common areas and common facilities and did not believe Nobel had provided a reserve fund sufficient to repair the defects, the condominium owners brought a derivative action on behalf of the Association against Nobel.2 Later, an independent litigation committee of the Association was appointed and filed a cross-complaint against Nobel. The committee alleged claims for breach of implied warranty, strict liability, negligence and as the third-party beneficiary of express and implied warranties Nobel made to individual homeowners. Following unsuccessful efforts to mediate the Association’s claims, Nobel filed a motion to compel arbitration under the provisions of the CC & R’s. The trial court denied the motion with respect to the bulk of the Association’s claims, but compelled arbitration of the express warranty claims. Nobel filed a timely notice of appeal. (Code Civ. Proc., § 1294, subd. (a).)

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Common Interest Developments>Governing Documents>Enforcement

California Civil Code § 1354.

Covenants and Restrictions in Declaration as Equitable Servitudes; Enforcement; Alternative Dispute Resolution

(a) The covenants and restrictions in the declaration shall be enforceable equitable servitudes, unless unreasonable, and shall inure to the benefit of and bind all owners of separate interests in the development. Unless the declaration states otherwise, these servitudes may be enforced by any owner of a separate interest or by the association, or by both.

(b) A governing document other than the declaration may be enforced by the association against an owner of a separate interest or by an owner of a separate interest against the association.

(c) In an action to enforce the governing documents, the prevailing party shall be awarded reasonable attorney’s fees and costs.

A Binding Arbitration Provision contained in a HOA’s CC&Rs was held not to be enforceable as between the HOA and the Developer in a construction defect action…

Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC


(2010) 113 Cal.Rptr.3d 399
** Review Granted | Previously published at: 187 Cal.App.4th 24 **

SYNOPSIS

Background: Homeowners association filed action on its own behalf, and as a representative of its members, against condominium project developer for damages to common areas, property owned by the association, and property owned by individual association members, caused by alleged construction defects. Developer petitioned to compel arbitration, based on arbitration clause contained in recorded covenants, conditions and restrictions. The Superior Court, San Diego County, No. 37-2008-00096678-CU-CD-CTL, Ronald L. Styn, J., denied developer’s petition. Developer appealed.

OPINION

McINTYRE, J.

A homeowners association filed a construction defect action against the developer of a condominium project on its own behalf and as a representative of its members for damage to common areas, property owned by the association, and property owned by individual members.

We conclude that an arbitration provision in a declaration of covenants, conditions and restrictions (CC & R’s) recorded by the developer of the condominium project, which may not be changed by the association without the written consent of the developer, did not constitute an “agreement” sufficient to waive the constitutional right to jury trial for construction defect claims brought by the homeowners association. Additionally, assuming the homeowners association is bound by a jury waiver provision contained in purchase and sale agreements signed by the individual condominium owners, we conclude that the jury waiver provision in the purchase and sale agreements is not enforceable because it is unconscionable. Accordingly, we affirm the trial court’s order denying the developer’s motion to compel arbitration.

FACTUAL AND PROCEDURAL BACKGROUND

Pinnacle Market Development (US) LLC, Pinnacle International (US) LLC, Pinnacle Market Development (Canada) LTD, Michael De Cotiis, and Apriano Meola (collectively Pinnacle) constructed and sold condominiums in a common interest development project in downtown San Diego known as the Pinnacle Museum Tower Condominium (Project). Pinnacle recorded CC & R’s forming the Pinnacle Museum Tower Association (Association), a California nonprofit mutual benefit corporation, to manage and repair the Project’s common areas. Pinnacle pledged to convey certain property, including easements and drainage facilities and utility installations, to the Association before conveyance of the first condominium.Pinnacle also retained the right to convey property to the Association at any time. Pinnacle conveyed to each buyer of a condominium an undivided fractional interest as tenant-in-common to the common areas. Under the CC & R’s each condominium owner must be a member of the Association, *405 and pay an assessment to the Association for its maintenance and repair of the common areas.

The second page of the CC & R’s states, in capital letters, that article 18 contains a mandatory procedure for the resolution of construction defect disputes that includes the waiver of the right to a jury. Article 18 contains an arbitration provision reciting in capital letters that Pinnacle, the condominium owners and the Association agree to resolve any construction dispute through binding arbitration in accordance with the Federal Arbitration Act (FAA, 9 U.S.C. § 1, et seq.) and the California Arbitration Act (CAA, Code Civ. Proc., § 1280 et seq.). Specifically, the arbitration provision states that by accepting a deed for any portion of the Association property, the Association and each owner agree to give up their right to a jury trial and have any construction dispute decided by arbitration. The CC & R’s define a “[c]onstruction [d]ispute” as “any dispute between an Owner or the Association and [Pinnacle] or between an Owner or the Association and any employee, agent, partner, contractor, subcontractor or material supplier of [Pinnacle] which dispute relates to the use or condition of the Project or any improvements to the Project.”

The arbitration provision provides that its interpretation is governed by the FAA because many of the materials incorporated into the Project were manufactured in other states, and involved interstate commerce. The arbitration provision applies only to a construction dispute in which Pinnacle has been named a party, and provides that no amendment may be made to the arbitration provision without Pinnacle’s written consent.

In selling the condominiums Pinnacle used a standard purchase and sale agreement that recited on the first page that the buyer agrees to comply with the CC & R’s by accepting a grant deed to the condominium. Page 8 of the document contained a section pertaining to dispute notification, resolution procedures, and waivers. The section, which required the initials of the buyer and seller, stated:

“Buyer and Seller agree that any certain disputes shall be resolved according to the provisions set forth in Article XVIII of the [CC & R’s] and waive their respective rights to pursue any dispute in any manner other than as provided in [the CC & R’s]. [¶] Buyer and Seller acknowledge that by agreeing to resolve all disputes as provided in [the CC & R’s], they are giving up their respective rights to have such disputes tried before a jury. [¶] WE HAVE READ AND UNDERSTOOD THE FOREGOING AND AGREE TO COMPLY WITH ARTICLE XVIII OF THE [CC & R’s] WITH RESPECT TO THE DISPUTE REFERENCED THEREIN.” (Capitalization and bold type in original.)

After unsuccessfully mediating its dispute with Pinnacle, the Association filed this action on its own behalf and as a representative of its members for damages to common areas, property owned by the Association, and property owned by individual Association members, including: “subterranean parking garage, drainage, exterior walls, windows, decks, interior walls and doors, roof and electrical, plumbing, and mechanical components and systems.” Pinnacle petitioned to compel arbitration under the arbitration provision contained in the CC & R’s, and the jury waiver provision in the purchase and sale agreements. The trial court denied the motion on the ground that while the arbitration provision in the CC & R’s constituted an agreement to arbitrate entered into by Pinnacle and the Association, it refused to enforce the provision as unconscionable. It also concluded that the Association *406 was not a party to the purchase and sale agreements; thus, Pinnacle could not rely on the jury waiver provision in the purchase and sale agreements to compel arbitration. Pinnacle timely appealed.

DISCUSSION

I. General Legal Principles

12 The FAA applies to any written agreement to arbitrate a transaction involving interstate commerce (Allied-Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 281, 115 S.Ct. 834, 130 L.Ed.2d 753), and preempts state laws applicable only to arbitration agreements (Perry v. Thomas (1987) 482 U.S. 483, 492, fn. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426).However, even where the FAA applies, it defers to state contract law principles to determine the enforceability of arbitration clauses, recognizing as defenses “grounds that exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2; accord, Code Civ. Proc., § 1281; see generally Doctor’s Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 686-687, 116 S.Ct. 1652, 134 L.Ed.2d 902.) Accordingly, “the FAA does not apply until the existence of an enforceable arbitration agreement is established under state law principles involving formation, revocation and enforcement of contracts generally.” (Banner Entertainment, Inc. v. Superior Court (1998) 62 Cal.App.4th 348, 357, 72 Cal.Rptr.2d 598(Banner ).)

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Chapter 1 includes:
Article 1. Preliminary Provisions
Article 2. Definitions

DAVIS-STIRLING COMMON INTEREST DEVELOPMENT ACT CHAPTER 1. GENERAL PROVISIONS

Article 1. Preliminary Provisions

§1350. Citation
This title shall be known and may be cited as the Davis-Stirling Common Interest Development Act.

§1350.5. Headings
Division, part, title, chapter, and section headings do not in any manner affect the scope, meaning, or intent of this title.

§1350.7. Methods of Delivering Notice; Applicable Sections of Law

(a) This section applies to delivery of a document listed in Section 1363.005 or to the extent the section is made applicable by another provision of this title.

(b) A document shall be delivered by one or more of the following methods:

(1) Personal delivery.
(2) First-class mail, postage prepaid, addressed to a member at the address last shown on the books of the association or otherwise provided by the member. Delivery is deemed to be complete on deposit into the United States mail.
(3) E-mail, facsimile, or other electronic means, if the recipient has agreed to that method of delivery. The agreement obtained by the association shall be consistent with the conditions for obtaining consumer consent described in Section 20 of the Corporations Code. If a document is delivered by electronic means, delivery is complete at the time of transmission.
(4) By publication in a periodical that is circulated primarily to members of the association.
(5) If the association broadcasts television programming for the purpose of distributing information on association business to its members, by inclusion in the programming.
(6) A method of delivery provided in a recorded provision of the governing documents.
(7) Any other method of delivery, provided that the recipient has agreed to that method of delivery.

(c) A document may be included in or delivered with a billing statement, newsletter, or other document that is delivered by one of the methods provided in subdivision (b).

(d) For the purposes of this section, an unrecorded provision of the governing documents providing for a particular method of delivery does not constitute agreement by a member of the association to that method of delivery.

Article 2. Definitions

§1351. Definitions
As used in this title, the following terms have the following meanings:

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