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It’s a Good Day to be a Developer

Construction & Contractor Disputes

In the recent case of Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, the California Supreme Court faced the issue where an owners association filed a construction defect lawsuit against a condominium developer, seeking recovery for damage to its property, and damage to the separate interests of the condominium owners.  In response, the developer filed a motion to compel arbitration, based on a clause in the recorded declaration of covenants, conditions, and restrictions (CC&R’s).  The CC&R’s provided that the association and the individual owners agree to resolve any construction dispute with the developer through binding arbitration in accordance with the Federal Arbitration Act.

The Court concluded that “even though the association did not exist as an entity independent of the developer when the declaration was drafted and recorded, it is settled under the statutory and decisional law pertaining to common interest developments that the covenants and terms in the recorded declaration reflect written promises and agreements that are subject to enforcement against the association.”

The Court reasoned that, in essence, the CC&Rs become a contract, binding against the owners association and its members.  “Once the first buyer manifests acceptance of the covenants and restrictions in the declaration by purchasing a unit, the common interest development is created (Civ. Code, § 1352), and all such terms become ‘enforceable equitable servitudes, unless unreasonable’ and ‘inure to the benefit of and bind all owners of separate interests in the development.'”  This is true even if the CC&Rs are not read by the purchasers of units.  “[A]ctual notice is not required for enforcement of a recorded declaration’s terms against subsequent purchasers.”

As to the owners’ association, the Court similarly held that “settled principles of condominium law establish that an owners association, like its constituent members, must act in conformity with the terms of a recorded declaration.”  Thus, the Court reasoned, “it is no surprise that courts have described recorded declarations as contracts.”

As to the fact that the CC&Rs were created before there was anyone other than the developer, the Court said: “the Legislature has crafted a statutory scheme providing for the capacity of a developer to create a condominium development subject to covenants and restrictions governing its operation and use.  There appears no question that, under the Davis-Stirling Act, each owner of a condominium unit either has expressly consented or is deemed by law to have agreed to the terms in a recorded declaration.  As the exclusive members of an owners association, the owners have every right to expect that the association, in representing their collective interests, will abide by the agreed-upon covenants in the declaration, including any covenant to invoke binding arbitration as an expeditious and judicially favored method to resolve a construction dispute, in the absence of unreasonableness.  That a developer and condominium owners may bind an association to an arbitration covenant via a recorded declaration is not unreasonable.”

Why This Case is Important: This case resolves a conflict in California law and clearly establishes the fact that CC&Rs containing arbitration provisions for construction disputes are binding on all parties. This is an important victory for developers and a significant setback for owners associations and members in that it takes away their ability to seek a court or jury trial of their defect claims.  How far the law will now take the idea that CC&Rs are binding contracts is yet to be seen.

If you think you or a friend may need legal assistance regarding such matters, don’t hesitate to contact Brewer Offord & Pedersen LLP at (650) 327-2900, or on the web at www.BrewerFirm.com.

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