California Supreme Court Binds Homeowner Associations To Arbitration Provisions In CC&Rs

Construction Law E-Alert (August 2012)

In Pinnacle, a homeowners association sued a condominium builder for construction defects and resultant property damage to the common areas, and to the separate property interests held by the individual members.  The builder moved to compel arbitration, based on a provision contained in the CC&Rs which required resolution of all construction disputes through binding arbitration.  The association argued it could not be compelled to arbitrate these claims because it was not a party to the agreement to arbitrate, asserting "the Association did not bargain with [the builder] over the terms of the Project CC&R's or participate in their drafting." The Supreme Court rejected the association's argument on the grounds that the builder-authored CC&Rs complied with the Davis-Stirling Act ("the Act") (Civil Code §1350, et seq.) – the law that governs all common interest developments in California.  Under the Act, builders and sellers of common interest residential units are required to provide a copy of the CC&Rs to all purchasers, as well as copies of the Department of Real Estate's public report, which informs purchasers of their rights and remedies as members of the association, and encourages each prospective purchaser to review the terms carefully before entering into any agreement.  Further, the Act states all CC&Rs are enforceable, unless unreasonable, and inure to the benefit of and bind all owners in the development.  (Civ. Code, §1354, subd. (a).)  The Court found each owner who purchased a condominium in the project either expressly consented to the terms and provisions of the CC&Rs or was deemed to have consented to the terms at the time of purchase. The Court also did not find the arbitration provision to be unconscionable.  The Court indicated the provision was drafted and recorded in accordance with the Act, which allowed each prospective purchaser to make an informed decision prior buying a condominium unit.  The provision also limited arbitration to construction defect disputes. The Court did not find any evidence the provision "shocked the conscience" or was "oppressive" in any way. Pinnacle settles a decades-long conflict over whether arbitration provisions in CC&Rs for condominium projects are enforceable against homeowner associations and their members.  It remains unclear, however, whether Pinnacle's rationale will be applied to cases involving homeowner associations for single-family residences (as opposed to condominiums), assuming those CC&Rs have similar arbitration requirements.  Regardless, the result of Pinnacle is clear, if arbitration provisions contained in condominium CC&Rs meet the fairness and unconscionability tests set out by the Court, more condominium construction defect cases brought by homeowner associations will be resolved through the arbitration process. By Stephen A. Sunseri and Aarti Kewalramani for Gatzke Dillon & Ballance LLP