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Law Alert!

California Supreme Court Holds CC&Rs May Bind Owners and Association to Arbitrate Construction Defect Claims

(Posted October 22, 2012)

On August 16, 2012, the California Supreme Court held that in a common interest development, a developer (and the individual owners) may bind an association to an arbitration covenant in a recorded declaration of CC&Rs. In Pinnacle Museum Tower Ass'n v Pinnacle Market Dev. (US), LLC (2012) 55 C4th 223, the developer of a common interest community drafted and recorded CC&Rs that provided for the creation of an owners association to manage and maintain the property. The CC&Rs contained an arbitration clause under which the association and the individual owners agreed to resolve any construction disputes with the developer by binding arbitration in accordance with the Federal Arbitration Act (FAA) (9 USC §§1-16). The association sued the developer for construction defects, and the trial court denied the developer's motion to compel arbitration.

Applying state contract law to determine the rights of parties to enforce the arbitration agreement, while giving due regard to the federal policy favoring arbitration, the supreme court analyzed the contractual nature of the terms in the recorded declaration of CC&Rs under the Davis-Stirling Common Interest Development Act. Under CC §1352, a condominium development is created when a developer records a declaration of CC&Rs and other documents and then sells one of the individual units. Once the first owner accepts the covenants and restrictions in the declaration by purchasing a unit, all the terms become enforceable equitable servitudes, unless they are unreasonable. Actual notice is not required for enforcement of a recorded declaration's terms against subsequent purchasers. The recording provides sufficient notice to allow enforcement of the CC&Rs, and various statutory protections ensure that prospective buyers are informed of the terms of the CC&Rs.

The owners association and its members must comply with the terms of a recorded declaration. The owners should be able to rely on the association to abide by the agreed-on covenants in the declaration, including any covenant to use binding arbitration to resolve a construction dispute, in the absence of unreasonableness. It is reasonable and important that a developer and the individual owners be able to bind an association to an arbitration covenant in a recorded declaration because (1) the Davis-Stirling Act confers standing on an association to bring construction damage claims in its own name without joining the individual condominium owners (CC §1368.3) and (2) it is the members who pay the assessments that cover the expenses of resolving construction disputes. The court concluded that, even though the association did not bargain with the developer over the terms of the CC&Rs or participate in their drafting, under the statutory and decisional law pertaining to common interest developments, the covenants and terms in the recorded declaration reflect written promises and agreements that are enforceable against the association.

For further discussion of this topic, see California Construction Contracts, Defects, and Litigation (Cal CEB 2008) and Advising California Common Interest Communities (Cal CEB 2003).

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