The Davis-Stirling Common Interest Development Act (Civ. Code §4000, et seq.) (the “Act”), governs the formation and management of homeowner’s associations or HOAs, and also governs lawsuits filed by HOAs for construction defects.
In the 2021 case of Smart Corners Owner Association v. CJUF Smart Corner LLC, Case No. D076775 the 4th District Court of Appeal addressed the pre-litigation voting requirements of the Act and the impact of recent amendments to the Act.
In 2004, CJUF Smart Corner LLC contracted with Hensel Phelps Construction Company for the construction of the Smart Corner condominium project in San Diego, California. As part of the development, an HOA was formed, the Smart Corner Owner Association.
On July 6, 2017, the Smart Corner HOA filed a notice of construction defects with CJUF Smart Corner and Hensel Phelps under the Right to Repair Act (Civ. Code §895 et seq.) and under the Act. The notice identified defects in the project’s exterior barrier coating, windows, door casings and doors, private decks, waterproofing, concrete, bathtubs and showers, roof membrane and roof flashing, roof laps and seals, tower floors, plumbing, venting, garage, and parking structure.
Two months later, CJUF Smart Corner and Hensel Phelps notified the HOA of their election to opt-out of the Right to Repair Act and the Act’s pre-litigation procedures and, a month later, the HOA filed suit against CJUF Smart Corner and Hensel Phelps alleging causes of action for negligence, strict liability, breach of warranties, and violation of the construction standards of the Right to Repair Act. In its answer, CJUF Smart Corner asserted as a defense, that the HOA had not complied with the CC&R requirements for maintaining a claim, specifically, that a majority of the members of the HOA did not vote in favor of filing suit. The HOA claimed that if the majority-vote requirement of the CC&Rs were enforceable, that by February 15, 2018, a majority of the members of the HOA had voted in favor of filing the lawsuit and ratified the past actions of the HOA’s Board in filing the lawsuit.
While the case was pending, the 4th District Court of Appeal in Branches Neighborhood Corp. v. CalAtlantic Group, Inc. upheld an arbitration decision which found against an HOA which had failed to obtain a 51% vote prior to filing suit against a developer, even though 92 of 93 members of the HOA later voted ratify the HOA’s Board’s earlier decision to file suit against the developer.
CJUC Smart Corner filed a motion for summary judgment based on the decision in Branches. It contended Smart Corner HOA’s lawsuit was barred because it had failed to follow the pre-litigation voting requirements of its CC&RS and, pursuant to Branches, the members of the HOA could not later ratify the actions of the HOA’s Board in filing the lawsuit. The trial court rejected the HOA’s argument that Branches only applied to arbitration decisions, found in favor of CJUC Smart Corner, and asserted “Branches analyzes the substantive, legal issue of enforcement of a CC&R member consent requirement and, as such applies irrespective of the forum” and that under Branches “Plaintiff’s failure to obtain the requisite consent of the membership prior to bringing this action against the [Developers] renders [the Association’s] original complaint invalid.”
CJUC Smart Corner appealed. During pendency of the appeal the California State Legislature enacted Senate Bill 326 which became effective January 1, 2020. The new legislation nullified pre-litigation vote requirements like those involved in the Branches decision.
In response, CJUC Smart Corner argued that the HOA could not benefit from the recent enactment of Section 5986 because the trial court’s decision on CJUC Smart Corner’s motion for summary judgment was a “final decision on the merits” which had been entered before the effective date of the statute.
The Court of Appeal found it compelling that the State Legislature was attempting to address a “trend of developers taking advantage of their ability” to dictate CC&R provisions and that the State Legislature clearly intended the statute to apply retroactively but placed limits on its retroactive effect to cases in which a final judicial decision had been reached. As such, the court found that the “Legislature intended ‘final judicial decision’ to refer to a judgment for which the time to appeal had passed, or, if an appeal was then, had reached finality after completion of the process of appellate review.”
As a further, independent ground the Court of Appeal held that the majority vote requirement as a pre-condition prior to filing suit was void as to public policy when a majority of the members voted in favor of filing suit after the lawsuit was filed. Thus, the Court of Appeal held Civil Code section 5986 CC&R provisions establishing pre-conditions or limitations on a HOA Board’s authority to commence and pursue construction defect claim will be found void and enforceable.
Developers and HOAs should consult with their legal counsel – Developers to strategize other ways to limit HOA construction defect claims, and – HOAs with construction defect claims to assure that they properly comply with applicable administrative procedures before filing suit.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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