For Housing Developers Seeking Enforcement of ADR Provisions, the Line Forms at the Rear

On July 25, the California Supreme Court added to its logjam of cases addressing the enforceability of alternative dispute resolution (ADR) provisions in Covenants, Conditions and Restrictions (CC&Rs) recorded by developers. After oral argument in Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, et al. in late May, the legal and development communities anxiously await the Supreme Court’s ruling on this issue, which will determine the viability of thousands of similar provisions contained in CC&Rs for projects developed during the real estate boom in the early 2000s.

The latest case, Verano Condominium Homeowners Association v. La Cima Development, involves a construction defect lawsuit over a condominium conversion project in San Diego, California. Unit sales began in 2005, and the homeowners association (HOA) filed suit in April 2010. As with almost all other common interest developments, the developer recorded the CC&Rs prior to the sale of any units. The Court of Appeal previously held that the HOA’s claims could be divided into three categories:

(1) those claims relating to HOA-owned common areas, which are not subject to an agreement to arbitrate because the developer may not enforce the arbitration provision in the CC&Rs;

(2) those claims raised by the HOA on behalf of owners who did not purchase units from the developer, and therefore were not subject to arbitration provisions in purchase contracts; and

(3) those claims raised by the HOA on behalf of original purchasers subject to valid and enforceable arbitration provisions contained in their purchase contracts.

In this final regard, the Verano opinion from the lower court did provide some hope that California courts will abide by the United States Supreme Court’s show of support for arbitration in AT&T Mobility v. Concepcion.

The Davis-Stirling Common Interest Development Act includes a broad provision authorizing declarants to include in CC&Rs any matters they or the homeowners deem appropriate. During oral argument in Pinnacle, the Supreme Court devoted much of its time to whether the Davis-Stirling Act could be read to authorize arbitration provisions. Developers maintain that this statutory hook, coupled with DRE oversight and a long history of treating CC&Rs as contractual provisions, should provide a sufficient basis for the enforcement of these provisions. In recent years, however, lower courts have disagreed and found ways to evade the expressed public policy in favor of arbitration, which sets the stage for the Supreme Court to act in Pinnacle.

With the Petition for Review granted, Verano now joins Villa Vicenza Homeowners Association v. Nobel Court Development, LLC, et al. and Promenade at Playa Vista Homeowners Association v. Western Pacific Housing, Inc., et al, all matters in which Allen Matkins has represented the developer, in the queue behind Pinnacle.

If you are interested in learning more about the cases mentioned above or have questions, please contact Valentine Hoy, Matthew Marino, or Timothy Hutter.