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Earlier this year, the California Supreme Court in McMillin Albany LLC v. Superior Court addressed whether a homeowner must follow pre-litigation dispute resolution procedures when it sues a builder for “common law” construction defect claims such as negligence and strict liability. In analyzing this issue, the Supreme Court suggested that Civil Code sections 895 to 945.5, also known as the Right to Repair Act or SB 800, preclude a plaintiff from filing certain common law construction defect claims against a builder. Although its holding potentially reduces the theories of liability available to an association, McMillin Albany simplifies an association's burden of proof, leaves unaffected an association's claims for attorneys' fees for proving construction defect claims, and expands the fiduciary duties of an association's Board of Directors.
SB 800 sets forth detailed statewide construction standards that developers and builders (referred to collectively as “builders”) must meet when they construct residential buildings after 2003. It also establishes a pre-litigation dispute resolution process requiring homeowners to provide builders notice of alleged construction defects and the opportunity to cure such defects. For example, a homeowner, before suing, must provide a builder with written notice and a general description of alleged construction defects. (§ 910(a).) After the homeowner provides notice, the builder must acknowledge receipt of the notice (§ 913) and thereafter has a right to inspect and test the alleged defects (§ 916). If the builder inspects and tests the defects, the builder may offer a repair (§ 917) or pay the homeowner money in lieu of a repair (§ 929). SB 800 provides procedures for repairs, authorizes the parties to mediate disputes, and allows the homeowner to sue the builder in the event the builder performs an unsatisfactory repair or fails to agree to a settlement. (§§ 917-930.) The builder must make each SB 800 response within certain deadlines specified by the statute. McMillin Albany addressed whether a homeowner must engage in these procedures when she or he sues a builder for common law construction claims but not SB 800 claims.
Plaintiffs Carl and Sandra Van Tassel and several dozen other homeowners (collectively, “the homeowners”) bought 37 new single-family homes from developer and general contractor McMillin Albany LLC (“McMillin”) at various times after January 2003. In 2013, the homeowners sued McMillin for construction deficiencies at the foundations, plumbing systems, electrical systems, roofs, windows, floors, and chimneys. The homeowners claimed McMillin violated SB 800 standards, and in addition, they sued for common law claims such as negligence, strict product liability, breach of contract, and breach of warranty.
McMillin asked the homeowners to postpone the litigation so it could investigate the alleged construction deficiencies as provided by the SB 800 pre-litigation procedures. The homeowners rejected McMillin's request and instead dismissed their SB 800 claim. Consequently, McMillin filed a motion with the trial court to order the homeowners to engage in the SB 800 pre-litigation procedures. The homeowners argued that the SB 800 procedures did not apply because they no longer pursued an SB 800 claim. The homeowners cited Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC, which held that SB 800 does not prohibit a homeowner from filing common law claims when the construction defects cause actual property damage or personal injuries. The trial court denied McMillin's motion, citing Liberty Mutual. The Court of Appeal found the opposite: it concluded that SB 800 replaced common law remedies, so a homeowner must engage in the SB 800 pre-litigation procedures when he or she pursues construction defect claims against a builder. Subsequently, the California Supreme Court agreed to review the case.
The Supreme Court held that the homeowners were required to engage in the SB 800 pre-litigation procedures because SB 800 was the homeowners' “virtually exclusive remedy” in a construction defect case. The opinion suggests that when a plaintiff sues a builder for residential construction defects, the plaintiff can only pursue a claim under SB 800 and cannot pursue common law negligence and strict product the liability claims regardless of whether defects cause property damage or personal injury. Although the Court noted that SB 800 allows plaintiffs to bring common law claims for breach of contract, fraud, or personal injury, it did not answer whether a homeowner could allege that the builder negligently failed to satisfy the SB 800 building standards. Instead, it indicated that regardless of what a homeowner alleges, she or he must go through the SB 800 pre-litigation procedures to pursue construction defect claims.
Previously, when an association filed a claim against a builder for construction defects, it typically made at least two legal arguments. First, the association would make a statutory claim that the builder violated SB 800. Second, the association would make common law claims that the builder was, for example, negligent or strictly liable for damage at the development. Now, McMillin Albany seems to prohibit an association from pursuing some of the common law claims—negligence and strict liability. While the reduction in theories of liability suggests that McMillin Albany is detrimental to associations, it actually benefits them. McMillin Albany clarifies that builders must construct developments to the SB 800 building standards, so associations do not need damage to sue for construction defect. It also leaves open the argument that an association can be awarded attorneys' fees if it demonstrates that the builder violated SB 800. Furthermore, it sheds light on a board of directors' fiduciary duty to investigate whether builders have violated SB 800.
An association can seek relief under SB 800 even if there is no damage.
Previously, an association was required to find evidence of damage before it could sue for negligence or strict liability in construction defect cases. Now, The California Supreme Court clarified that SB 800 grants “homeowners the right to sue for deficiencies even in the absence of property damage or personal injury.” In other words, associations can sue a builder for construction defects even if the association does not find damage. Indeed, for all construction defect claims, an association can pursue its claim if it discovers an SB 800 violation regardless of whether the buildings are damaged.
An association can still argue that it is entitled to attorneys' fees for proving SB 800 violations.
Even before McMillin Albany, Berding | Weil has argued that associations are entitled to recover attorneys' fees for proving an SB 800 violation. McMillin Albany further opened the door for associations to continue to make the attorneys' fees argument. It indicates that a builder must satisfy the SB 800 standards at the time “escrow closes” as defined by the statute. In theory, a builder could violate SB 800 as soon as it completes defective construction and before an association is even formed. An association's governing documents, including the CC&Rs, typically indicate that the builder constructed the project to the SB 800 building standards. Even if the governing documents did not reference SB 800, statutory law at the time parties enter into a contract is incorporated in the contract as if the contract actually included the statutory language. Therefore, the CC&Rs incorporate the SB 800 building standards into the sale contract. California courts have indicated that CC&Rs are enforceable equitable servitudes, and when an association sues to enforce the CC&Rs and prevails, the association shall be awarded reasonable attorneys' fees and costs. Thus, the SB 800 standards become enforceable equitable servitudes, and when an association prevails on its SB 800 claims, it should be awarded its attorneys' fees.
A board of directors has a duty to investigate whether the builder violated SB 800, even if there is no damage.
Finally, McMillin Albany clarifies a fiduciary duty of an association's board of directors. If a board does not need to discover damage to file a claim for an SB 800 violation, then it has a duty to investigate whether the builder merely violated an SB 800 standard. Thus, a board can immediately investigate whether the builder constructed the development in violation of SB 800's standards. This is especially important given the statutes of limitation and repose, which establish deadlines by which an association can bring a claim for defective construction. McMillin Albany suggests that boards should investigate their developments sooner. In an effort to make developments safe for owners, boards must now search for violations, not only damage.
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