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Court Punishes HOA That Files Construction Defect Claim Without Membership Approval

Most governing documents require membership approval before pursuing a construction defects claim (“CD”). Obtaining approval is sometimes inconvenient, risky, complicated and is based on technical provisions of each association's Bylaws, CC&Rs, election rules and the Davis-Stirling Common Interest Development Act (“DSA”). Nevertheless, the failure to obtain that approval can be fatal to an Association's right to bring a claim as the Association learned in Branches Neighborhood Corporation. v Calatlantic Group, (filed 8/10/2018, publication order 8/24/2018).

The case can be read here: http://www.courts.ca.gov/opinions/archive/G055201.PDF.

In that case, the Association initiated a request to arbitrate a construction defect claim exceeding $5,000,000 against the project developer without first obtaining the approval of the membership. Citing the CC&R provision that required a membership vote and approval prior to bringing that claim, the developer successfully persuaded an arbitrator to dismiss the case. That dismissal was upheld on appeal.

The Association made several arguments attempting to save its case: that the voting requirement as written in these CC&Rs was contrary to public policy, had to be read in conjunction with certain provisions of the DSA and, especially that the membership ultimately approved and ratified bringing the claim after it was filed.

The Court was unpersuaded; it rejected application of the DSA to this particular set of CC&Rs and strictly construed the provision requiring membership approval prior to bringing the claim. It concluded that the prior approval was consistent with other statutes in the DSA which purport to put a “check” on Board power. In other words, even though the alleged defects repair costs were more than $5,000,000 the Association's case was lost because there was no CD vote and approval before commencement of the arbitration process.

Takeaways

• Do not listen to those who say the voting requirements are unenforceable;
• Treat members with respect and ensure they have information they need to vote;
• Utilize law firms with both CD and “general counsel” expertise to ensure compliance with the special notice and voting requirements relating to SB 800 and other CD claims under the Civil Code, Corporations Code, Bylaws, CC&Rs and voting rules; and
• Assume members, the developers, and the Courts will expect “strict compliance” with the governing documents.

The really sad part of the Branches case is that when the “ratification” vote was finally taken, 92 of the 93 HOA members that participated supported the claim.

We believe not all construction conditions are defects and not all defects justify arbitration or litigation. But, when the defects are serious and pervasive, with good planning, experienced legal advice, strict compliance with voting requirements applicable to each community, it can make a difference between financial loss and large special assessments and a successful recovery, repair, and preservation of property values.

For more about the processes and procedures that can make the difference between a Branches result and a successful one, contact Jill Jackson (jjackson@berdingweil.com), or give us a call at: 800.838.2090.

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