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Please note that the following article is strictly to provide information and neither the content nor transmissions through this website
are intended to provide legal or other advice or to create an attorney-client relationship.
California imposes numerous limits on the amount of time that owners/HOAs have to formally pursue defect claims against Builders. If an owner/HOA fails to act within that proscribed time period it will lose its ability to pursue a claim altogether – which, in the context of HOAs, will typically mean that reconstruction will then need to be funded through bank loans or special assessments.
The very outside time limit to bring defect claims against a Builder is 10 years from the date of substantial completion. However, within that 10-year period are shorter, independent deadlines to bring a claim that depend on the building component at issue (some of which are as short as 1 year from close of escrow) and limits that can be triggered by the owner/HOA learning of a particular claim (knowledge which can shorten the 10-year clock on that specific claim from 10 years to 3 years).
Proper analysis of these legal time limitations is extremely important to ensure that as many claims as possible are protected. Poor analysis of those time limits, or simple neglect with regard to their potential expiration, can be fatal to an Association's financial health.
The clock on those legal time limits can only be stopped in one of three ways: by issuing a Notice to Builder, by filing a lawsuit, or by entering into a written agreement with the Builder to pause those clocks.
An HOA's governing documents will almost always contain language requiring some sort of affirmative approval (i.e., vote) before the pre-litigation process and/or formal litigation can be initiated. In our experience, most will state that the pre-litigation procedures can be initiated by a vote of the Board of Directors (as long as certain notice is provided to the owners), while formal litigation can only be initiated by a formal vote of the HOA's membership.
Each governing document is different, however, and in many instances the nuances can be difficult to identify. Some could certainly require membership approval for pre-litigation, and some could require only Board of Director approval for formal litigation. Moreover, when membership approval is required the threshold needed for that approval can vary fairly wildly: some governing documents require only a majority of a quorum of the overall members (or less), while others can require up to 90% approval of all members!
Recent California law has only helped strengthen Builders' resolve in pushing the voting requirements within the governing documents, as it suggests that HOA's cannot obtain approval from members "after the fact" – at a date after formal litigation is initiated – if the governing documents do not clearly allow for ratification.
It is extremely important to retain competent attorneys at the very early stages of any construction defect investigation to perform a review of the HOA's governing documents to evaluate requirements for initiating either the pre-litigation procedures or formal litigation. If the analysis on voting requirements is done poorly, or omitted in its entirety, the HOA can be susceptible to losing the ability to pursue claims against the Builder altogether (and only have to swallow that bitter pill months down the road after spending substantial dollars on attorneys and consultants).
The owner/HOA can be released from any obligation to follow-through with the pre-litigation process for a number of reasons, including where the Builder (1) fails to acknowledge receipt during time specified; (2) elects not to go through the process; (3) fails to make an offer to repair; (4) fails to strictly comply with the timeframes; or (5) retains a repair contractor that does not complete the repair in time or manner specified. Once released from the pre-litigation procedures the owner/HOA is free to initiate formal litigation (subject to any requirements or approvals contained within an HOA's governing documents).
An insurance company's obligations to a Builder depend upon the language of the policy that it issued; however, insurance companies will usually argue that they have the right, but not the duty, to participate in the pre-litigation process. Absent a lawsuit being filed the Builder may not have much leverage to force a carrier – and their insurance dollars – to participate in the pre-litigation phase.
Given that the Builder is usually looking to the carrier to fund a settlement of a defect claim since it paid premiums to that carrier, a lack of participation by a carrier in pre-litigation does have the potential to derail settlement at that stage.
This is entirely dependent on the Builder and its willingness to (1) acknowledge the extent of defects within a community, and (2) meaningfully engage the Association to address those defects.
Unfortunately, some Builders are more inclined than others to seriously engage in the process. Since an attempt at the pre-litigation process is mandatory before formal litigation can be pursued, however, it can be a valuable source of data that will help facilitate resolution of the dispute at some further point in the future.
Once formal litigation is started an HOA can encounter more difficulties in sales and/or refinancing efforts within its community. Those difficulties will typically evaporate immediately once that formal litigation concludes.
It is difficult to predict what will happen in any given community, but generally a Notice to Builder will not have the same impact on sales and refinancing (because no lawsuit has been filed).
Whether a dispute is in the pre-litigation process or formal litigation, it is extremely important to have attorneys that are not only experienced with the sale and refinance process (so they can help facilitate those transactions to the extent possible by providing relevant information on the claims) but attorneys that also have the capacity to respond quickly given the time constraints inherent in those activities.
Larger firms have the ability to address all issues that arising during the life of a claim against a Builder – including the ability to prioritize sales and refinancing concerns of owners so they do not become disgruntled with the process.
Claims such as personal injury, class actions that address only the incorporation of a defective component into a residence, statutory remedies, and fraud are excluded from the pre-litigation process.
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