The Court of Appeal Issues a Decision Potentially Invalidating ADR Provisions in Developer-Drafted CC&Rs
09 | 19 | 2008
Legal e-Update
On Friday, September 12, 2008, the Court of Appeal issued a sweeping decision potentially invalidating alternative dispute resolution (“ADR”) provisions in CC&Rs governing owner or homeowners association disputes with developers.
In July 2007, Luce Forward, on behalf of Intergulf Developments (Kettner) LLC, the developer of Treo@Kettner, a condominium project located in San Diego, sought enforcement of an ADR provision contained in the project CC&Rs against the Treo@Kettner Homeowners Association, which had recently filed a construction defect lawsuit against Intergulf. In November 2007, after several rounds of briefing, the superior court granted Intergulf’s motion and held that the construction defect case was to be decided by a judicial referee instead of a jury.
The Association petitioned for a writ of mandate to reverse the superior court’s ruling. While the superior court’s decision turned primarily on whether the ADR provisions in the Treo CC&Rs were procedurally and substantively unconscionable, the more sweeping issue considered by the Court of Appeal was whether CC&Rs drafted and recorded by a developer prior to the first closing constitute a “written contract” between a developer and a homeowners association. This is because Code of Civil Procedure section 638, the statute authorizing ADR by judicial reference, requires that a “written contract” must exist between the parties for the controversy to be decided by a referee.
On September 12, 2008, the Court of Appeal issued its decision overturning the superior court’s ruling. The Court of Appeal held that CC&Rs are not a “contract” between a developer and a homeowners association under section 638. There is no drafting recommendation that can alter the result. This decision is inconsistent, however, with Villa Milano Homeowners Association v. Il Davorge, a case previously decided by the Court of Appeal which found CC&Rs are a contract between a developer and a homeowners association with respect to the agreement to arbitrate construction defect disputes.
Should the Court of Appeal’s decision remain in force, all judicial reference provisions, and potentially all ADR provisions included in developer-drafted CC&Rs may be unenforceable against a homeowners association. The decision does not apply, however, to ADR provisions contained in developer-drafted purchase agreements between a developer and a purchaser. Intergulf has decided to challenge the ruling by petitioning the California Supreme Court for review. Luce Forward’s appellate attorney, Charles A. Bird, will be handling the petition. Anyone interested in supporting a grant of review may contact Mr. Bird at . If you would like to discuss how this decision might affect existing or future development projects, please contact a member of Luce Forward's Common Interest Subdivision Team.