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Berding | Weil Community Association ALERT Newsletter
Legal News and Comments for Community Association Boards and Managers Issue #28 • September 2009
When Your CC&Rs Hate You
Or, How Developer Protections in Governing Documents Work to Block Association Defect Claims
By Matt J. Malone, Esq.
When it creates a community association, a developer drafts the initial set of governing documents. Not surprisingly, those documents usually contain certain provisions designed to protect the developer, particularly from later construction defect claims. By now, most readers are probably aware of the basic protections that a developer adopts in the governing documents to protect itself from future litigation: arbitration provisions, mediation requirements, and the pre-litigation procedures of Title 7 and the Calderon process. All are important, but by 2009, these provisions are now old hat. This article explores the more recent developments in CC&R drafting by developers and their counsel, as well as what can be done to avoid the traps these newer provisions have set for an association that may have a construction defect claim.
Don't Make a Claim without a Member Vote Or, How to Make Defect Litigation Much, Much Harder For Associations
Part 1
First among the newer developer self-protection provisions is the requirement that a member vote be held before an association can "initiate a construction defect claim." While this provision would certainly require a member vote before the association could bring a lawsuit, its intent is far broader. By using the language "construction defect claim," the provision could be read to require a member vote before the association could give any notice to the builder that defects were present. This would include notice required by either California Civil Code Section 1375 or Title 7, which are prerequisites to a defect claim, and trigger certain time periods during which each side must provide information to the other and the builder can investigate and offer to repair alleged defects.
Practically, the effect of this provision is enormous. Statutes of limitations run quickly – indeed, under Title 7, some can run as quickly as one year after the association takes control from the developer. Serving the statutory notice to the builder stops the statute from running for a period of time. But if the association cannot even get the notice out until it holds a member vote and gets quorum, statutes may run before there are even enough votes to make a decision. The association stands to lose its rights because it must wait for member approval in order to "initiate a construction defect claim." This could also be read broadly to apply to virtually any communication from the association to the developer regarding construction deficiencies, basically crippling the board of director's ability to bring such issues to the developer's attention.
And that is exactly what the provision is designed to do. Ask yourself: When Microsoft wants to make a claim against another company, does it hold a shareholder meeting to authorize a notice of that claim or the resulting lawsuit? No, and the reason is straightforward: delay could be potentially disastrous to the claim. Further, the board of directors of Microsoft has the responsibility to conduct the business of the company, including making necessary claims. That is not a responsibility that is delegated to the shareholders. But then, Microsoft's governing documents were not written by the very people Microsoft might have to sue. New associations, however, are forced to work with governing documents written by developers--the same developers who the association may have to sue to remedy defects or budget deficiencies. And it is in the interest of those developers to make it as hard as possible for an association to bring that case.
Don't Hire an Attorney on Contingency for Construction Defect Cases Or, How to Make Defect Litigation Much, Much Harder For Associations
Part 2
Similar provisions requiring member approval pop up in the context of fee arrangements with attorneys. Here's one example from a recent set of CC&Rs:
"Litigation/Arbitration: The Board has authority to enter into a contingent fee contract with an attorney in a matter involving alleged design or construction defects in the Project, only as to the facilities or improvements the Association is responsible for maintaining as provided herein, and then only after getting the vote at a duly noticed and properly held membership meeting, of a majority of a quorum of the Members other than Declarant [developer]."
So, in order to hire a law firm to represent the association for a contingent fee for defect cases, or any other cases involving facilities the association must maintain, the association must get member approval. What if the case is about something else? Under this provision, the board could hire a contingency attorney all on its own. Only for "facilities" and "maintenance" cases–e.g., construction defect cases–does the board need to go to its members in order to hire an attorney on a contingency fee contract.
Why might an association want to hire an attorney on a contingency fee contract? To answer that, first a little background: A contingency fee agreement is one in which the client does not pay the attorney's hourly rate as the attorney works the case. Instead, the client agrees that a portion of the recovery, if any, is paid to the attorney as that attorney's fee for services. Thus, the client does not have to put up any money for attorney's fees during the prosecution of the case. Similarly, the attorney takes the risk that if there is no recovery, he or she does not get paid.
For a new association looking at a potential construction defect action, a contingency fee agreement can have certain advantages. New associations are typically without sufficient money in the budget to pay an attorney's hourly rate, especially for the hours required in pre-litigation discussions or in litigation itself. (In some cases, new associations don't even have sufficient funds from the developer to meet maintenance obligations, much less to hire counsel.) The use of a special assessment is hardly palatable, and in an era of foreclosures and delinquencies, it may create more problems than it solves by piling further obligations on people who are already having trouble paying their mortgages. This leaves a contingency arrangement as, occasionally, the only realistic way in which an association can obtain competent, experienced counsel to represent its interests.

PREVIOUS ISSUES
QUESTION OF THE WEEK
Question:
"What is the
association's budget?"
Answer:
The budget is the anticipated expenses for the association's operation and reserve accounts for the year. It includes both Operating expenses and Reserve Accounts. The Operating expenses are typically the day to day costs of running the Association. The Reserve Accounts are used to fund long-term maintenance and repair projects like painting and re-roofing.
Aging in Place: A New Plan for the Suburbs?
Could Older Common Interest Developments Become Part of More Livable, Less Car-Dependent Communities?
Can we save older common interest developments?
Does their eventual obsolescence give us an opportunity to turn them into something else?…»
Why Won't They Serve?
Homeowners won't volunteer for boards of directors of community associations—another nail in the coffin?
Community associations are corporations.
Their bylaws require management of the association by an elected board of directors…»
What You Don't Know...
When do Statutes of Limitation begin to run on Construction Claims?
Statutes of Limitation are intended to protect defendants from stale claims.
They are also traps for the unwary claimant.
If the time period expires before an appropriate claim is made, legal rights can be permanently lost…»
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