This is the second of a two-part series on how developers of new projects have attempted to build liability firewalls around themselves in the governing documents that they draft for new associations in an attempt to immunize themselves from liability. In last week's edition, Tyler Berding explored the new, shorter limitations on actions contained in Title 7 of the California Civil Code and how developers have strategically loaded the bases in their favor with provisions intended to accelerate the running of statutes of limitation in construction defect cases. In this week's edition, Matt Malone discusses provisions that developer's hope will make it difficult, if not impossible for association board members to bring claims for faulty construction. In a future edition we will discuss why most of these efforts will likely prove futile.
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
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.
By Andrea O'Toole, Esq.
Why is a foreclosing lender not required to satisfy the lien for delinquent assessments recorded against the property by the homeowner's association? Shouldn't the lender be required to do this when it sells the property to a new owner?
Unfortunately for homeowner's associations, a lender foreclosure and sale of the property often results in no money for the association and the association is left to try to collect the money from the prior owner. In California, the rule of priorities is based on the "first in time is first in right" rule (there are a few exceptions to the rule but none that elevates the priority of the association's lien). Because the foreclosing lender recorded its trust deed prior to the association's lien, its interest in the property is senior to the association's interest. Once the lender forecloses and the property is sold at auction (or title reverts to the lender because there is no buyer), all encumbrances junior to the lender are extinguished. This includes the association's lien. (This scenario assumes there are no excess proceeds from the foreclosure and sale of the property which, currently, is a very common situation as the loan amounts tend to be higher than the fair market value of the properties.) Lenders, of course, would be much less willing to lend money to purchase property if they could not ensure that they would be first in line to take the collateral in the event of the borrower's default.
BANKRUPTCY WON'T WORK
Why There's No Protection for Members When Community Associations "Go Broke"
By Tyler Berding and Sandra Bonato
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