Arbitration Clauses in CC&Rs and Purchase Agreement for Condo Project Do Not Compel Homeowners Association To Arbitrate Claims For Construction Defects

In Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, (— Cal.Rptr.3d —-, Cal.App. 4 Dist., July 30, 2010), a court of appeal considered whether an arbitration clause contained in a condominium project’s CC&Rs and purchase agreements required the homeowners association to arbitrate its construction defect claim against the project developer. The court of appeal invalidated the arbitration clause as an “unconscionable” violation of the right to a jury trial, and found that no agreement had actually been made to arbitrate.

Facts

Pinnacle Market Development (US), LLC and its affiliates ("Pinnacle") constructed and sold condominiums in the Pinnacle Museum Tower Condominium ("Tower") project. Pinnacle recorded a declaration of covenants, conditions, and restrictions ("CC&Rs"), which formed the Pinnacle Museum Tower Association ("Association") to act as the owners association and manage and repair Tower's common areas.

The CC&Rs contain an arbitration clause providing that "Pinnacle, the condominium owners and the Association agree to resolve any construction dispute through binding arbitration in accordance with the Federal Arbitration Act [("FAA")] . . . and the California Arbitration Act." The arbitration clause states, "by accepting a deed for any portion of the Association property, the Association and each owner agree to give up their right to a jury trial and have any construction dispute decided by arbitration." It provides that the arbitration provision is governed by the FAA, applies only where Pinnacle has been named a party to the construction dispute, and that no amendment to its provisions may be made without written consent from Pinnacle.

Pinnacle used a standard purchase and sale agreement that provides that the condominium buyer agrees to comply with the CC&Rs, that Pinnacle and the buyer agree that certain disputes shall be resolved in accordance with the dispute resolution procedure set out in the CC&Rs, and that by agreeing to resolve all disputes as provided in the CC&Rs, they are giving up their respective rights to have such disputes tried before a jury.

Association, on its own behalf and as a representative of its members, brought a lawsuit against Pinnacle for construction defects. Pinnacle petitioned the trial court to compel arbitration. The trial court denied Pinnacle's motion to compel arbitration.

Decision

The appellate court held that "an arbitration provision in [CC&Rs] recorded by the developer of the condominium project, which may not be changed by the association without the written consent of the developer, did not constitute an 'agreement' sufficient to waive the constitutional right to jury trial for construction defect claims brought by the homeowners association." The court further held that "assuming the homeowners association is bound by a jury waiver provision contained in purchase and sale agreements signed by the individual condominium owners, we conclude that the jury waiver provision in the purchase and sale agreements is not enforceable because it is unconscionable."

The court found that California law does not allow "the enforcement of a binding arbitration provision in a purchase contract purporting to preclude a buyer from litigating a construction defect action in court." It ruled that a developer should not be allowed "to accomplish through the [CC&Rs] what it could not accomplish through a purchase contract."

While acting as both the creator of the Tower project and the Association, Pinnacle executed the CC&Rs. The court found that Association, however, did not actually agree to the arbitration provision. The court stated that it failed "to see how the Association could have agreed to waive its constitutional right to a jury trial because, for all intents and purposes, Pinnacle was the only party to the 'agreement,' and there was no independent homeowners association when Pinnacle recorded the CC&R[]s." Accordingly, the court found that Association did not expressly accept the terms of the arbitration provision and there was no conduct from which Association's agreement to arbitrate may be implied. "Although the arbitration provision states that by accepting a deed for any portion of the association property, the Association agreed to give up its right to a jury trial and have any construction dispute decided by arbitration, the Association had no choice but to accept the property that Pinnacle deeded to it."

The issue before the court was not whether a developer can include an arbitration clause in a CC&R; the court concluded that a developer may do so. Instead, the court addressed "the enforceability of a binding arbitration clause that waives a homeowners association's right to a jury trial, and can never be changed by the homeowners association without the written consent of the developer." The court found that a developer cannot impose such a provision on a homeowners association, finding that in such a situation the homeowners association has not agreed to the arbitration provision. The court noted there is no reason a developer cannot instead place a provision in the CC&Rs that requires "the homeowners association and its members to decide via the amendment process to ratify a binding arbitration provision." Another alternative would be for the developer to provide in the CC&Rs that a homeowners association's failure to amend the CC&Rs to eliminate the arbitration clause amounts to the association's acceptance of the provision.

The court further concluded that the jury waiver provision contained in the purchase and sale agreements was "unconscionable." The purchase and sale agreements incorporated the CC&R's arbitration provision, but the agreements do not themselves specifically mention arbitration and they do not "explain to purchasers the type of disputes for which they have agreed to waive their constitutional right to a jury." Purchasers may only discover this information by reading the CC&Rs. Although the purchase and sale agreements incorporated the CC&Rs, the court found no evidence that Pinnacle gave purchasers a copy of the CC&Rs or made them readily available when the purchasers signed the agreements.

The court found that the "arbitration provision is unfairly one-sided because it requires virtually every claim condominium purchasers might raise against Pinnacle to be arbitrated, while Pinnacle would have no conceivable reason to make a claim against condominium purchasers related to the use or condition of the Project, particularly after escrow closed." As a result of these conclusions and holdings, the court of appeal affirmed the decision of the trial court and found that arbitration of the construction defect claim was not required.

Questions

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Jon E. Goetz | 805.786.4302