This Week – Arbitration and Construction Defects; Assessor’s Office Update

Arbitration Clauses Continue to be Unenforceable in Construction Defect Cases

A recent Court of Appeal decision has continued the march against the enforceability of binding arbitration in construction defect cases involving condominium projects and other common interest developments. In Pinnacle Museum Tower Association v. Pinnacle Market Development (US) (2010) 187 Cal.App.4th 24, the Court held that even though the arbitration clause was clearly displayed on the front page of the CC&Rs and in the condominium purchase agreements, it was not enforceable against the homeowners association. This was because the homeowners association only existed through the actions of the developer, so it could not effectively “agree” to arbitration and the associated waiver of the right to jury trial. In reaching this ruling the Court relied on the decision in Grafton Partners v. Superior Court (2005) 36 Cal.4th 944, which held that waivers of jury trial rights in contracts were not enforceable if the waiver occurred before contract execution. The Court also found that the Legislature has provided a specific set of pre-dispute procedures that must be followed before litigation, and that the Legislature allowed the parties to determine if arbitration would be binding or non-binding. (SB 800 procedures.) Finally, the Court ruled that arbitration clauses would not be enforced in individual homeowner contracts because the provisions were unconscionable, unfairly one-sided, and did not provide sufficient notice to the buyers.

The ruling in Pinnacle is consistent with a number of cases that have found arbitration clauses unenforceable against homeowners associations. Other courts have used the doctrines of unconscionability and inconsistency with California Civil Code Section 1298.7 (right of action for defect claims may not be precluded by an arbitration clause) to strike down arbitration provisions. Another case has disallowed judicial reference. Based on the many cases finding against developers and arbitration, it is difficult to imagine that any arbitration provisions would be enforceable without legislative or Supreme Court intervention.

One interesting point is that the Court seemed to leave developers with an opening to create an enforceable arbitration provision. The Court stated that because the CC&Rs could be amended by the homeowners association (in this case, the arbitration provision was not allowed to be amended) and if the language in the CC&Rs stated that the homeowners association would be deemed to accept the arbitration provision unless it was rescinded by the homeowners association, then perhaps this would be enough to show meaningful consent by the homeowners association.

The good news is that perhaps developers will receive some guidance and reconciliation of the different Court of Appeal opinions. The California Supreme Court granted review of Pinnacle on November 10, 2010. The two issues to be decided are (1) whether a homeowners association is bound by an arbitration provision in CC&Rs recorded before the association came into existence, and (2) did the Court of Appeal err by applying the unconscionability provision only to the arbitration clause, despite the requirements of the Federal Arbitration Act (favoring arbitration). Hopefully, the Supreme Court will give developers clear rules on whether CC&Rs can require arbitration of construction defect cases, since the Legislature has not done so. We will be tracking this decision.

SF Assessor’s Office Accepting Informal Review Applications

The San Francisco Assessor’s office will take applications for an “informal review” of homeowners’ requests for a property tax reduction. Owners of single family homes, residential condominiums, townhomes, or live-work units may submit an application to the Assessor prior to March 31, 2011. The Assessor will then perform an informal review to determine if the property value has declined. Taxpayers will be notified of the Assessor’s decision, and will retain the right to a formal appeal. Appeals may be filed from July 5, 2011 until September 5, 2011. Go to for more information and forms.

Update on Backlog of Real Estate Tax Appeals

As we have talked about in prior updates, there is an extensive backlog of real estate tax appeals. There were approximately 6600 appeals filed for the 2010-2011 tax year. It is taking about 12-18 months for an appeal to be heard. The 2009 tax appeals are estimated to be completed around July of 2011. Once the 2009 appeals are completed, the Appeals Board will begin hearing the 2010 appeals. We understand that the Assessor’s office may be looking to help reduce this backlog by working on informal settlements of residential property appeals, which make up about 65% of all the appeals. If you would like to learn more about how these informal settlements work, or have other questions about tax appeals, please call Kevin Rose.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben & Junius, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Copyright 2011 Reuben & Junius, LLP. All rights reserved.