There is an increasing trend by Developers, in an effort to avoid responsibility for construction defects, to insert provisions in the original Association governing documents which they draft that make it exceedingly difficult to pursue such claims against them. The significant harm of these ‘poison pill’ provisions was highlighted in the recent California Appellate Court Case entitled Branches Neighborhood v. CalAtlantic Group (2018) 26 Cal.App.5th 743 in which a condominium project claiming $5 million in construction defects had their case summarily dismissed for failing to comply with provisions in the Developer drafted CC&Rs requiring a member vote ‘before’ filing a claim in arbitration.
The arbitrator in Branches dismissed the HOA’s claim despite the fact that ‘after’ filing the claim, the homeowners overwhelmingly voted to pursue the claim (92 out of 93 voting in favor of pursuing the claim) and intended their vote to be retroactive to a date prior to filing the claim. The arbitrator ruled that the subsequent vote and ratification of the Board’s actions by the membership did not apply retroactively and thus the failure to obtain the vote ‘prior’ to filing was fatal. The Court of Appeal did not find that any of the narrow circumstances for overturning an arbitrator’s decision were present and thus affirmed the award. The HOA recently filed a petition for review with the California Supreme Court challenging the decision of the Court of Appeal. If the Supreme Court does not overturn the decision, the homeowners at Branches will be barred from pursuing a claim as the ten (10) year statute of repose has expired (although the claim was timely when initially filed) and the homeowners will be required to fund $5 million in repairs (nearly $30,000 per homeowner) which should rightfully be paid by the Developer or its insurance carrier.
Other even more draconian provisions designed to avoid Developer liability for construction defects have been attempted, such as: imposing supermajority quorum and membership vote requirements (at or above 65%); requiring a membership vote before the Board can retain counsel to advise them as to whether or how to proceed; requiring a membership vote before a Board can spend any HOA funds to investigate whether construction deficiencies may exist; requiring notice to be given to the Developer of any Board meetings where construction defects may be discussed, whether in open or executive session, long after Developer representatives have left the Board; allowing Developer representatives to sit on Boards long after all units are sold and Developer representatives would typically no longer be members of the Board; and including a provision in the Governing Documents which prohibits Boards from amending it’s CC&R’s to remove provisions like this without Developer’s consent, which would not be forthcoming.
Developers have argued that they insert these provisions in the CC&Rs to ‘protect’ the homeowners from their own Boards that may pursue claims which will be expensive for the members to litigate. However, as evidenced by the result in Branches, this alleged justification is purely self-serving and designed to protect Developers against claims for faulty construction and thereby unfairly saddle homeowners with the expense.
The Supreme Court of Massachusetts recently held that such provisions are void as against public policy. In deciding Trustees of the Cambridge Point Condominium Trust vs. Cambridge Point, LLC, (2018) 478 Mass. 697 the Massachusetts Supreme Court stated “that it is overreaching for a Developer to impose a condition precedent that, for all practical purposes, makes it extraordinarily difficult or even impossible for the [Board of Directors] to initiate any litigation against the Developers regarding the common areas and facilities of a condominium.”
The California Supreme Court should follow the lead of Massachusetts and invalidate such ‘poison pill’ provisions to avoid such harsh results.
Branches Neighborhood Corp. v. CalAtlantic Group, Inc. (2018) Cal.App.5th 743
Trustees of the Cambridge Point Condominium Trust v. Cambridge Point, LLC (2018) 478 Mass. 697