An appellate court has rejected an appeal by Playa Capital and the developer’s co-defendant that sought to compel binding arbitration in a lawsuit brought by a homeowners group at the planned community of Playa Vista.
The three -judge panel ruled that the developer essentially has no standing to force arbitration.
“This appeal presents the question of whether, in response to a construction defect action brought by a condominium homeowners association, the developer can compel binding arbitration of the litigation pursuant to an arbitration in the declaration of covenants, conditions and restrictions (CC&R’s),” the court wrote. “The answer is no.
“We reach this conclusion because the developer does not rely on a contract with the homeowners association to compel arbitration but instead on the arbitration provision in the covenants, conditions and restrictions,” the court continued. “Yet, under California law, the provisions in the CC&R’s are equitable servitudes and can be enforced only by the homeowners association, the owner of a condominium or both.
“Developers are not among those permitted to enforce CC&R’s.”
An equitable servitude is described as a nonpossessory interest in land that functions like a covenant that imposes strict duties and restrictions on the use of the land, or in real estate terms, “running with the land.”
The Promenade at Playa Vista Homeowners Association sued Playa Capital, the developer of Playa Vista, and the Western Division Housing Corp. Oct. 29, 2009, claiming that there were construction defects in some of the condominium units.
The association alleges that there are defects in roofs, stucco, doors and windows, as well as in plumbing, electrical and mechanical components and systems of the complex. On Oct. 29, the developers filed a motion to compel the plaintiffs to submit to binding arbitration, but the trial court denied its motion.
Dan Clifford, the lead attorney for the homeowners association in the appellate case, said his clients had the law on their side regarding binding arbitration cases.
“Arbitration has to be agreed to by both parties,” said Clifford. “Developers often offer to put arbitration clauses in CC&R’s and when the developer did that in this case he created the equitable servitude.”
Clifford says thus far there has been no discovery in the case. “We’re really at the cusp of the litigation,” the attorney said.
The covenant was signed only by the developers, who drafted and recorded the document prior to any of the owners moving into the 90-unit complex in the planned community, according to the plaintiffs.
According to the terms of the governing document, it could not be amended without consent from the developers.
That provision is akin to stacking the deck, said Clifford. “Arbitrators tend to be favorable to developers and can be inclined to adopt a ‘split the baby’ view,” he said.
Regarding which party can enforce the tenets of the covenant, the court found that case law states, “The primary purpose of a homeowners association organized as a nonprofit whose membership consists of the owners of real property within an area subject to planned and uniform restrictive covenants, is to enforce the covenants on behalf of and for the good of all property owners” who constitute its membership.
“It is one thing to say that a homeowners association, which consists of property owners, can enforce the CC&R’s. It is quite another to jump to the conclusion that the developer, which has no ownership interest in the property, direct or indirect, may enforce them,” the court ruled.
Clifford thinks allowing developers to insert binding arbitration clauses in homeowners association covenants is unfair to the property owners. “I think that’s why the Legislature limits enforcement to the associations and its members,” he said.
The judges also appeared to rely on current state real estate regulations pertaining to legal clashes between homeowners associations and developers regarding arbitration over faulty or inadequate construction.
“Our conclusions that the developers lack standing is in harmony with the regulations promulgated by the Department of Real Estate governing alternative dispute resolution procedures in CC&R’s as to the claims between developers and owners (California Code Regulations title 10, 2791.8) and the department’s task of reviewing CC&R’s before allowing the sale or lease of land,” the court wrote.
“Nothing in the regulations or pertinent binding statutes authorizes a developer to insert a provision in the CC&R’s requiring binding arbitration of construction defects claims brought against it where the provision is, by its terms, not subject to amendment by the eventual owners.
“Accordingly, the trial court properly denied the motion to compel arbitration.”
Donald Barr, a developer who built projects on the Westside for more than three decades, said it was never his style to insert binding arbitration clauses in a homeowners group’s governing documents.
“I never like arbitration,” said Barr, a Santa Monica resident. “Judges tend to be less emotional and win, lose or draw, I wanted someone who could reason out any problems that (homeowners) might have.”
Barr said only in cases that were not very complex, like how often trees should be trimmed, did he favor going to arbitration.
Clifford thinks this ruling will make developers reconsider inserting binding arbitration clauses in governing documents of homeowners associations.
“It’s my understanding that people who represent developers are concerned about this (case),” the attorney said. “This is an important ruling, not only for my clients but for every CC&R in the state.”
Barr, who wrote covenants, conditions and restrictions for homeowners groups, agrees that a developer should not have the right to enforce the documents’ provisions, even if it included the legal recourse as binding arbitration.
“If they weren’t apprised of what was in (the CC&R), the developer has no right to enforce it,” said the developer, who is also an attorney.
The defendants’ only recourse is the state Supreme Court. They have until Monday, Jan. 9 to file a petition of review.
Calls to the office of Wood, Smith, Henning & Berman, the law firm that represented Playa Capital and The Western Pacific Housing Inc., were not returned.