A Developer lays a Trap for the Unwary
[Introductory Note: Statutes of Limitation are intended to protect defendants from stale claims. They are also traps for the unwary claimant. If the time period expires before an appropriate claim is made, legal rights can be permanently lost. Here’s a story about an artful attempt by a California developer to deprive a new community association of some valuable time that it needs to evaluate the condition of the project before the limitation periods run out.]
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You just moved into a new condominium project. You bought one of the first units sold in the second phase. Sales in that phase are just about done and then the project will be sold out. The project is just a little over two years old, so you are satisfied that any warranty items will get fixed. How hard could it be with the developer still on the board and with a few units left to sell? Everything seems to be going as expected.
But all is not perfect. The iron fences around the project are corroding badly. And the common area landscaping has a lot of dead spots where the irrigation system apparently doesn’t reach. There are places where rain and irrigation water pond for days and mosquitoes are breeding. You’ve also noticed that some of the wood fences in the project appear to be leaning. You went to the board meeting last night. Two owners are on the board along with three developer representatives. You raised those issues with the board, and one of the developer representatives told you that it was not the developer’s problem any longer, that it was the association’s responsibility to fix those particular defects. You argued that the developer is responsible for defects for ten years[1]. You also pointed out that you only noticed these problems a few months ago. So how could it no longer be the developer’s responsibility to fix clearly defective components?
It not only could be it actually was no longer the developer’s responsibility. As to those components, its legal liability had lapsed. How did this happen? First of all, Title 7 of the California Civil Code specifies standards for residential construction, commencing at Section 896.[2] In the same section it also lists special, shorter, periods for bringing actions on certain building components. A deteriorating manufactured product like iron fences and irrigation and drainage problems have a very short 1-year limit on claims. Wood fence post claims expire after 2 years. But you just found out about it, and you came to the board meeting a couple of days later, certainly a year (and definitely not two) hasn’t passed. Or has it?
Some of the Section 896 limitation periods accrue (start to run) on a fixed date: “close of escrow,” and certain fence, irrigation and drainage claims are among that group. But how does that apply to a community association with dozens of escrows closing at different times? The statute provides that for a claim filed by a community association, the phrase, “close of escrow” actually means something very different.
With respect to claims by a community association, California Civil Code 895(e) defines "Close of Escrow" as: "...the date of substantial completion, as defined in Section 337.15 of the Code of Civil Procedure, or the date the builder relinquishes control over the association's ability to decide whether to initiate a claim under this title, whichever is later.”[3] Obviously, this is not the day some owner went down to the title company and signed closing documents.[4]
If you go to Section 337.15 you will find the definition of "substantial completion." There are 4 options:
(1) The date of final inspection by the applicable public agency.
(2) The date of recordation of a valid notice of completion
(3) The date of use or occupation of the improvement
(4) One year after termination or cessation of work on the improvement
"...whichever first occurs."
With respect to claims by a community association, California Civil Code 895(e) defines "Close of Escrow" as: "...the date of substantial completion, as defined in Section 337.15 of the Code of Civil Procedure, or the date the builder relinquishes control over the association's ability to decide whether to initiate a claim under this title, whichever is later.”[3] Obviously, this is not the day some owner went down to the title company and signed closing documents.[4]
If you go to Section 337.15 you will find the definition of "substantial completion." There are 4 options:
(1) The date of final inspection by the applicable public agency.
(2) The date of recordation of a valid notice of completion
(3) The date of use or occupation of the improvement
(4) One year after termination or cessation of work on the improvement
"...whichever first occurs."
Among that group (1) and (2) would probably be candidates for the first occurring event, and whichever one it was, it probably happened well over a year ago, probably two years ago, when the project was completed. But what difference does that make? The developer still has 3 out of 5 seats on the board of directors, clearly controls the association, and is not likely to relinquish control until the last units are sold, so “close of escrow” hasn’t happened yet, and no periods of limitation have started to run, right?
Wrong.
This particular development has a unique set of bylaws that may not be as unique as we think. Subsection 1.6 of the bylaws states: "The sole and exclusive authority to initiate claims on behalf of the Association in connection with (Title 7 claims) shall rest with the Board members elected solely by Class A members (those elected by the members other than the developer)...The decision of a majority of the non-declarant board members shall control..." (Emphasis added)
The result? This provision effectively surrenders the developer’s control over the decision to make a construction defect claim as of the date that the non-developer board members were appointed, and if that event occurred over a year ago, it is quite likely that these shorter limitation periods (and perhaps other, longer periods) have already expired. Why? Do you remember the language of Section 895(e)? The period in which to make a claim for certain of the building standards in Title 7 commences on: "...the date of substantial completion, as defined in Section 337.15 of the Code of Civil Procedure, or the date the builder relinquishes control over the association's ability to decide whether to initiate a claim under this title, whichever is later.”[5] (Emphasis added)
In this case both of those events occurred over a year ago and maybe as long as two years ago. By inserting this provision into the bylaws of the association, the developer has effectively compressed what would normally be a 1 or 2-year period of limitations into a much shorter timeframe. What it has done is to essentially eliminate the length of the entire sales period from the time an association would normally have to evaluate a project by starting the clock “ticking” as of the date that the first non-developer board members took office. For some components, like electrical and plumbing systems, concrete, and paint, longer limitation periods on new claims apply, so this is not as crucial,[6] but for those components with 1 and 2-year cutoffs; the time to file a claim could expire before the project is sold out!
This places an enormous fiduciary responsibility on the non-developer board members who may not appreciate their obligations or have sufficient expertise or experience to initiate an inspection of a project that is still being sold, maintained and managed by the developer and the developer’s employees and subcontractors. The non-developer board members may have the bare legal authority to initiate a claim, but do they have the authority to hire attorneys to advise them? Will the developer representatives on the board permit them to retain the services of an architect or engineer to investigate the project? If not, the authority to initiate a claim is illusory.
So what we have is a very clever effort by the developer’s attorneys to truncate the rights of the owners. The average owner would never notice this provision, and even if they did they would have no idea of its consequences. The California Department of Real Estate, the “guardian” of the rights of real estate consumers, has permitted this sleight of hand. The only real protection against the operation of a similar bylaw provision is for the new board of directors to immediately file an appropriate notice of commencement of legal proceedings pursuant to Civil Code Section 1375 (b), a claim under Title 7, or request that the builder execute a tolling agreement.[7]
Of course, the average new owner/board member will be completely unaware of the need for this strategy, and in the unlikely event that they actually were aware of the provisions of CCP 337.15 they would no doubt interpret the developer’s continuing majority control of the board as control of the claims process as well. The developer’s representatives or attorneys would not likely point out these specific bylaw provisions or suggest anything that might otherwise compromise the rights of the developer. And even if these owner/board members were aware of the consequences, their lack of authority to obtain expert advice and support renders meaningless whatever authority they do have.
We strongly suggest that any board member/owner on a new project board of directors carefully read the association’s bylaws, and if there is anything that would indicate a potential for early surrender of a builder’s authority to initiate a claim such as the language above, outside counsel should immediately be consulted. Any delay could potentially sacrifice valuable claims.
We tend to think of a developer relinquishing control over an association as a good thing. But in this case it’s not an altruistic gesture. It is specifically intended to shorten the period that a new association has to evaluate the project and determine whether construction issues exist. There is no other explanation for this unique provision in an association’s bylaws. Be aware of it. What you don’t know can hurt you.
[1] That is not exactly a true statement. California Code of Civil Procedure Section 337.15 is actually a “statute of repose” which sets the outside limit of the developer’s liability for new construction at ten years from a specific date determined in accordance with the statute. There are many considerably shorter such periods in the law, such as those discussed in this article, which will cut off a developer’s responsibility much sooner, depending upon the type of claim made and as we discuss here, the type of building component that is the subject of the claim. A complete list of components and the time limits for bringing claims can be found on our website.
[2] Title 7 of the California Civil Code (also known as SB800) commencing with Section 895, was enacted to give builders a right to repair defects in new construction. It also set into law a number of construction “standards” to which builders must adhere and for some of those standards enacted specific limitations on bringing actions, some as short as 1 or 2 years.
[3] The statute of limitations for damage to property is three years from the date of “discovery” of the facts constituting a cause of action. (California Code of Civil Procedure Section 338.) The referral to CCP 337.15 to establish a fixed trigger date makes it clear that the legislature intended for these new periods of limitation to be shortened “statutes of repose” for specific building components. This makes it irrelevant when the issue was “discovered” at least when dealing with limitation periods as short as 1-2 years.
[4] That definition of “close of escrow” still applies, however, to actions against the developer brought by individual owners on their own behalf.
[5] California Civil Code Section 895(e)
[6] In larger projects, with longer build out periods, where the developer has effective, if not legal, control for a much longer period, the longer limitation periods for other components could also expire.
[7] A “Notice of Commencement of Legal Proceedings” is not a lawsuit and does not involve the courts. It is sent to a developer pursuant a statutory provision that allows an association to toll the running of any applicable statutes of limitation for 180 days by the simple expedient of this notice. A claim filed pursuant to Title 7 has a similar tolling provision, but the tolling is for a shorter period. A tolling agreement is a consensual agreement with the developer (or other participants in the construction of the project) to suspend the operation of the statute of limitations, usually for a limited and defined period. If you have any questions regarding the applicability of these tolling provisions, or their necessity, you should consult with an attorney specializing in construction defect claims on behalf of community associations.
