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On August 16, 2012, the California Supreme Court in Pinnacle Museum Tower Association v. Pinnacle
Market Development (US), LLC held that arbitration
provisions in Covenants, Conditions and Restrictions (CC&Rs)
are enforceable against an owners association. The state Supreme
Court's decision settles an area of common interest development
(CID) law that was left in flux for several years because of
conflicting opinions in the courts of appeal on this issue.
The real estate project involved is a mixed-use residential and
commercial condominium CID project located in San Diego, Calif. The
owners association that was formed to own and maintain the common
areas of the project brought a construction defect lawsuit against
the developer. The developer moved to compel arbitration based on
provisions in the CC&Rs recorded for the project that required
construction disputes with the developer to be resolved through
binding arbitration. Both the trial court and California Court of
Appeal for the Fourth Appellate District held the arbitration
provisions were unenforceable against the owners association and
unconscionable.
In reversing the holdings of the lower courts, the California
Supreme Court concluded that covenants in CC&Rs, including a
covenant to arbitrate certain disputes, will be "honored and
enforced unless proven unreasonable." The court concluded
further that the arbitration provisions in the Pinnacle CC&Rs
were not unconscionable.
In reaching its decision, the court relied on certain
factors:
the structure of and language used in the actual arbitration
provisions in the CC&Rs;
the Federal Arbitration Act, which reflects federal policy
favoring arbitration as an expeditious way of resolving disputes;
and
the Davis-Stirling Act, which is the governing law for the
formation and governance of CID projects in California and allows a
developer to bind an owners association to an arbitration covenant
through recorded CC&Rs, provided it is not unreasonable.
While this decision establishes that the Federal Arbitration Act
and the Davis-Stirling Act encourage the use of arbitration as a
favored method of dispute resolution, the arbitration provisions in
the CC&Rs should still be drafted in a way to satisfy a
technical analysis of whether those provisions are reasonable.
Legal counsel can be helpful in preparing and structuring CC&Rs
so that any arbitration provisions contained in the CC&Rs
should be enforceable.
Ultimately, with this recent decision, developers in California
may feel confident that construction defect disputes can and will
be resolved through binding arbitration if that is their chosen
alternative dispute resolution procedure.
If you have any questions about this Alert, please
contact Marianne F. Adriatico, any member of the Real Estate
Practice Group or the attorney in the firm with whom you are
regularly in contact.
This article is for general information and does not include
full legal analysis of the matters presented. It should not be
construed or relied upon as legal advice or legal opinion on any
specific facts or circumstances. The description of the results of
any specific case or transaction contained herein does not mean or
suggest that similar results can or could be obtained in any other
matter. Each legal matter should be considered to be unique and
subject to varying results. The invitation to contact the authors
or attorneys in our firm is not a solicitation to provide
professional services and should not be construed as a statement as
to any availability to perform legal services in any jurisdiction
in which such attorney is not permitted to practice.
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