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This month the Second District Court of Appeal concluded that
the developer of a condominium complex lacked standing to enforce
the declaration of covenants, conditions, and restrictions
(CC&R's) after it had sold all the units in the
complex.
Western Pacific Housing and Playa Capital Company (the
"Developers") constructed and sold a 90-unit condominium
complex in Playa Vista, California. The homeowners association
("HOA") for the complex later filed suit against the
Developers, alleging construction defects. The Developers sought to
enforce a binding arbitration provision in the
CC&R's.
The Second District Court of Appeal upheld the trial court's
rejection of a motion to compel arbitration. It reasoned that the
Developers could have enforced an arbitration provision in a
contract. However, CC&R's are not contracts, but
rather equitable servitudes, which may only be enforced by
a property owner or an HOA.
The court relied on California Civil Code section 1354, which
states that CC&R's "shall be enforceable equitable
servitudes" and may be enforced "by any owner of a
separate interest or by the association, or by both." Relying
on the plain meaning of section 1354, the court decided that
"the Developers cannot enforce the CC&R's once they
have completed the project and sold all the units" because
"they no longer have any ownership interest in the
property."
The court also decided that the Federal Arbitration Act, which
makes a written arbitration provision in a contract valid
and enforceable, did not apply because CC&R's are not
contracts.
The court distinguished B.C.E. Development, Inc. v. Smith,
215 Cal.App.3d 1142 (1989), which allowed a developer to enforce
CC&R's where it had continuing authority to do so through
an architectural review committee. In contrast, the Playa Vista
Developers had not retained any authority or control to enforce
CC&R's . Moreover, given the plain language of section
1354, the court suggested that B.C.E. Development was
wrongly decided.
The California Supreme Court is set to consider this same issue in
Pinnacle Museum Tower Assn. v. Pinnacle Market Development
(US), LLC, 187 Cal.App.4th 24 (2010), review granted November
10, 2010, S186149. If it agrees with the Second District Court of
Appeal, developers may begin retaining an interest in the
properties they develop to preserve their right to enforce
CC&R's.
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