Facts: A developer constructed a common interest development (CID), drafting and recording the covenants, conditions and restrictions (CC&Rs) before any unit was purchased or a homeowners’ association (HOA) was formed. The CC&Rs included a provision stating if the HOA found a construction defect, it would pursue the developer through arbitration. Buyers purchased the units in the CID and signed the CC&Rs, thereby forming the HOA. A construction defect was found in the common area. The HOA sought to pursue the defect claim in court and the developer sought to have the dispute settled through arbitration.
Claim: The developer claimed the CC&Rs’ arbitration provision was enforceable since members of the HOA agreed to the arbitration provision in the CC&Rs upon purchase.
Counterclaim: The HOA claimed the arbitration provision in the CC&Rs was unenforceable since the CC&Rs were unconscionable, as they were created before the HOA was formed.
Holding: The California Supreme Court held the arbitration provision was enforceable since the CC&Rs were conscionable, as the HOA members had agreed to the CC&Rs when they purchased the property, regardless of whether the CC&Rs were drafted before the formation of the HOA. [Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, et al. (2012) 55 CA 4th 223]
Editor’s note – first tuesday has long been an advocate against arbitration provisions, as any decision reached by the arbitrator is final and binding. Further, the ruling need not be based on any precedents, thus the outcome is impossible to predict and uncorrectable if the ruling is based on a misunderstanding of the law. As a matter of policy, first tuesday does not include any arbitration provisions in our library of over 400+ real estate forms.
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