[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 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.]
You just moved into a new condominium project. You bought one of the first units sold in the second phase. The sales in that phase are almost finished and then the project will be sold. The project is just over two years old, so you are satisfied that all warranty items will be repaired. How difficult could it be with the developer still on the board and with a few units to sell? Everything seems to go as expected.
But not everything is perfect. The iron fences around the project are severely corroding. And the landscape of the common area has many dead spots where the irrigation system apparently does not reach. There are places where rain and irrigation water stagnate for days and mosquitoes breed. He has also noticed that some of the project’s wooden fences appear to be leaning. You went to the board meeting last night. Two owners are on the board along with three developer representatives. You brought those issues up to the board, and one of the developer representatives told you that it wasn’t the developers’ problem anymore, that it was the association’s responsibility to fix those particular flaws. You argued that the developer is liable for defects for ten years. He also noted that he only noticed these issues a few months ago. So how could it stop being the developer’s responsibility to fix clearly defective components?
It’s not just could be actually I was it is no longer the responsibility of the developer. As for those components, their legal responsibility had expired. How did this happen? First, Title 7 of the California Civil Code specifies the standards for residential construction, beginning with Section 896. In the same section it also lists special and shorter periods for bringing actions on certain components of construction. A deteriorating manufactured product, such as iron fences and irrigation and drainage problems, has a very short claim limit of 1 year. Wood fence post claims expire after 2 years. But he just found out and came to the board meeting a couple of days later, certainly not a year has passed (and definitely not two). Or do you have it?
Some of the Section 896 limitation periods are increased (start running) on a fixed date: “escrow closing,” and certain fence, irrigation, and drainage claims fall within that group. But how does that apply to a community association with dozens of escrows that close at different times? The statute provides that for a claim filed by a community association, the phrase, “closing escrow“It actually means something quite different.
With respect to community association claims, California Civil Code 895(e) defines “Closure of escrow” What: “…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 ability of the association to decide whether to bring a lawsuit under this title, which let it happen later.” Obviously, this is not the day that some homeowner went to the title company and signed the closing papers.
If you go to Section 337.15 you will find the definition of “substantial completion.“There are 4 options:
(1) The date of the final inspection by the corresponding public agency.
(2) The date of entry of a valid notice of termination
(3) The date of use or occupation of the improvement
(4) One year after completion or cessation of improvement works
“…any first occurs.”
Between that group (1) and (2) would probably be candidates for the first event that happened, and whatever it was, it probably happened more than 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, clearly controls the partnership, and isn’t likely to relinquish control until the last units are sold, so the “escrow close” hasn’t happened yet and won’t there are limitation periods have started to work, right?
Wrong.
This particular development has a unique set of bylaws that may not be as unique as we think. Section 1.6 of the statutes establishes: “The sole and exclusive authority to initiate claims on behalf of the Association in connection with (Title 7 claims) shall rest with the members of the Board elected solely by the Class A members (those elected by the members other than the developer )… The decision of the majority of non-reporting board members will control…” (Emphasis added)
The result? This provision effectively relinquishes the developer’s control over the decision to file a construction defect claim as of the date the non-developer board members were appointed, and if that event occurred more than one year ago, it is most likely these shorter statutes of limitations (and perhaps other longer periods) have already expired. Why? Remember the language of Section 895(e)? The deadline to claim certain Title 7 building regulations begins 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 pursue a claim under this title, whichever is later.” (Emphasis added)
In this case, both events occurred more than a year ago and maybe two years ago. By inserting this provision into the association’s bylaws, the developer has effectively compressed what would normally be a 1 or 2 year limitations period into a much shorter time frame. What it has done is essentially remove the length of the entire sales period from the time an association would normally have to evaluate a project by starting the clock from the date the first non-developer board members they took office. For some components, such as electrical and plumbing systems, concrete, and paint, longer limitation periods apply for new claims, so this is not as critical, but for those components with 1-year and 2-year limits; the time to file a claim could expire before the project runs out!
This places an enormous fiduciary responsibility on 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, held and managed by the developer. Developer and the Developer’s employees and subcontractors. . Non-developer board members may have minimal legal authority to initiate a claim, but do they have the authority to hire attorneys to advise them? Will the developers’ representatives on the board allow them to retain the services of an architect or engineer to investigate the project? Otherwise, the authority to initiate a claim is illusory.
So what we have is a very clever effort by the developer’s lawyers to truncate the rights of the owners. The average homeowner would never notice this arrangement, and even if he did, he would have no idea of its consequences. The California Department of Real Estate, the “guardian” of real estate consumer rights, has permitted this sleight of hand. The only real protection against the application of a similar statutory provision is for the new board of directors to promptly file proper notice of commencement of legal proceedings under Civil Code Section 1375(b), a suit under Title 7, or request that the builder execute a maquila contract.
Of course, the average new owner/board member will not be aware of the need for this strategy, and in the unlikely event that they were indeed aware of the provisions of CPC 337.15, they would no doubt interpret continued majority control of the board. from the developer. as well as the control of the claims process. The developer’s representatives or attorneys are unlikely to point to these specific statutory provisions or suggest anything that might compromise the developer’s rights. And even if these owners/board members were aware of the consequences, their lack of authority to seek expert advice and support makes any authority they do have meaningless.
We strongly recommend that any board member/owner on a new project’s board of directors carefully read the association’s bylaws, and if there is anything that might indicate a potential early waiver of a builder’s authority to initiate a claim such as above language, outside should immediately consult a lawyer. Any delay could potentially sacrifice valuable claims.
We tend to think of a developer relinquishing control of an association as a good thing. But in this case it is not an altruistic gesture. It is specifically intended to shorten the period that a new association has to evaluate the project and determine if there are construction problems. There is no other explanation for this unique provision in an association’s bylaws. Be aware of it. what you do not know they can hurt you.