“California’s Right To Repair Act Is Not A Homeowner’s Exclusive Remedy When Construction Defects Cause Actual Property Damage.”

by Low, Ball & Lynch
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The California Court of Appeals recently issued two decisions holding that California’s Right to Repair Act (“SB 800”) is not the exclusive remedy for a homeowner seeking damages for construction defects that have also resulted in property damage.  Rather, a homeowner who incurs property damage due to construction defects may also pursue common law tort causes of action.

By way of background, the California Supreme Court held in Aas v. Superior Court, 24 Cal.4th 627 (2000), that a plaintiff cannot recover tort damages for design or construction defects unless there is resulting property damage.  This left homeowners with construction defect claims but no corresponding property damage without a common law cause of action.  The Aas case created the impetus for the California legislature to enact SB 800 or The Right to Repair Act – in 2002 (codified at Civil Code Sections 895 through 945.5.)

The Right to Repair Act (“the Act”) abrogated the Aas decision and provides a homeowner with a statutory cause of action to recover purely economic damages related to construction defects even if there is no property damage.  Under the Act builders have the absolute right to repair construction defects pursuant to pre-litigation claims presentation, repair and mediation procedures.  After the Act was passed, many in the construction industry believed that it was the exclusive statutory remedy for homeowners (or insurers in subrogation) to recover damages for construction defects.

  1.  Liberty Mutual Insurance Company v. Brookfield Crystal Cove, LLC

The Fourth District of Appeal in Liberty Mutual Insurance Company v. Brookfield Crystal Cove, LLC, 219 Cal.App.4th 98 (2013), considered whether the Right to Repair Act eliminated a property owner’s common law rights and remedies when actual damage has occurred.

Eric Hart bought a newly constructed home from Brookfield Crystal Cove LLC (“Brookfield”).  A pipe in the home’s sprinkler system burst, causing significant damage.  Brookfield repaired the damage.  Hart’s homeowner insurer, Liberty Mutual Insurance Company (“Liberty Mutual”), paid Hart’s relocation expenses during repairs.  Liberty Mutual sued Brookfield in subrogation to recover their expenses.  The trial court found that Liberty Mutual’s complaint was time-barred under the Act, because Liberty Mutual did not file its complaint within four years from the close of escrow (Civil Code § 896(e)).  The Court sustained Brookfield’s demurrer and dismissed the Liberty Mutual complaint.  The Court of Appeal reversed.

The Court held that Liberty Mutual’s complaint did not fall exclusively within the Act and was, therefore, not time-barred under the four-year statute set forth in Section 896(e).  The Court first discussed the history of the Act and noted that the specific goal of the Act was to abrogate the holding in Aas v. Superior Court (2000) 24 Cal.4th 627, 632 (no tort liability for construction defects in residential properties absent actual property damage).  However, the Act’s legislative history did not support a finding that common law claims for actual property damage were barred.  Many provisions of the Act support the conclusion that the Act covers instances where construction defects were discovered before actual damage has occurred.  Therefore, a homeowner who suffers actual damages as the result of a construction defect has a choice of remedies between the Act or their common law remedies.  In this case, just because the plaintiff did not comply with the time restraints of the Act did not mean that the plaintiff was time-barred from pursuing their common law rights against the developer.

The Court also found that just because the Act provides for a wide range of damages, it “does not mean that the Act abrogated the construction defect statute of limitations” contained in Code of Civil Procedure sections 337.1, (patent defects, four years), and 337.15 (latent defects, ten years).  The Court admitted that one of the goals of the Act was to do away with the different statute of limitations applying to latent versus patent defects where those defects did not result in actual property damage.  However, it noted that the legislature did not repeal Code of Civil Procedure sections 337.1 and 337.15.  In the Court’s view, the legislative history made clear that the intent in enacting the Act was to provide for the identification and repair of construction defects before they cause actual damage to the structure or its content.  The Act was not intended to be the sole remedy to recover actual damages incurred as the result of construction defects.  In the Court’s view, the Act itself acknowledged that other laws may apply to construction defect claims.   Therefore the Act was not the exclusive means for seeking redress once construction defects cause property damage.

The trial court’s order sustaining the demurrer was reversed.

Liberty Mutual is a very important case because it allows a plaintiff to avoid the Right to Repair Act if they have suffered actual damages.  Prior to this decision, the construction industry had fought hard to enact the Right to Repair Act and felt that the Right to Repair Act was the exclusive remedy for homeowners or insurers in subrogation actions.  If the builders did not comply with the Right to Repair Act, only then could a lawsuit be filed.  Under this decision, a property owner that has suffered actual property damage may elect to proceed under the Right to Repair Act or common law theories of liability or both.

  1. Burch v. Superior Court

In Burch v. Superior Court, 223 Cal.App.4th 1411 (2014), the Second District Court of Appeal agreed with the Fourth District Court of appeal and Liberty Mutual and held that the Right to Repair Act (“the Act”) does not provide the exclusive remedy for a homeowner seeking damages for construction defects resulting in property damage.

Custom Home Builders (“Custom”), a general contractor, built a single family residence in Pacific Palisades area of Los Angeles pursuant to a written contract with the developer, Premier Homes (“Premier”).  Burch purchased the home from Premier pursuant to a sales contract.  Scott Warren and Daniel Sahar are the principals and owners of both Custom and Premier.

Burch filed a complaint and several amended complaints against Premier, Custom, Warren and Sahar for construction defects.  Burch’s third amended complaint alleged construction defects as  well as breach of the sales contract, negligence, breach of implied warranty, unjust enrichment and breach of contract/third party beneficiary.

Burch alleged that defendants breached their duty of care regarding construction, resulting in construction defects.  She specified that some of the construction defects lead to property damage.

Defendants Custom, Warren and Sahar moved jointly for summary judgment or summary adjudication, arguing that the Act established a statutory action for violation of the standards set forth in the Act as the exclusive remedy for damages for construction defects such that Burch’s common law claims for construction defects were barred.  Premier separately moved for summary judgment/summary adjudication on the same basis.

The trial court granted summary adjudication in favor of all defendants on the second cause of action for negligence and the third cause of action for breach of implied warranty.  Burch filed a petition for writ of mandate, contending that the Act does not provide the exclusive remedy for damages for construction defects and the trial court erred by summarily adjudicating her counts for negligence and breach of implied warranty.

The Court of Appeal held that the Act does not preclude Burch from pursuing common law causes of action for negligence and breach of warranty and reversed the ruling of the trial court granting summary adjudication of the causes of action for negligence and breach of implied warranty as error.

The first court revisited the California Supreme Court case Aas v. Superior Court, 24 Cal.4th 627, 647, 652-653 (2000), where the Court held that deficiencies in residential construction were actionable in tort only if they caused property damage or personal injury.  The California legislature enacted that Right to Repair Act in 2002 which abrogated the holding in Aas to allow the recovery of damages for specified construction defects resulting in only economic loss.  Civil Code section 896 states that any action for damages arising out of or related to deficiencies in residential construction, including a builder’s liability, and to some extent the liability of a general contractor and others, is limited to liability for violation of the construction standards set forth in the Act.

However, the Act sets forth various exceptions.  Civil Code Section 943 (a) states, “…this title does not apply to any action by a claimant to enforce a contract or express contractual provisions, or any action for fraud, personal injury, or violation of a statute…”  Furthermore, Civil Code Section 897 exempts from the limitation of liability under the Act any defect that “causes damage.” Therefore, the Court of Appeal held that the Act does not limit or preclude common law claims for damage for construction defects that have caused property damage (citing Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98, 103-104).

COMMENT

Under Liberty Mutual and Burch a homeowner or its insurance company pursuing subrogation in California may proceed under both the Right to Repair Act and common law tort remedies if a construction defect result in property damage.  Therefore, the Right to Repair Act is not the exclusive remedy for construction defects.  These two cases will likely be used by homeowners to avoid application of the Right to Repair Act’s pre-litigation procedures.  Homeowners may choose to immediately file a lawsuit in the event that their alleged construction defects have also result in corresponding property damage.  On the other hand, a builder/developer can negotiate to include contractual pre-litigation procedures and/or binding alternative dispute resolution procedures in purchase contracts as a means of resolving disputes out of court and outside of the operation of The Right to Repair Act.

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