Provisions In CC&R'S Requiring Arbitration Of Claims Against Developers By Homeowners Associations Or Owners Are Not Enfroceable

In Villa Vicenza Homeowners Ass'n v. Nobel Court Dev., LLC, No. D054550 (4th Dist. Jan. 11, 2011, the Fourth District of the California Court of Appeal held that a provision in a declaration of covenants, conditions and restrictions (CC&R's) that required a homeowners association (HOA) and homeowners to arbitrate claims against the developer are not enforceable. The developer in Villa Vicenza drafted the CC&R's for its condominium project, including an arbitration provision, before the formation of the HOA. The CC&R's required that the HOA and homeowners arbitrate any claims they have against the developer. When the HOA and homeowners filed suit against the developer for defects in common areas and facilities, the developer filed a motion to compel arbitration under the provisions of the CC&R's.

The Court of Appeal recognized that both the Federal Arbitration Act and California Arbitration Act favor arbitration agreements. However, the enforceability of an arbitration agreement "is determined by reference to state-law principles governing the formation of contracts." On that basis, the court found that the CC&R's did not create an enforceable agreement to arbitrate. In reaching this conclusion, the court relied on its decision in Treo @ Kettner Homeowner's Ass'n. v. Superior Court, 166 Cal. App. 4th 1055 (2008) (hereinafter, Treo). In Treo, the court concluded that a provision in the CC&R's that waived an HOA's and homeowners' right to a jury trial in a dispute with the developer was not entered into with actual notice and meaningful consent. Since an HOA springs into existence after the creation and recording of the CC&R's, and since later purchasers of units receive only constructive notice of the CC&R's through their recording and effectively have no choice but to accept the CC&R's, the CC&R's cannot constitute a contract sufficient to waive the right to a trial by jury.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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