Rare court victory for home builders

Aug. 22, 2012

By Joseph Perkins

It has taken the better part of two decades, but the California Supreme Court has finally reined in so-called “construction defect” lawsuits, the threat of which has had a damping effect on development of multi-family for-sale housing.

The case in question pitted the homeowners association for San Diego’s Pinnacle Museum Tower against the developer of the 182-unit high-rise condominium. The HOA sued the developer for alleged defects. The developer countered by demanding binding arbitration, based on a clause of the covenants, conditions and restriction (CC&R) to which each of the condo owners agreed upon purchasing their units.

While lawyers representing the HOA asserted that the condo owners had an inviolate right to have their claim heard by a judge and jury (no matter what the CC&R said), and while both a state trial court and appellate sided with the HOA, California’s highest court ruled in favor of the condominium tower’s developer.

That doesn’t mean that developers no longer have to worry about construction defect claims. It simply means that those claims will be settled by mandatory arbitration rather than adjudication in court, with all the time and expense that entails.

The biggest beneficiaries of the Supreme Court decision is not the state’s developers, although they certainly welcome the favorable ruling, but first time homebuyers who cannot afford the median-priced single-family detached home, but can afford a condo or townhouse.

The supply of such multi-family housing was far outstripped by demand during much of the 1990s and early 2000s as developers, wary of construction defect litigation, decided it was safer to build single-family homes rather than multi-family product.

Indeed, a 1996 survey by the University of Southern California’s Lusk Center Research Institute found that four of five California builders of multifamily housing had been hit with construction-defect litigation, a cottage industry for the state’s rapacious trial lawyers.

Because of the omnipresent threat of construction defect litigation, the statewide production of condos fell from 18,691 units in 1994 to a mere 2,945 in 1999. Meanwhile, the number of insurance providers that covered new condo development projects declined from 30 in 1991 to two by decade’s end.

The move away from multi-family housing to single-family housing by the state’s lawsuit-averse home builders had much to do with the run up in price of entry level housing in Californiad uring the early 2000s. It also explains why homeownership became unattainable during the previous decade for many California residents who dreamed of becoming first-time homebuyers.

Given the continuing struggles of California’s housing industry, it is unrealistic to expect condo development to return anytime soon to levels of two decades ago, before the explosion of construction defect litigation.

However, the recent decision by the California Supreme Court, steering HOAs to arbitration rather than jury trials, almost certainly will have a stimulative effect on development of multi-family for-sale housing when the state’s housing market finally rebounds.