Arbitration covenant that runs with the land binds homeowners and their association even though neither was a direct party to the covenant

Posted in: Arbitration, Real Estate Law by Steven Vartabedian on

One of the earlier blog articles that I wrote on this site commented on the trend of California appellate cases questioning the fairness of arbitration clauses that often left the non-drafting party without any bargaining power. While many of these situations arise in the context of disadvantaged consumers and employees directly contracting with the drafting party, the circumstance stated in my February 7, 2011 blog concerned homeowners and homeowners associations. As was stated in the opinion which was the subject of that blog, Villa Vicenza Homeowners Association v. Nobel Court Development LLC 185 Cal.App.4th 23 (2011), in spite of the provisions of California Civil Code section 1354 generally providing that recorded covenants in deeds are enforceable as equitable servitudes binding future property owners, that court resorted to the exception: “unless unreasonable.” I questioned whether there was a substantial enough basis establishing unreasonableness in that homeowners had record notice of these covenants; they could simply choose not to buy these homes realizing that claims against the developer would require arbitration, waiving the right to a public trial.

The Villa Vicenza published opinion and others like it had a short “shelf-life.” They were granted review by the California Supreme Court. And just this past month that case name appeared again in the published body of law, this time in a minute order of the Supreme Court stating the grant of review was vacated and the matter was remanded to the Court of Appeal to decide the matter in light of the Supreme Court’s recent opinion in Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US) LLC (2012) 55 Cal.4th 223.

In Pinnacle, a homeowners association sued a condominium developer for construction defect, seeking damage to its property and damage to the separate interests of the condominium owners who compose its membership. The developer filed a motion to compel arbitration, based on a clause in the recorded declaration of covenants, conditions, and restrictions providing that the association and the individual owners agree to resolve any construction dispute with the developer through binding arbitration in accordance with the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.).

The Supreme Court granted review to determine whether the arbitration clause is binding on the association, and if so, whether it must be invalidated as unconscionable. The high court determined that, even though the association did not exist as an entity independent of the developer when the declaration was drafted and recorded, it is settled under the statutory and decisional law pertaining to common interest developments that the covenants and terms in the recorded declaration reflect written promises and agreements that are subject to enforcement against the association. The court concluded that the arbitration clause binds the association and is not unconscionable.

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