Homeowner Associations and Members Not Necessarily Bound By Arbitration Provisions in CC&Rs or in Related Purchase Agreement Where Developer is Initial Declarant

Pinnacle Museum Tower Association v. Pinnacle Market Development (US) LLC, No. D055422 (4th Dist. July 30, 2010)

By Michael Wilmar and Aaron Kleven

Homeowners and homeowner associations are not necessarily bound by arbitration provisions in a declaration of covenants, conditions and restrictions, or in a related purchase agreement, where the developer is the initial and only declarant. That is the implication of a July 30th ruling of the Fourth District of the California Court of Appeal. In Pinnacle Museum Tower Association v. Pinnacle Market Development (US) LLC, a homeowner association brought a construction defect suit on behalf of itself and its members for damage to common areas. The developer of the condominium project attempted to block the suit, claiming the plaintiff was bound to an arbitration provision recorded in the project CC&R’s. It argued the provision committed the Association to resolve all construction disputes through arbitration and waived the Association’s right to a jury trial. The purchase and sale agreements signed by the individual condominium owners also contained a jury waiver and a provision compelling owners to comply with the arbitration provision in the CC&R’s. But the court concluded that the provision in the CC&R’s did not constitute an agreement sufficient to wave the Association’s constitutional right to a jury trial. And it found the corresponding provision in the purchase and sale agreement unconscionable and unenforceable against the individual owners.

The problem with the arbitration provision in the CC&R’s was that the Association had no meaningful opportunity to agree to it. This arises from the way most homeowner associations are created. The developer (Pinnacle) drafted the CC&R’s, including the arbitration provision, before the formation of the homeowner association. The Association then “[sprung] [sic] into existence” when the developer recorded the declaration. Pinnacle signed the CC&R’s in its capacity as the Association’s creator and initial declarant. The effect was that the CC&Rs were in effect before the Association had begun to function as a genuinely independent entity. Neither it not any of its members (other than the developer) ever had the opportunity to agree (or not agree) to waive their rights. As the court explained:

Based on the application of fundamental contract formation principles, we fail to see how the Association could have agreed to waive its constitutional right to a jury trial because, for all intents and purposes, Pinnacle was the only party to the “agreement,” and there was no independent homeowner’s association when Pinnacle recorded the CC&R’s.