California Supreme Court Holds that Arbitration Clause in CC&Rs is Enforceable Against Homeowner’s Association

Both my parents and in-laws live in communities with homeowner’s associations, where they tell you what color you can paint your house, that you need to trim your crazy looking tree and that you can’t park your junker on the lawn. I don’t. I’m perfectly happy living next to my neighbors who raise chickens in their backyard, thank you very much. Ok, I could do without the chickens, and in particular the rooster, but I could raise my own feathered flock if I wanted to, which is my point.

But homeowner’s associations don’t make all the rules. In a recent case, the California Supreme Court held that an arbitration clause contained in a recorded declaration of covenants, conditions and restrictions (“CC&Rs”) was enforceable against a homeowner’s association . . . even though the association was not even in existence (and, therefore, had no ability to consent to or reject the CC&Rs) at the time the CC&Rs were recorded.

In, Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, Case No. S186149 (August 16, 2012), Pinnacle Market Development (US), LLC and others (collectively “Pinnacle”) developed a residential and commercial community interest development known as the Pinnacle Museum Tower Condominium in San Diego, California. Pursuant to the Davis-Stirling Common Interest Development Act (Civil Code section 1350 et. seq.), which govern’s homeowner’s associations, Pinnacle recorded CC&Rs, which, among other things, included an arbitration clause and provided for the creation of a homeowner’s association called the Pinnacle Museum Tower Association (“Association”).

After the Association was formed, it filed a construction defect lawsuit against Pinnacle. Pinnacle then filed a motion to compel arbitration pursuant to the arbitration clause in the CC&Rs, which the trial court denied and the Court of Appeal affirmed, on the ground that the arbitration clause was unconscionable and could not waive the Association’s constitutional right to a jury trial. The California Supreme Court, however, reversed.

The Supreme Court explained that, where parties have contractually agreed to resolve their dispute by arbitration, the Federal Arbitration Act preempts state law which would otherwise afford a party the right to trial by jury. Further, explained the Court, where parties have agreed to resolve their disputes by arbitration, the party challenging an arbitration clause bears the burden of proving that the arbitration clause is unenforceable such as on the ground of unconscionability.

Here, however, the arbitration clause was not unenforceable, because under the Davis-Stirling Act, actual notice is not required to enforce CC&Rs against homebuyers, and CC&Rs are enforceable as equitable servitudes against homeowner’s association even where such associations may not have been formed at the time the CC&Rs were recorded:

It is true we have emphasized that arbitration derives its legitimacy from the fact that the parties consent to resort to the arbitral forum rather than to litigation, with its possibility of a jury trial. Such consent is generally required. As we have previously recognized, however, various legal theories allow for delegated authority to consent. Not only do common law principles such as fiduciary duty and agency permit enforcement of arbitration agreements against nonsignatory third parties, but the Legislature can also provide for the reasonable delegations of authority to consent.

Because the Davis-Stirling Act provides reasonable protections for homeowners and the CC&Rs at issue were drafted and recorded as “dictated by the legislative policy choices embodies in the Davis-Stirling Act,” held the Court, Pinnacle’s “procedural compliance with the Davis-Stirling Act provides a sufficient basis for rejecting [the Association’s] claim of procedural unconscionability.” The Court further held that a provision within the arbitration clause providing that each party is to bear its own attorney’s fees and costs was not substantively unconscionable.

Pinnacle is an important win for homebuilders and reverses a trend in recent decisions which have invalidated arbitration clauses contained in CC&Rs. This was a tough case, and I could see the equities on both sides, but as the Supreme Court pointed out it was a “legislative policy choice,” and those choices can sometimes be difficult to make.

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