Arbitration Provisions in Recorded Declarations
COMMON INTEREST DEVELOPMENTS
The California Supreme Court held that an arbitration clause in a recorded Declaration of Covenants, Conditions and Restrictions calling for the owner's association to arbitrate construction disputes with the condominium developer is enforceable and binding on the association, even though the association did not exist when the declaration was drafted or recorded.
Pinnacle Market Development conveyed to each buyer a condo unit in fee and a proportionate undivided interest in the common area as a tenant in common. It deeded all other real property directly to the owner's association in fee. Article XVIII of the recorded De - claration states that by accepting a deed, the association and each owner agree to waive their right to a jury trial and have any construction dispute naming Pinnacle as a party resolved exclusively through binding arbitration in accordance with the Federal Arbitration Act and the California Arbitration Act. Section 8 of the purchase agreement refers to Article XVIII and requires the parties to initial the provision reciting their agreement "TO COMPLY WITH ARTICLE XVIII OF THE DECLARATION WITH RESPECT TO THE DISPUTE REFERENCED THEREIN."
The association filed a construction defect action against Pinnacle, which moved to compel arbitration. The district court invalidated the arbitration agreement on unconscionability grounds. The California Court of Appeal concluded by a split vote that the association did not waive its constitutional right to jury trial for construction defect claims because it did not exist when Pinnacle recorded the Declaration.
The California Supreme Court was not persuaded by this reasoning. It reversed the denial of Pinnacle's motion to compel arbitration.
First, it noted that Civil Procedure § 1298.7, which allows a purchaser to pursue a construction and design defect action against a developer in court, would be preempted by the FAA (even if it applied to these facts) because it discriminates against arbitration.
Next, the court turned to whether there was a valid arbitration agreement. It discussed the Davis-Stirling Act, which governs the creation and operation of common interest developments, and makes covenants and restrictions in recorded declarations enforceable "unless unreasonable." The court concluded that covenants and restrictions in recorded declarations must be enforced "unless they are wholly arbitrary, violate a fundamental public policy, or impose a burden on the use of affected land that far outweighs any benefit. …