Careful Planning

Clearly, Title 7 creates opportunities to address many issues related to Builder liability for defective construction. Indeed, the intent of Title 7 was to revamp the law related to construction defects, so as to create a new balance between Builder and homeowner.  We have written this section to explain what CAN be done.

What Actions Should Be Taken?

Review Functionality Standards: A good beginning is to thoroughly review the Performance Standards (Civil Code Section 896 and Civil Code Section 897). Each Builder should meet with its architect and project managers and review the Performance Standards. First, determine which subcontractors are involved with which Performance Standards. Then schedule meetings with the subcontractors. At each subcontractor meeting, make sure that appropriate consultants are in attendance. The purpose of the meetings will be to review the applicable Performance Standards to ensure that every residence is constructed so as to satisfy the Performance Standards. All manufactured products to be installed by the subcontractor should be reviewed. Manufacturer specifications, representations and warranties for all products and materials should be reviewed (California Civil Code 896(g)(3)(B)). Maintenance standards should be discussed and subcontractor input gathered.

Review Subcontracts: Subcontracts may need to be modified (a) to require compliance with the Functionality Standards and any Builder created Enhanced Protection Agreement, and (b) to provide that disputes will be resolved in accordance with the Pre-litigation Procedures or any Builder created alternative non-adversarial pre-litigation procedures and any Builder created alternative binding dispute resolution procedures. The subcontract could also require the subcontractor to reimburse the Builder for any repairs performed by others as provided for in the Pre-litigation Procedures or otherwise.

Prepare Maintenance Manuals: Title 7 includes one especially encouraging item for Builders. California Civil Code Section 907 provides that "A homeowner is obligated to perform all reasonable maintenance obligations and schedules communicated in writing to the homeowner by the builder and product manufacturers . . . " But, if no written recommendations are required, the homeowner is only required to perform "commonly accepted maintenance practices" (whatever that is determined to mean). Consider preparing and providing buyers with a Maintenance Manual. A buyer's failure to comply with reasonable maintenance requirements included in a Maintenance Manual provided to the buyer in writing is an affirmative defense to the buyer's claims under Title 7. (California Civil Code Section 945.5) Traditionally, the distinction between a "defect" and a failure to properly maintain has been a blur -- was a window improperly flashed (a "defect") or did the owner fail to properly caulk and seal? Maintenance specifications can help answer these types of questions. But, the Builder's failure to provide written maintenance requirements could be more likely to result in Builder liability, now that California law provides for maintenance requirements to be set forth in writing.

During the subcontractor meetings suggested above, written maintenance specifications can be reviewed, supplemented or finalized. Builders may find the maintenance recommendations in the publication, "California Building Performance for Residential Construction and Homeowners Maintenance Guide" (see BuildingStandardsInstitute.org ) helpful. Builders may also refer to other consultants that specialize in the preparation of maintenance manuals. Many samples of maintenance manuals are also available on the internet.

Consideration should be given to organizing a Maintenance Manual similar to the organization of California Civil Code Section 896 (the "Performance Standards"). If the Builder is "opting out" of the Performance Standards and instead providing buyers with an Enhanced Protection Agreement, consideration should be given to organizing the Maintenance Manual similar to the Enhanced Protection Agreement or including the Maintenance Manual within the Enhanced Protection Agreement. As an example, the Enhanced Protection Agreement could first warrant that doors will not permit water to pass into the Residence, and then could establish the duty of the owner to inspect and maintain weather stripping, clean debris from all weep holes, caulk in appropriate locations, etc.

All maintenance requirements and schedules must be reasonable. Builders should remember that a primary defense to a violation of a Performance Standard (some component is not performing or functioning) is that the homeowner or Association failed to provide proper maintenance as required by reasonable written maintenance obligations. Thus, written maintenance obligations should be considered whether or not the Builder "Opts Out" of either or both of the Performance Standards or the Pre-litigation Procedures.

Enhanced Protection Agreement: Enhanced Protection Agreements are not in common use.  An Enhanced Protection Agreement will generally provide more precise standards than the Performance Standards set forth in Title 7. If an Enhanced Protection Agreement establishes clear usable and measurable standards of acceptable and functional construction, those standards can be provided to subcontractors for use during construction. Additionally, the standards will guide the Builder and the homeowner during the resolution of customer service issues.  However, Enhanced Protection Agreements were more commonly used when Title 7 was enacted (2003) and are only infrequently used by builders presently (November, 2012).

A Builder should discuss any plans to create an Enhanced Protection Agreement with the Builder's insurance broker or coverage counsel.

Is there a middle ground?

Some attorneys have suggested that the Builder should not create an Enhanced Protection Agreement (in other words, they should not "opt out" of the Performance Standards), but should instead supplement the more ambiguous Performance Standards with more specific standards. This approach might seem appealing, but the first item to note is that such an approach may be outside the arrangements mandated by Title 7. Title 7 contemplates either the use of the Performance Standards set forth in Title 7 or a replacement of those standards with an Enhanced Protection Agreement. The real question is what happens when a buyer claims that a component does not satisfy the Performance Standards set forth in Title 7, but there is other documentation signed by the buyer which states that the component or system is not deficient?

If the documentation is part of an Enhanced Protection Agreement, the initial questions will be (1) does the documentation for that component provide protection "greater than, or equal to " the Performance Standard for that component (California Civil Code Section 904), and (2) did the buyer notify the Builder of the buyer's intent to challenge the Performance Standard when the buyer filed its initial notice of claim? (California Civil Code Section 904)

If the document is not an Enhanced Protection Agreement, the initial questions will be (1) should the document be considered, (2) what weight should be given to the document, and (3) does the document for that component provide protection "greater than, or equal to " the Performance Standard for that component?

Builders may generally prefer the results of the former (creation of an Enhanced Protection Agreement) to the latter (trying to somehow supplement the Performance Standards to remove some of the ambiguities). And, of course, if the Builder has supplemented the Performance Standards with a warranty package (rather than an Enhanced Protection Agreement), buyer's are at liberty to make use of the written warranty provided to them in those areas in which the warranty standards exceed the Performance Standards.

What about the One Year Fit and Finish Warranty?

The Fit and Finish Warranty is a separate requirement that applies independently of the Performance Standards and any Enhanced Protection Agreement. (California Civil Code Section 900) If it is included in a section of an Enhanced Protection Agreement or Limited Warranty, that section should be clearly labelled as a Fit and Finish Warranty. Any walk-through inspection procedures must be reviewed and any language which appears to waive the Fit and Finish Warranty or reduce the warranty to less than one year will not be acceptable. The walk-through inspection process cannot waive the Fit and Finish Warranty, but if properly drafted it may establish evidence that there are no visible fit or finish deficiencies as of the date of the walk-through.

Pre-litigation Procedures

Many or most Builders have  been "opting out" of the Pre-litigation Procedures and establishing alternative non-adversarial procedures. Title 7 does not establish any standards for the enforceability of these alternative non-adversarial procedures. Rather, Title 7 provides that existing laws shall continue to apply to determine the enforceability of alternative pre-litigation procedures, as well as arbitration, judicial reference and other binding alternative dispute resolution procedures. (California Civil Code Section 914(b))

Creation of Alternative Binding Dispute Resolution Procedures

In essence, problems with a home or common area should be resolved in a three-step process.

  1. Customer Service Process: Ordinarily, the first step will be for the homeowner or Association to contact the Builder's customer service department. The homeowner is not required to use this step. However, nothing in Title 7 prohibits using normal customer service process to resolve construction deficiencies. In order to encourage informal resolution of disputes, a written "Customer Service Process" can be developed by the Builder and provided to all homeowners at the time of sale.
  2. Pre-litigation Procedures: The second step will be for the homeowner or the Association to make a claim under Title 7's Pre-litigation Procedures. If the Builder has "opted out" of Title 7's Pre-litigation Procedures and established alternative non-adversarial procedures (a "Formal Claim Process") then these procedures will govern this second step.
  3. Binding Resolution Process: The third step will be litigation. Title 7 expressly provides that the Builder may establish a contractual arbitration or judicial reference procedure to provide an alternative binding dispute resolution process which takes over once the Pre-litigation Procedures are completed. (California Civil Code Section 914(b)).  However, several cases have created a somewhat complex situation.  As of this date (November, 2012) it appears that binding arbitration set forth either in CC&Rs of a common interest development or in an agreement with a purchaser are likley to be enforceable (a properly drafted binding arbitration provision included in CC&Rs should be enforceable in disputes with the homeowners association, original purchasers and even resale purchasers; binding arbitration provisions in an agreement with a purchasr should be enforceable with that purchaser).  On the other hand, judicial reference appears less likely to be enforceable.

Both Builder and homeowner benefit if most or all construction deficiencies are resolved quickly and informally, preferably through the Customer Service Process. As soon as the homeowner files a Pre-litigation Claim or begins a Formal Claim Process, a very formal and complex resolution procedure begins (Step 2., described above). That process may be suitable for disputes, but it is not well suited for deficiencies readily corrected through customer service. It is important that the homeowner be well informed of the availability of a Customer Service Process to resolve construction deficiencies.

For several years many Builders have also included alternative binding dispute resolution provisions in purchase contracts, CC&Rs and subcontractor agreements. One of the primary purposes of these provisions is to avoid jury trials, which are costly and often result in emotionally motivated decisions. Additionally, alternative binding dispute resolution procedures have been used to provide Builders with advance notice and opportunities to repair and to require the selection of a qualified arbitrator or refere to resolve the dispute.  However, as stated in 3., above, the law is presently uncertain.

Record Documents: Consider what documents should be recorded. Title 7 requires notice of Title 7's Pre-litigation Procedures to be recorded as well as a notice that these procedures impact the legal rights of the buyer. Title 7 provides that an Enhanced Protection Agreement is not binding on resale purchasers unless the agreement is recorded or the purchaser otherwise has actual notice of the agreement. Consideration should be given to recording any written maintenance obligations so that resale purchasers will have notice of them. Consideration should be given to recording any alternative non-adversarial pre-litigation procedures and any alternative binding dispute resolution procedures so that resale purchasers will or might be bound by them.

Provide Documents to Buyers: Consider what documents should be provided to buyers. If the Builder is not going to "opt out" of Title 7's Pre-litigation Procedures, then all the documentation described in the section titled ("Required Sales Documentation") must be provided to buyers. If the Builder does "opt out" of Title 7's Pre-litigation Procedures, then notice of the decision to "opt out" must be provided to the buyer as well as all documents required by the Builder's alternative non-adversarial procedures. The required One Year Fit and Finish Warranty must be provided to buyers.

What About Associations?

Title 7 appears to be intended to apply to common area conveyed to Associations in the same manner that it applies to residences conveyed to buyers. However, Title 7 does not adequately address Associations. For example, Association common area generally includes improvements other than "residences" (this term is used 10 times in Title 7) and there is no "initial sale" or "sales representative" (the term "sale" is used 15 times in Title 7) relating to conveyances of common area to an Association. The inapplicability of these terms to Associations makes it difficult to understand how Title 7 applies to common area. Further, Civil Code Section 896 provides that Title 7 "applies to original construction intended to be sold as an individual dwelling unit." And California Civil Code Section 938 provides that "This title applies only to new residential units where the purchase agreement with the buyer was signed by the seller on or after January 1, 2003." Associations do not own "individual dwelling units" or "residential units."

The same analysis, documents and actions discussed in "Careful Planning" should be performed for all common area improvements.