As a receiver completing new condominium and tract housing projects, the subject of California SB 800 long term construction defects liability comes up a lot. So I asked noted subdivision and DRE lawyer Robert Smylie of Robert Smylie & Associates to recap the issues for me. His explanation follows (with some paraphrasing on my part with his permission). Of course, I’m not a lawyer, so those of you with further questions should contact him directly at rsmylie@smylieandassociates.com, or read his article at http://www.waldrealtyadvisors.com/downloads/download.html:
California Senate Bill 800 (contained in Title 7 of Part 2 of the Civil Code) (“SB 800”), is a complex piece of legislation which was enacted to attempt to reduce the amount of potential construction defect litigation on new condominium, town home and tract housing subdivisions.
California has led the nation in construction defect litigation resulting in large multi-million dollar judgments against builders. It is likely to now become a significant pitfall for lenders who decide to foreclose on new for-sale housing development projects and especially those that require further construction to complete and/or to repair. By far and away these judgments are a result of run-away juries in civil actions. Even in those situations where the claims are meritless, the builder and the insurance companies have often incurred large defense fees and costs defending the actions. This problem is further compounded by the fact that homeowners and homeowners associations have up to 10 years (in most cases) to file an action for construction defects, with most construction defect claims occurring more than eight years after the project was completed.
Although no court in California has specifically ruled on the topic, it is relatively certain that plaintiff’s attorneys will file suit and name commercial lenders who foreclose on for-sale housing projects and subsequently undertake the completion of the improvements or make significant post-completion repairs (as is often the case when new housing developments get in trouble). It will be argued that such lenders fit within the broad definition of “Builder” for the purposes of SB 800.
The good news is that lenders can insulate themselves from long term construction defects liability in three ways:
1) Support the original builder so that he can complete and sell out the project;
2) Sell their construction loan to a third party developer; or,
3) Appoint a Receiver to complete and sell the project on a wholesale/bulk basis, or unit by unit at retail prices.
Many lenders have found the appointment of a receiver to be their best option.
One of the particular challenges that lenders face is that it is unlikely that they will have the necessary documentation or the ability to comply with the stringent timelines to satisfy the statutory requirements of SB 800. Under this scenario, the lender may be prevented from availing itself of the opportunity to inspect and repair, but more importantly would be exposing itself to civil litigation as opposed to the alternative dispute resolution of claims.
In response to the proliferation of construction defect claims, California Senate Bill 800 was enacted to allow builders to receive a notice of potential claims from a homeowner or association before it filed litigation, a right to inspect the purported claims and to give builders the opportunity to repair or replace the defective improvement before homeowners and or associations could file civil actions.
Builders are required to make an “election” prior to going to sale as to whether they will comply with the strict statutory obligations of the statute or whether they will create their own contractual alternatives to the strict compliance requirements of the statute. This election may have a significant effect on successors. If the builder has elected in the project documents to strictly comply with requirements of the statute, the “Builder” is required to fulfill various onerous procedural requirements, including the delivery of various certain construction documents in order to avail itself of the benefits described herein. Failure to comply with each and every obligation and time restriction under SB 800, the builder forfeits the right to effectuate repairs at the property, and the homeowner is free to file a civil action against the builder. As a result, the “election” becomes very important.
