J & N REALTY, INC.

Construction Defect Issues for Homeowners Associations  

Civil Code Section 1375—which is applicable to all real estate developments that consist of 20 units or more and were sold before January 1, 2003—is currently the most important statutory scheme for construction defect litigation.  However, SB 800, which was passed in 2002 and is codified in Civil Code Sections 875 et seq., will ultimately replace Civil Code Section 1375.  SB 800 is the statutory framework for construction defect litigation involving all new residential property sold on or after January 1, 2003.  

The California Supreme Court’s 2000 decision in Aas v.Superior Court became the impetus for SB 800.  In Aas, the Supreme Court seemingly settled a longstanding issue: whether developers, contractors, and their insurers were liable to homeowners for repairs of construction defects that had not manifested damage.  The court ruled that construction defect plaintiffs were not allowed to recover damages for economic loss when the alleged defects had not caused property damage.  The court’s holding, however, was met with derision from trial lawyers and many in the real estate industry.  Many people echoed the sentiments of Chief Justice George, who, in dissent, asked why a homeowner should “have to wait for a personal tragedy to occur in order to recover damage to repair known serious building code safety defects caused by negligent construction.” 

In 2002, the California legislature answered Chief Justice George’s question and passed SB 800.  The principal purpose of SB 800 is to specify the rights and requirements of a homeowner seeking to bring an action for construction defects.  The bill includes applicable standards for home construction, the statute of limitations, the burden of proof, the damages that are recoverable, applicable prelitigation procedures, and the obligations of the homeowner.  By its purpose and provisions, SB 800 overrules the Aas court’s interpretation of what constitutes actionable damage. 

The more significant changes in SB 800 include: 

• Accrual date for statute of limitations purposes 

In construction defect actions, the statute of limitations will run from either 1) the date of the close of escrow between the builder and the original homeowner or 2) the date of substantial completion of the project as defined by Code of Civil Procedure Section 337.15—whichever is later. 

• Prelitigation procedure 

Prior to the filing of a complaint, the plaintiff is required to provide the developer with written notice of the plaintiff’s intent to commence a legal proceeding.  The plaintiff must describe the claim in reasonable detail sufficient to determine the nature and location, to the extent these are known, of the claimed violation.  The notice has the same force and effect as the Notice of Commencement of Legal Proceeding outlined in Civil Code Section 1375.5. 

• Receipt and acknowledgment of the notice of claim 

The developer must acknowledge receipt of the plaintiff’s notice within 14 days of receiving it.  Once the developer has acknowledged the claim, the developer has 14 days to perform an initial inspection and destructive testing. 

• Notice to other parties related to the dispute 

The developer is required to provide notice of a planned inspection and testing to any subcontractors, design professionals, and other parties related to the dispute, including insurance carriers.  The notice must be provided “sufficiently in advance” in order to allow the relevant parties to attend the initial inspection (or, if requested, the second inspection) “of any alleged unmet standard and to participate in the repair process.” 

• Second inspection and testing 

If considered “reasonably necessary,” the developer can conduct a second inspection and testing within 40 days of the initial inspection and testing. 

• Offer to repair 

If the developer believes that repairs are warranted, the developer may, within 30 days of the inspection and testing, offer in writing to repair the violation.  The offer to repair should also compensate the homeowner for all applicable damages as provided in Civil Code Section 944.  These damages include the reasonable cost for repair, reasonable relocation and storage expenses, lost business income (if there is any), “investigative costs,” and “all other costs or fees recoverable by contract or statute.”  These provisions of the new law regarding the applicable damages that may be part of the offer to repair specifically override Aas. 

The offer to repair also must include a detailed, specific, step-by-step statement 1) identifying the particular violation that is being repaired, 2) explaining the scope, nature, and location of the repair, and 3) setting a reasonable completion date for the repair. 

• Authorization to proceed with repair 

The homeowner has three options once the developer’s offer to repair is received.  The homeowner can 1) authorize the developer to proceed with the repair, 2) request that the developer provide the names of three contractors other than the developer or the original contractor to perform the work, or 3) proceed to mediation. 

• Use of alternative contractors 

If the homeowner elects to use an alternative contractor to perform the repairs, the developer (who may also be the original contractor) is entitled to an additional noninvasive inspection of the premises to permit the proposed contractors to review the proposed site of the repair.  The developer has 35 days from the date of the homeowner’s request for the names of other contractors to comply with the request.  The homeowner then has 20 days to authorize either the developer or one of the three proposed alternative contractors to perform the requisite repairs. 

• Mediation  

The parties may choose to resolve their dispute through mediation.  Either the developer selects and pays for the mediator or the developer and homeowner agree to split the cost and jointly select the mediator.  The statute provides for a mediation limited to four hours unless the parties mutually agree to another arrangement.