Property Owners Must Comply with Builders

Property Owners Must Comply with Builders’ Prelitigation Procedures In Purchase Agreements Before Proceeding With Lawsuits. Provisions in contracts requiring parties to first mediate their disputes are increasingly common in real estate transactions.  In fact, many standard real estate purchase agreements require such alternative dispute resolution (ADR) before either party can file a lawsuit.  Two weeks ago in The McCaffrey Group, Inc. v. Superior Court of Cal., 2014 Cal. App. LEXIS 266, the California Court of Appeal made it clear that such provisions are enforceable, and can operate to bar lawsuits from proceeding until all specified ADR processes are exhausted.

In The McCaffrey Group, provisions in home purchase contracts required the homeowners to submit their construction defect claims to nonadversarial prelitigation procedures before proceeding with a lawsuit. Those procedures included providing McCaffrey (the builder) with notice of the claimed defect, giving McCaffrey the right to inspect and correct it, and, if the homeowner was still unsatisfied, engaging in non-binding mediation.  The plaintiff homeowners ignored these dispute resolution procedures and filed suit against McCaffrey to recover damages they allegedly suffered due to the defective construction of their homes.

 After answering the plaintiffs’ complaint, McCaffrey filed a “Motion to Compel ADR” and stay the action. McCaffrey asserted the plaintiffs had breached the mandatory ADR procedures set forth in their home purchase contracts; therefore, it was entitled to a court order staying the action until the plaintiffs complied.  The trial court denied the motion based on its conclusion that the ADR provisions were unconscionable.  However, on appeal, the Court of Appeal reversed, finding the provisions enforceable.

 The Court of Appeal noted that the plaintiffs did not contend that they were surprised or misled by the ADR provisions in the contracts.  Instead, the plaintiffs first argued that the provisions were unconscionable because they stated no meaningful timeline within which McCaffrey had to act, thereby giving McCaffrey a license to delay.  However, the Court of Appeal noted that if no time is specified for the performance of an act, a reasonable time is allowed.  The Court also explained that, under the ADR procedures, McCaffrey was required to act in good faith in conducting an inspection, determining whether to repair, and in completing the repairs. If it failed to do so, it would expose itself to additional liability for breach of the covenant of good faith and fair dealing.

 Second, the plaintiffs claimed that requiring them to pay half the cost of the mediation was unfair.  But, the Court of Appeal found that plaintiffs failed to show that the mediation fees they were likely to pay would be exorbitant or place an unreasonable burden on them, or that mediation was likely to take an undue amount of time.  The Court also noted that California Courts have concluded that it is not unconscionable for a homebuyer to pay half the costs of judicial reference as provided in a home purchase agreement.  Thus, there was no reason why a different result should apply to the mediation clause in the purchase contracts at issue.

 Third, the plaintiffs alleged that they were disadvantaged because the ADR provisions required them to provide notice of their claims, and to describe the nature and location of the claims in reasonable detail.  But, the Court of Appeal found that there is nothing unfair in requiring a homeowner to describe the nature and location of the claim in reasonable detail.

 Finally, the plaintiffs asserted that the ADR procedures were unconscionable because they took away various statutory rights they would have otherwise.  In response, the Court of Appeal explained that the contractual ADR procedures were alternatives to the statutory procedures that would have otherwise applied.  Therefore, by entering into their purchase contracts, the plaintiffs had agreed to the alternate ADR procedures.

 For these reasons, the Court of Appeal held that the plaintiffs did not meet their burden of establishing that the ADR procedures were unconscionable.  Therefore, the Court found the procedures to be enforceable, and directed the trial court to enter a new order compelling the plaintiffs to comply with the procedures prior to proceeding with their lawsuit.

Last but not least, to save yourself from any additional mishap, get the services of a Real Estate Lawyer who will help you move smoothly through all procedures. An additional piece of advice, do keep the work permit Canada in check.

Leave a Reply

Your email address will not be published. Required fields are marked *