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(This
article first appeared in the April 14, 2003, issue of the
San Francisco Recorder.)
Howrey LLP
The
kinds of questions attorneys are hearing since passage of California
Senate Bill 800 reflect the widespread uncertainties and
misunderstandings surrounding the law.
The
general contractor on a 200-unit condominium project completed
before January 1, 2003, the effective date of SB 800,
is notified by the developer that the contractor is the
"builder" under SB 800 and that the developer
plans on listing the contractor as the "builder"
in all disclosures to buyers. Is the general contractor
really the SB 800 builder?
A
roofing subcontractor receives an "SB 800 Addenda"
from the developer of a multi-unit townhouse project completed
before January 1, 2003, that demands the subcontractor
fulfill all warranty obligations under SB 800 without
any offer of additional compensation. Must the subcontractor
accede to this uncompensated burden?
This
article will focus on the transitional aspects of SB 800:
projects that were partially constructed or partially sold
as of January 1, 2003. Because it is in the interest of
all builders, contractors and subcontractors to minimize
the number of projects to which SB 800 applies and to thereby
expand the application of Aas v. Superior Court,
24 Cal.4th 627 (2002), this article also will explore arguments
for avoiding the application of SB 800 to transitional condominium
projects.
Some
background on SB 800 is needed to set the stage for discussing
its application.
The Law
SB
800 was signed into law on September 20, 2002, by Gov. Davis.
It applies to new construction intended to be sold as individual
dwelling units, whether as single-family homes or attached
units. It was sought by plaintiffs' attorneys in response
to the Aas decision, which precluded recovery in tort for
construction defects that had not yet caused property damage
or physical injury. SB 800 is codified at Civil Code §§895,
et seq.
The Builder
Civil
Code §911 defines a "builder" under SB 800
as "a builder, developer, or original seller and applies
to the sale of new residential units on and after January
1, 2003." The entity actually selling the new residential
unit to the public almost certainly will be considered the
"builder" under SB 800. The statute does not expressly
refer to general contractors and leaves unclear whether
they are SB 800 "builders." While "builder"
is defined as "a builder, developer, or original seller,"
a general contractor would not be in a position to provide
much of the documentation and disclosures required of "builders"
by SB800.
The Standards
Civil
Code §896 provides that a "builder" and other
participants in the construction process shall be liable
for violation of specified standards for new residential
construction. In general, the standards set forth performance
requirements (doors, windows and roofs should not leak;
foundations should not be structurally unsafe).
Transition Problems
Two
significant issues regarding the scope of SB 800 are:
- The
extent to which both developers and general contractors/subcontractors
can be held liable for violation of the standards on transitional
projects.
- Which
types of transitional condominium projects fall within
SB 800.
General Contractor/Subcontractor
Liability
SB
800 places a much greater burden on developers than prior
law. A "builder" is, in effect, strictly liable
for violation of the standards because Civil Code §941
requires only evidence of failure to meet an applicable
standard in order to impose liability.
General
contractors and subcontractors can be involved in the SB
800 process because Civil Code §936 provides that the
statute applies to "subcontractors, material suppliers,
individual product manufacturers, and design professionals
to the extent that [they] caused… a violation of a
particular standard as the result of a negligent act or
omission or a breach of contract."
Thus,
under §936, parties other than the "builder"
are liable only when they are proved to have been negligent
or to have breached a contract. But, "builders"
will attempt to pass through their strict liability to third
parties, including subcontractors, by means of flow-down,
warranty and indemnity clauses in contracts.
If
the contractor/subcontractor entered into the contract/subcontract
before January 1, 2003, it may argue that the SB 800 standards
do not apply because the statutory standards did not exist
at the time of contracting. If the argument prevails, the
statutory standards cannot be used to impose statutory liability
on contractors/subcontractors for transitional projects.
Thus, a "builder" could be liable under the standards
but would need another legal basis to pass that liability
on to its contractor/subcontractors.
Further,
to the extent that the SB 800 standards impose liability
on contractors/subcontractors in excess of what existed
under prior law, an argument can be made that the standards
are unenforceable as an unconstitutional interference with
contractual rights and obligations between the general contractor
and subcontractors and between the developer and general
contractor. While developers making such an argument will
face the response that they can pass on their added SB 800
costs to the public by increasing the price of units for
sale, contractors/subcontractors on transitional projects
do not have that option. They are locked into contractual
prices negotiated before SB 800 took effect. While constitutional
challenges to regulatory legislation usually are longshots,
courts have tempered some prior changes in substantive law
by applying them only prospectively and not retrospectively,
particularly when contracts have been made in reliance on
the prior state of the law.
Timing Issues for
Condominium Projects
There
is no clearly stated commencement date for causes of action
for violation of SB 800 standards. Civil Code §911
is titled " 'Builder' Defined" but appears to
also provide an effective date: "applies to the sale
of new residential units on or after January 1, 2003."
The term "sale" is not defined in SB 800. In the
case of a single-family home or townhouse, however, there
is no uncertainty as to the meaning of "sale."
But,
in the case of claims for common area defects on condominium
projects -- traditionally the most hotly contested and litigated
type of construction defect action -- it is necessary to
refer to several different clauses to determine an effective
date because there is no "sale" of the common
area. The term "sale" in §911 probably has
the same meaning as "close of escrow" in §895
(e), which provides:
"Close
of escrow" means the date of the close of escrow
between the builder and the original homeowner. With respect
to claims by an association, as defined in subdivision
(a) of Section 1351, "close of escrow" means
the date of substantial completion, as defined in Section
337.15 of the Code of Civil Procedure, or the date the
builder relinquishes control over the association's ability
to decide whether to initiate a claim under this title,
whichever is later.
Thus,
the word "sale" in §911 almost certainly
means the date of relinquishment of control over the association.
If so, SB 800 applies to condominium projects on which the
builder relinquished control after January 1, 2003.
But,
the meaning of "relinquishment of control" is
not defined in SB 800. Developers will argue for the earliest
possible date -- probably the earlier of the date that a
majority of the association's board of directors was not
elected/appointed by the developer or the date when the
developer sold 50 percent of the units. The association
will argue for the latest possible date -- probably the
date on which the developer no longer had the power to elect
the majority of the members of the board of directors. (Some
CC&Rs give developer votes up to five times the voting
power of homeowner votes.) Given the lack of definition
of "relinquishment of control" and the high stakes
involved, there is a substantial probability that this issue
will be litigated.
SB
800 also appears intended to apply to condominium projects
for which sales began before January 1, 2003 - with results
that could be inconsistent. The Legislature could have eliminated
many transitional questions by providing that SB 800 applied
only to projects for which construction began after January
1, 2003, or for which construction contracts were signed
after January 1, 2003. But, the Legislature chose to apply
SB 800 to sales completed after January 1, 2003. Thus, one
unit, sold before January 1, 2003, is not protected by SB
800 while an adjoining unit, sold after January 1, could
be protected. Nor is the developer likely to have been able
to comply with SB 800's detailed documentation and disclosure
requirements for all units sold before January 1, 2003.
Yet, the developer still would be liable for ensuring that
all common areas of the project, including the interests
of pre-2003 buyers, met the standards.
Whether
SB 800 ultimately is able to strike a balance between the
legitimate concerns of homeowners on the one hand and developers,
contractors and subcontractors on the other hand remains
to be seen. But, what does seem clear is that the transition
period for SB 800 will be bumpy and is fraught with kind
of uncertainty that inevitably leads to litigation.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2003 Howrey LLP
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