New Standards, Procedures, Defenses Enacted for Housing Construction Defect Disputes in California


October 28, 2002

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Thelen Reid Brown Raysman & Steiner LLP

Governor Gray Davis signed Senate Bill 800 on September 20, 2002. It sets new standards and procedures in California for homeowners suing to recover damages for construction defects.

SB 800 adds a new Title 7 to the Civil Code. Title 7 defines standards for new housing construction and provides that the violation of those standards is the basis for defect litigation. SB 800 also creates a mandatory pre-litigation procedure that gives the homebuilder the opportunity to repair the alleged defects, to mediate or to make a cash settlement before the homeowner can file an action in court.

Perhaps the most notable impact to existing law from SB 800 will be its new statutes of repose. SB 800 specifies new time limits for filing actions that vary with the type of defect claimed. These new time limits are noted below. SB 800 also places limits on the damages that can be recovered in litigation brought under the statute.

SB 800 is a lengthy, complex piece of legislation that leaves considerable room for interpretation by the courts. Many provisions are imprecise. The exceptions created within the statute for defect actions brought by homeowners "to enforce a contract or express contractual provision, or any action for fraud, personal injury or violation of a statute" have the potential to undermine the effectiveness of the new statute.

Following are some of the major provisions of SB 800:

Who is covered by SB 800:

• SB 800 primarily covers actions brought by homeowners against builders. (§§895 (f) and 896.) It defines a "builder" as a builder, developer or original seller. (§911.) It defines "homeowner" to include the individual owners of single family homes, individual unit owners of attached dwellings and common interest development associations. (§895 (f).) SB 800 also purports to cover actions against subcontractors, material suppliers, product manufacturers and design professionals. (§936.)

Types of Housing Covered:

• SB 800 applies to original construction intended to be sold as individual dwelling units, whether the units are single family units or attached units. The law does not apply to condominium conversions. (§§895 (f), 896.)

Limitations on Damages:

• In general terms SB 800, limits recovery of damages for detached single-family homes to the lesser of the cost of repair or the diminution in value of the home caused by the defect. (§942 (b).)
  
  
• Because SB 800 does not set limits for attached housing, those damage limits are less clear. However, SB 800 provides that claims for damages made under its provisions are limited to the reasonable value of: repairing the defect; repairing damages caused by the repair effort; repairing damages caused by the defect; removing and replacing any improper repair by the builder; reasonable relocation and storage expenses; lost business income if the home was used as a principal place of a business licensed to be operated from the home; reasonable investigative costs; and other costs or fees recoverable by contract or statute. (§944.)

Date of Sale Triggers Applicability:

• Applicability of the statute depends on the date the new unit was sold. SB 800 applies to the original sale of new residential units on and after January 1, 2003. (§§911, 938.)

Standards Defining Actionable Defects:

SB 800 gives lengthy definitions, which it calls "standards," for the types of defects that it governs. SB 800 purports to limit the builder's liability to damages for violation of these standards. (§896.) In order for a homeowner to make a claim for violation of these standards, it need only demonstrate that the home does not meet the applicable standard, subject to the affirmative defenses specified by the statute (noted below). (§941 (e).) A brief overview of these standards, in very general terms, follows:

• Water Issues: Unintended water shall not be allowed to pass beyond, around or through doors, windows, patio doors, deck doors, roofs, roofing systems and components, decks, balconies, exterior stairs, foundations systems, floor slabs, stucco, siding, framing, retaining walls, other exterior walls and wall finishes, surfaces, components and fixtures. (§§896 (a) (1) through (13).) SB 800 also specifies that plumbing, sewer and utility lines shall not leak or corrode and that shower and bath enclosures and ceramic tile countertops and finishes shall not allow water into the interiors of walls, flooring systems or other components. (§896 (a) (14) through (18).)
  
  
• Structural Issues: Components such as foundations, load-bearing components, slabs and underlying soils shall not contain significant cracks or significant vertical displacement and shall not be structurally unsafe. SB 800 also provides that these same components shall be constructed in material compliance with building code criteria for earthquake and wind-load resistances. (§896 (b) (1) through (4).) These and other defined standards in SB 800, which are based solely on code compliance or safety issues, appear to have been created to pull back from the rule stated in Aas v. Superior Court, 24 Cal.4th 627, 12 P.3d 1125, 101 Cal.Rptr.2d 718 (2002). Aas exempted builders from tort liability for construction defects that have not caused physical injury or damage.
  
  
• Soils Issues: Soils and engineered retaining walls shall not cause damage to the structure built upon the soil or the engineered retaining wall and shall not cause the structure to be structurally unsafe. (§896 (c) (1) and (2).)
  
  
• Fire Protection Issues: Structures shall materially comply with building codes and other regulations governing fire protection of the occupants. Electrical and mechanical systems, fireplaces, chimneys and related components shall be constructed and installed so as not to cause an unreasonable risk of fire. (§896 (d) (1) through (3).)
  
  
• Electrical, Sewer and Plumbing Issues: Such systems shall be installed to operate properly and shall not impair the use of the structure by its inhabitants. (§896 (e) through (f).)
  
  
• Manufactured Items: SB 800 provides a standard for manufactured items not otherwise covered. It states that these items, including windows, doors, roofs, plumbing products and fixtures, fireplaces, electrical fixtures, HVAC units, countertops, cabinets, paint and appliances shall be installed so as not to interfere with the products' useful life. (§896 (g) (3).) However, SB 800 does not apply to any action seeking recovery solely for a defect in a manufactured product located within or adjacent to a structure. (§896 (g) (3) (E).)
  
  
• Other Defined Standards: SB 800 defines standards for heating and air conditioning, cracks and vertical displacement in exterior walls and paving, and a long list of smaller construction components, including irrigation systems and drainage, untreated wood posts, untreated steel fences, paints and stains, roofing materials, landscaping systems, ceramic tile and backing, dryer vents and inter-unit noise transmission. (§896 (g) (1) through (14).) It also provides that structures shall be constructed in a manner so as not to impair the occupants' safety because the structure contains public health hazards as determined by an authorized public health officer or agency having jurisdiction. (§896 (g) (15).)
  
  
• Fit and Finish Items: Although the language in this section of SB 800 is unclear, it appears to limit the homeowner's remedies for "fit and finish" claims related to cabinets, mirrors, flooring, interior and exterior walls, countertops, paint finishes and trim to a one-year warranty. Other than the requirement that the builder provide a one-year warranty for such items, fit and finish claims do not appear to be actionable under SB 800. (§900.)
  
  
• Enhanced Protection Agreements: SB 800 allows a builder the option of providing greater protection or longer protection periods in its contract with the homeowner than defined by the statute. SB 800 calls such contracts "enhanced protection agreements." However, the builder may not, by contract with the homeowner, lower the protections or standards from those defined in SB 800. (§901.)

Pre-litigation procedure:

SB 800 sets forth a lengthy, detailed and cumbersome procedure that must be followed before an action is filed against any party that allegedly contributed to the claimed defects. (§§910 to 938.) The burden of this procedure falls largely on the builder, and the time periods are strictly construed. Some of the major steps in the procedure are:

• Notice of Claim: The homeowner gives written notice of the claim to the builder. (§910 (a).)
  
  
• Acknowledgement of Notice: The builder must acknowledge, in writing, receipt of notice of the homeowner's claim within 14 days after receiving it. (§913.)
  
  
• Inspection: The builder has 14 days to schedule an inspection of the housing unit after acknowledging receipt of the notice of claim. (§916 (a).) If the builder needs a second inspection, it must request it within three days of the first inspection and complete it within 40 days of the initial inspection. (§916 (c).)
  
  
• Notice to Other Responsible Parties: If the builder intends to hold a subcontractor, design professional, product manufacturer, material supplier, insurance carrier, warranty company or service company responsible for contribution, the builder must notify them in time for them to attend the initial or second inspection of the unit. (§916 (e).)
  
  
• Builder's Offer: Within 30 days of the initial inspection or the second inspection, if one is requested, the builder may offer in writing to repair the alleged defect and compensate the homeowner for all damages allowed under the statute. (§917.)
  
  
• Homeowner's Response: Upon receipt of the offer to repair, the homeowner has 30 days to authorize the builder to proceed with the repair or to request the names of up to three alternative contractors for the repair work. (§918.)
  
  
• Offer to Mediate Required: The builder's offer to repair shall be accompanied by an offer to mediate, if the homeowner so chooses. If the mediation fails, the homeowner shall allow the repairs to be performed. (§919.)
  
  
• Timing of Repairs: Any repairs undertaken by the builder shall be commenced within one of the following time periods: (a) Within 14 days of the homeowner's acceptance of the offer to repair; or (b) within 14 days of the homeowner's selection of an alternative contractor; or (c) within seven days after mediation (if one occurs); or (d) within five days of securing a building permit if one is required. (§921.)
  
  
• No Waiver or Release for Repairs: The builder may not obtain a release or waiver in exchange for the repair work performed as part of the prelitigation procedure. (§926.)
  
  
• Cash Offer Alternative: Nothing in the pre-litigation procedure prohibits the builder from making only a cash offer to the homeowner without any offer to repair. The homeowner may accept the cash offer or reject it and proceed with the filing of an action. (§929 (a).) The builder may obtain a "reasonable release" in exchange for a cash payment. (§929 (b).)
  
  
• Builder's Failure to Comply with Procedure: If a builder fails to act in accordance with the timeframes mandated in the pre-litigation procedure, unless extended by mutual agreement of the parties and confirmed in writing, the homeowner may proceed with filing the action. (§930 (a).)
  
  
• Homeowner's Failure to Comply with Procedure: If the homeowner does not comply with the requirements of the pre-litigation procedure, the builder may bring a motion to stay any subsequent court action or other proceeding until the procedural requirements of the statute have been met. (§930 (b).)
  
  
• Evidence of Repair Efforts Not Inadmissible: Any repair efforts undertaken by the builder and evidence of both parties' conduct during the process shall not be considered settlement communications or offers of settlement and are not inadmissible evidence on such basis. (§934.) There are onerous obligations imposed on the builder to provide extensive notices and documentation to the buyers at the time of the sale and also if requested by the homeowner as part of the pre-litigation procedure. (§912 (a) through (i).)

Statutes of Repose:

In several places throughout its text, SB 800 sets limitation periods that vary with the types of defects. Generally these limitation periods are as follows:

• 10 years after substantial completion of the improvement (or the date of recordation of a valid notice of completion) for actions brought pursuant to the statute -- so long as provisions within the statute do not specify otherwise. (§941 (a).)
  
  
• Five years from close of escrow for paint and stain applications. (§896 (g) (10).)
  
  
• Four years after close of escrow for electrical, plumbing and sewer systems (§896 (e) and (f)); cracks or vertical displacement of exterior pathways, driveways, hardscape, sidewalls, sidewalks and patios (§896 (g) (1)); unreasonable corrosion of steel fences (§896 (g) (9)).
  
  
• Two years from close of escrow for survival of landscape systems (§896 (g) (12)); dryer ducts (§896 (g) (14)); and untreated wood posts in contact with soil (§896 (g) (8)).
  
  
• One year after original occupancy of the adjacent unit for inter-unit noise transmissions in attached structures. (§896 (g) (6).)
  
  
• One year after close of escrow for irrigation systems and drainage. (§896 (g) (7).)

Code of Civil Procedure §§337.1 and 337.15 do not apply to actions brought under SB 800. (§941 (d).) Thus, there are no distinctions between latent and patent defects for purposes of measuring the limitations periods created by SB 800. Also, if the builder elects to repair the defects as part of the pre-litigation procedure, the applicable statutes of limitations are tolled for up to 100 days after the repair is completed. (§927.) Existing statutory and decisional law regarding the tolling of statutes of limitation also may apply. (§941 (e).)

Affirmative Defenses:

SB 800 expressly provides builders with the following affirmative defenses in response to claimed defects:

• Unforeseen act of nature, defined to include weather conditions, earthquakes, war, terrorism or vandalism in excess of design criteria established by codes, regulations or ordinances in effect at the time of construction. (§945.5 (a).)
  
  
• Homeowner's unreasonable failure to prevent or minimize damages. (§945.5 (b).)
  
  
• Homeowner's failure to follow the builder's or manufacturer's recommendations or commonly accepted maintenance obligations. (§945.5 (c).)
  
  
• Homeowner's alteration, wear and tear, misuse, abuse, neglect or use of the structure for something other than its intended purpose. (§945.5 (d).)
  
  
• Statutes of limitations or repose that bar the claim. (§945.5 (e).)
  
  
• Builder has obtained a valid release. (§945.5 (f).)
  
  
• Builder's repair was successful in correcting the defect. (§945.5 (g).)

On balance, builders should recognize that the complexities of SB 800 require close examination of the text of its various sections. Due to the bill's length, there are many details and fine points that are not discussed in this article. Nonetheless, builders need to be aware of them. Given that the timetables set forth in the statute are strictly construed, builders, subcontractors and others would greatly benefit from becoming familiar with the procedures outlined in SB 800 so they can be prepared in case they receive notice of homeowner claims made under the statute. Depending on the date of sale, such claims could begin to arise as early as January 2003.

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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2002 Thelen Reid Brown Raysman & Steiner LLP