Second Quarter 2003

California: California Attempts to Resolve Residential Construction Defect Claims Without Litigation

Holland & Knight Newsletter
Roger B. Coven

Californians who buy new homes after January 1, 2003, and then find problems with their residences will face a whole new world of conflict resolution due to California’s recent enactment of Senate Bill 800 (SB 800), known by many as the “Fix-It” bill.  No longer can a California homeowner simply find a good lawyer and sue.  Rather, a homeowner must give the builder a detailed notice of the problems and follow an extensive set of procedures that include mediation and allowing the builder or some other contractor to make repairs.  The builder has the option of following these new dispute resolution and repair procedures or not, but in either case, the builder will be subject to a complex set of construction standards.  For residential housing first sold on or after January 1, 2003, not only will the process for resolving construction problems with the builder be set by statute, but the nature and scope of what problems must be fixed will be defined in great detail.

The reach of this new law is not limited to homeowners and builders.  By its express terms, SB 800 applies to “residential construction, design, specifications, surveying, planning, supervision, testing, or observation of construction.”  See Calif. Civil Code §896.  It applies to builders, developers, original sellers, subcontractors, material suppliers, individual product manufacturers, and design professionals.  Calif. Civil Code §§896, 911 and 936.  For any residential property originally sold on or after January 1, 2003, the Act also governs claims by the initial purchasers, subsequent purchasers and homeowner associations.  Calif. Civil Code §945.

SB 800 was the result of months of negotiations among California homebuilders, trial lawyers, the insurance industry and several key lawmakers.  The California Building Industry Association calls SB 800 the “Fix It” bill, because it gives homebuilders the right to fix problems, and clearly hopes that the bill will spur additional construction in California.  There are benefits for homeowners in SB 800 as well, especially in the definitions of “actionable defects” that must be fixed under the bill.  Whether SB 800 will have the desired effect of reducing construction defect litigation in California and promoting additional new construction remains to be seen.  The complexity of SB 800 may end up as a double-edged sword — many problems may be solved by the dramatic strokes of the bill, but there will be plenty of room for lawyers and experts to argue over the fine points of what is, and what is not, an “actionable defect.”

SB 800’s Definition of “Actionable Defects”

Perhaps the most ambitious aspect of SB 800 is the Legislature’s attempt to define comprehensively in Chapter 2 of the Act all construction defects that will be actionable.  The drafters stated their intent clearly: “The standards set forth in this chapter are intended to address every function or component of a structure.”  Calif. Civil Code §897.  And very little has been overlooked.  In Section 896, the Act defines “water issues” with respect to door and window systems, roofing systems, decks, foundations and slabs, stucco and exterior wall systems, plumbing systems, shower and bath enclosures, countertops, and exterior landscaping, irrigation and drainage.  Section 896 covers structural issues, soil issues, fire protection, plumbing, sewer and electrical issues, and numerous miscellaneous matters right down to the dryer ducts.

For California purchasers of new homes, this comprehensive definition of actionable defects presents at least some benefit: superseding the Aas decision.  In 2000, the California Supreme Court ruled in Aas v. Superior Court, 24 Cal.4th 627 (2000), that homeowners could not recover in tort for construction defects that had not yet caused any damage.  Thus, under Aas, unless a claim could be made on a contract theory, a homeowner could not sue on a condition that created a fire hazard until after the fire occurred, nor could a homeowner sue on a structural defect until his or her house started to crack or collapse.  Under SB 800, however, actionable defects must be fixed immediately, regardless of whether any damages have occurred.1

The comprehensiveness of the Act, however, will not put construction lawyers and experts out of business.  The standards set forth in Section 896 leave much to interpretation.  For example, the standards applicable to water issues state, among other things, that doors, stucco and exterior walls shall not allow unintended water to pass.  With respect to structural issues, the standards provide that foundations, load bearing components and slabs shall not contain significant cracks or vertical displacement and shall not cause the structure to be structurally unsafe.  The structure itself is required to materially comply with design criteria for earthquake and wind load resistance set forth in applicable codes, regulations and ordinances.  Plumbing and electrical systems “shall operate properly and shall not materially impair the use of the structure by its inhabitants.”  These and other standards leave much room for argument as to what is, and what is not, a defect.  Ultimately, these new standards may add little clarity to the process.

Pre-litigation Procedures that Homeowners and Builders Must Follow

For the builder, the pre-litigation procedures set forth in Chapter 4 of the Act start at the sales office.  When a sales agreement is executed, a builder must notify the homeowner-buyer whether the builder intends to follow the nonadversarial procedures of Chapter 4, or other nonadversarial procedures established by contract.  Such an election is binding if a claim is made later.2  At the time of sale, the builder must provide a variety of maintenance and warranty information and other notices, information and documents.  In addition, if requested by the homeowner, a builder must provide within 30 days, copies of plans, specifications, grading plans, soils reports, engineering calculations and additional maintenance and warranty information.  If the builder fails to comply with any of these requirements, the builder loses the protection of Chapter 4 and the homeowner is free to file a lawsuit.3

The “nonadversarial” pre-litigation procedures of Chapter 4 are initiated when the homeowner-claimant provides written notice of an alleged violation of the Chapter 2 standards.  The builder must acknowledge receipt of the notice within 14 days and must complete an initial inspection or testing within another 14 days.4  Within 30 days of the inspection or testing, the builder may offer to repair the violation, to compensate the homeowner for consequential damages, and to mediate the dispute if the homeowner so chooses.5  Alternatively, the builder has the option of offering a cash payment and, in such a case, the builder may negotiate a reasonable release in exchange for the payment.  If the builder decides to make the repair, however, it cannot obtain a release for doing so. 

Within 30 days of receipt of an offer to repair, the homeowner must either authorize the builder to proceed with the repair or request the builder to provide information on three alternative contractors, in which case the builder must provide the homeowner with a choice of contractors within 35 days.  Within 20 days of such presentation, the homeowner must authorize the builder or one of the alternative contractors to perform the repair.6

If the builder fails to make an offer to repair, fails to complete the repair in the time or manner specified, or fails to comply with any other requirement of Chapter 4, the homeowner may file an action.  After the repair is completed, the homeowner may file an action for violation of the applicable Chapter 2 standard or for inadequate repair, or both, seeking all damages available under the Act.  However, if a builder has completed a repair and no mediation has occurred, a homeowner must request mediation before filing an action.

Statutes of Limitation

SB 800 also provides a new set of statutes of limitation for claims related to residential construction subject to the Act.  For construction not subject to the new Act, claims for patent deficiencies must be brought within four years under Section 337.1 of the Code of Civil Procedure, and claims for latent deficiencies must be brought within 10 years under Section 337.15.  For claims subject to SB 800, however, Sections 337.1 and 337.15 do not apply. Under the new law, a catch-all limitations period of 10 years from substantial completion applies for all actions whether based on patent or latent defects.  For many claims, however, shorter periods apply – again, regardless of whether the claims are based on patent or latent defects.  A one-year period applies to claims based on noise transmission between attached structures, or on defects in irrigation systems or drainage.  A two-year period applies for claims based on defects in untreated wood posts, landscaping systems, or dryer ducts.  A four-year period applies for claims based on defects in plumbing or sewer systems, electrical systems, exterior hardscape, or untreated steel fences.  And a five-year period applies for claims based on defects in paint and stains.

For “actionable defects” that are not subject to a shorter period, the limitations period, even for patent defects, is 10 years from the date of substantial completion.7  The shorter limitations periods, however, may present serious problems for some future homeowners.  All of the one-year to five-year limitations periods set forth in Section 896 run from the “close of escrow,” so claims on many “actionable defects” may be barred before they are discovered.

Like many compromises worked out by committees, SB 800 is far from perfect.  It may serve its purpose well for relatively minor defects that can be easily fixed by the builder, but most builders are already fixing minor problems.  For serious problems, SB 800 provides builders with opportunities to solve problems before they become litigation issues.  If a builder manages to follow all of the procedures set forth in the Act, a homeowner would be compelled to allow repairs to be made and to engage in at least a short mediation before any action could be filed.  Unless the builder is successful in satisfying the homeowner, however, SB 800 may do little more than delay the inevitable.

[1]Some of the definitions of “actionable defects” caused by water issues require damages for the defect to be actionable.  But most do not.

[2]Civil Code §914(a).

[3]Civil Code §912(i).

[4]The builder must also give notice to any subcontractor, product manufacturer, material supplier or insurer it intends to hold responsible, and further deadlines are provided for additional inspections.

[5]Civil Code § 917.  If the homeowner chooses to mediate the dispute, a four-hour mediation shall take place within 15 days.  Civil Code § 919.

[6]Civil Code § 918.

[7]Section 941 provides that the date of substantial completion shall be “not later than the date of recordation of a valid notice of completion.”

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