This HOA arbitration clause case discusses those important legal issues ignored by state legislatures and the courts over the years — those pertaining to the homeowner’s consent to agree, his surrender of his rights by the mere acceptance of a deed, and raises the question of misrepresentation by the participants in the Unspoken Alliance. The Court in Pinnacle reiterated that consent may occur by implication, but does not concern itself with the “full knowledge” and misrepresentation of that implied consent. While the Court dealt with the matter before it, the arbitration clause, the application of its reasoning can be extended to the broader issues of a valid contract under its application of contract law requirements.
For example, one aspect is the holding that the buyer has agreed to the CC&Rs if he has opportunity to examine the CC&Rs, at or shortly after closing and accepting the deed, but declines to do so. This legal doctrine presumes that “all things being equal”, but they are not with regard to misrepresentation by the developer and the real estate agent, and the silence on the part of the consumer protection agencies. These agencies have failed to put forth warnings to buyer to the effect: There are surprises and covenants that you may feel are oppressive, which may affect your rights, freedoms, privileges and immunities to which you are entitled under state laws and the Constitution.
The Court stated the facts of the Pinnacle CC&Rs .
“In selling the condominiums Pinnacle used a standard purchase and sale agreement that recited on the first page that the buyer agrees to comply with the CC&R’s by accepting a grant deed to the condominium. . . . any dispute in any manner other than as provided in [the CC&R’s]. Buyer and Seller acknowledge that by agreeing to resolve all disputes as provided in [the CC&R’s], they are giving up their respective rights to have such disputes tried before a jury. WE HAVE READ AND UNDERSTOOD THE FOREGOING AND AGREE TO COMPLY . . . “
In spite of the above, the Court found the clause unconscionable. Borrowing from Villa Milano, the court quoted (emphasis added), “A developer should not be permitted to accomplish through the CC&R’s what it could not accomplish through a purchase contract.” (Please note that in a broader sense I have argued that HOAs by virtue of a written covenants running with the land — CC&Rs — cannot be allowed to circumvent the US Constitution.) The court held,
“We examine this question under general contract formation principles. . . .Essential components of a contract include parties capable of contracting and the consent of the parties to the contract. . . . Although the arbitration provision states that by accepting a deed for any portion of the association property, the Association agreed to give up its right to a jury trial and have any construction dispute decided by arbitration, the Association had no choice but to accept the property that Pinnacle deeded to it.
“We agree with Villa Milano insofar as it holds that CC&R’s can reasonably be ‘construed as a contract’ and provide a means for analyzing a controversy arising under the CC&R’s when the issue involved is the operation or governance of the association or the relationships between owners and between owners and the association. . . .”
Please read the following very carefully. “Does not comport” should be read as: insufficient to pass judicial review for the surrender of such an important Constitutional right.
“Treating CC&R’s as a contract such that they are sufficient to waive the right to trial by jury does not comport with the importance of the right waived. CC&R’s are notoriously lengthy, are adhesive in nature, are written by developers perhaps years before many owners buy, and often, as here with regard to the waiver of trial by jury, cannot be modified by the association. Further, the document is not signed by the parties. . . . The general principles discussed in Treo regarding the need for free and voluntary consent before a party can be deprived of its constitutional right to a jury trial are equally applicable to arbitration.”
The Court then addressed the issue of unconscionable adhesion contracts.
“Procedural unconscionability focuses on oppression or surprise. “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice,” while “surprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them. . . . In assessing substantive unconscionability, the paramount consideration is mutuality.
“The provision in the purchase and sale agreements did not mention arbitration, nor did it explain to purchasers the type of disputes for which they have agreed to waive their constitutional right to a jury. To discover this information, purchasers needed to read the CC&R’s. . . . However, for the terms of another document to be incorporated by reference into a contract, the reference must be clear and specific, and the terms of the incorporated document must be known or easily available to the contracting parties.” [The CC&Rs are incorporated by the statement that the deed is subject to CC&Rs, but most do not contain the explicit legal statement, “and are incorporated herein”].
And specifically in regard to binding homeowners by means of constructive notice,
“Assuming the CC&R’s had been recorded before the sale of the first condominium, we cannot conclude that recording a document qualifies as making the document readily or easily obtainable. It is unreasonable to assume that buyers eager to complete their purchase of a condominium will stop the process and travel to the county recorder’s office to locate a copy of the CC&R’s. Thus, there is a high degree of surprise because purchasers have no means of ascertaining . . . . Oppression also exists because the jury waiver provision in the purchase and sale agreements and the arbitration provision in the CC&R’s were part of preprinted materials presented on a take-it-or-leave-it basis to purchasers without any negotiation. . . . Accordingly, the existence of surprise and oppression reveals a high degree of procedural unconscionability.”
One would think that all those CAI lawyer-members of its College of Community Association Lawyer, and all those legal-academic aristocrats who write journals, attend seminars and conferences, and offer their person opinions in the Restatement Third, Property: Servitudes on what the law is would know better. The Restatement was supposed to summarize the general holdings of the courts, and not the opinions of the legal-academic aristocrats, as to the common law of servitudes (covenants running with the land).
For example, § 3.1, comment h, states: “in the event of a conflict between servitudes law and the law applicable to the association form, servitudes law should control”; and § 6.13, comment a, states: “The question whether a servitude unreasonably burdens a fundamental constitutional right is determined as a matter of property law, and not constitutional law”. These statements reflect an excess of zeal and an abuse of the duties as editors/contributors to the Restatement. It is not to difficult to conclude that this Restatement serves to advance the interests of the legal-academic aristocrats.
These efforts have permitted HOAs to become institutionalized over the years, which translates into an acceptance without question of the rights and powers of the HOA. The principles applied in this case on arbitration clauses must be extended to the very nature and legal foundation of the HOA scheme.
1. Pinnacle Museum Tower HOA v. Pinnacle Market Dev., D055422, Cal. App. Dist. 4 (July 30, 2010).
2. Villa Milano Homeowners Assn. v. Il Davorge, 84 Cal.App.4th (2000).
3. Treo @ Kettner Homeowners Ass’n v. Superior Court, 166 Cal.App.4th 1055 (2008).