– By Michael G. Kim, Esq. (originally published in Fall 2003)

California law provides various time limits, or statutes of limitation, within which a person, or a homeowners’ association, can sue for construction defects. Generally speaking, if a construction defect is “patent,” or readily apparent to the naked eye, a homeowner or homeowners’ association has four (4) years from the date of “substantial completion” (usually demarcated by the date of recording of the Notice of Completion for the home or phase of a project) within which to file a lawsuit. However, what one can see is often, as they say, only the tip of the iceberg.

Many construction defects, such as those related to improperly prepared soil, structural problems and certain plumbing issues, are not readily apparent to the naked eye, or are “latent.” Lawsuits over latent defects must be filed within 3 years (under California Code of Civil Procedure Section 337 governing negligence and strict liability) or 4 years (under California Code of Civil Procedure Section 338 governing warranty and contracts) of discovery of the defect, but in any event must be filed within 10 years of “substantial completion” pursuant to California Code of Civil Procedure Section 337.15.

As indicated above, the California Legislature provides homeowners and homeowners’ associations with an outer limit 10 year window within which to bring a lawsuit alleging construction defects. This 10 year rule was substantially modified by recent case law that effectively extended the 10 year period when a developer performs repairs to the allegedly defective areas within the 10 year period. The rationale behind these cases was that a homeowner affected by construction defects should not be lulled into a sense of security by a developer promising to perform repairs which ultimately prove unsuccessful. In the landmark case of Cascade Gardens Homeowners Association vs. McKellar and Associates, 194 Cal. App. 3rd 1252 (1987), the developer spent four months attempting to repair a defective roof at a condominium project. The association eventually filed suit and the developer raised the 10 year statute of limitation as a defense. The association argued, and the Appellate Court agreed, that the statute of limitations was tolled, or stopped, during the four month period during which the developer attempted to make these repairs. Cascade Gardens remained good law until this year.

On August 4, 2003, the California Supreme Court severely restricted the ability of homeowners and homeowners’ associations to effectively argue that the statute of limitations is tolled during the period of developer repairs. In Lantzy vs. Centex Homes, 31 Cal. 4th 363 (2003), the California Supreme Court ruled that the statute of limitations set forth in California Code of Civil Procedure Section 337.15 could be expanded only if the party arguing for expansion of a period could establish the elements of ”equitable estoppel.” In plain English, the concept of equitable estoppel essentially prevents a person from fooling another into not suing by making false promises to repair. Equitable estoppel in the context of a construction case was defined by the Supreme Court in Lantzy as follows:

(1) When one potentially liable for construction defects represents, while the limitation period is still running, that all actual damage has been or will be repaired, thus making it unnecessary to sue; (2) the Plaintiff reasonably relies on this representation to refrain from bringing a timely action; (3) the representation proves false after the limitation period has expired; (4) and the Plaintiff proceeds diligently once the truth is discovered.

Only under these circumstances, indicated the California Supreme Court, may a defendant be “equitably estopped,” or prevented from raising the 10 year statute of limitations as a defense. In Lantzy, the Supreme Court has now set a high standard for the circumstances that will take a particular construction case outside of the 10 year statute of limitations. The standard is now similar to that for a fraud claim.

What does the Lantzy case mean for your association?

As a practical matter, construction problems are usually discovered in a project or home toward the end of the 10 year period. It often takes several years for construction deficiencies to manifest in observable damage. Even after defects are discovered, most people do not understand the cause of the problem. In this context, the lesson of the Lantzy case is clear. As soon as a homeowner or homeowners’ association discovers any information suggesting that there may be a construction problem, an immediate effort should be made to identify all other such problems and contact the developer immediately to obtain its response.

In the case of a homeowners association, the management company should be the liaison between the affected owner and the developer. If the developer makes representations that it will fix the problems, the association should insist that the developer either agree in writing to extend the time to sue on the defects discovered or guarantee the repairs that it intends to perform. Absent such written assurance from the developer, the affected homeowner or homeowners’ association would be well advised to check on the relevant notice of completion dates for the home or the applicable project phase and calendar the last possible date to initiate “Calderon” proceedings (the pre-suit negotiation period required by Civil Code Section 1375). In an abundance of caution, the date calendared to start “Calderon” process should be approximately 9 years and 6 months after the applicable notice of completion date.

Members of Boards of Directors owe a fiduciary duty to the members of the associations they serve to take action to remedy construction problems by contacting the developer if they are discovered within the 10 year period. The Board must do whatever it can to protect the association’s right to seek recourse against the developer for those problems. Allowing the 10 year statute of limitations to lapse and potentially prevent such a recovery arguably would constitute a breach of that duty.

Of course, as soon as construction defects are discovered, counsel for the association should be contacted so that appropriate protective measures can be taken and a proper investigation commenced.