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Caveat Lender:The Subdivided Lands Act and Right to Repair Law - They Impact Sales Of Newly Constructed Homes Acquired Through Foreclosure By Riasanovsky, Leslie & Moore, Frederick* (This is part one of a detailed article on the Subdivided Lands Act and California’s Right to Repair Law. The complete article may be viewed on the California Receivers Forum’s website — www.receivers.org. Part II will appear in the next issue of RN) Lenders face the prospect of foreclosing on residential property developments in various stages of construction as a consequence of the downturn in the California residential real estate market and developer defaults. The developer may have completed all construction and the foreclosing lender may acquire and sell completed homes in some cases. In others, the lender may wish to complete construction before the homes can be sold. The prudent lender should consider a number of issues peculiar to the residential development industry before it proceeds under either scenario, however. This article highlights two of these issues: the potential applicability of California’s Subdivided Lands Act1; and the potential applicability of the “Requirements for Actions for Construction Defects” set forth in Sections 895 et seq. of the California Civil Code2 (commonly known as the “Right to Repair Law”). Subdivided Lands Act The Subdivided Lands Act (the “Act”) generally requires any person intending to sell undivided interests in subdivided lands within California to first obtain a final subdivision “public report” from the DRE4. The public report is designed to provide prospective purchasers with sufficient information to make an informed purchase decision and to protect buyers from misrepresentation, deceit and fraud5. A host of material must be furnished to the DRE to obtain a public report. Subdividers usually must submit “governing documents” intended for use in sale of properties. These include a notice of intention and completed questionnaire regarding the subject property, as well as any covenants, conditions, and restrictions (“CC&Rs”), sample purchase and sale agreements, deeds, escrow instructions, preliminary title reports, tract maps, condominium plans, homeowners association (“HOA”) budgets, articles of incorporation, and bylaws that may apply.6 Lenders taking title to five or more undivided interests in subdivided lands through foreclosure are not exempt from these obligations7. Nor are receivers appointed by courts at the request of such lenders for the purpose of marketing and selling such property exempt from these requirements8. If a public report for such property already exists (e.g., prepared by the prior owner or developer pre-foreclosure), the lender may be able to use it, pursuant to Section 11010.5 of the California Business & Professions Code, which states:
A lender wishing to use this statute must notify the DRE that it acquired the property through foreclosure within thirty (30) days after it takes title.10 The statute also requires that the property be sold “in conformance with the previously issued subdivision public report.”11 Precisely what this language means is subject to interpretation. Minor changes that do not affect the body of the public report (e.g., name and address changes, etc.) or the governing documents are presumably permissible12. But “material” changes reflecting different sales and marketing goals of the lender (such as revising the governing documents to provide that the homes will be sold in their “as-is” condition or to change the DRE phasing or HOA assessments, and the like) may be beyond the scope of permitted modifications.13 In the interest of avoiding differing applications of the statute by the
DRE, as well as avoiding potential criminal liability,14 any lender who
desires to make ANY changes to the public report or governing documents
other than a simple name or address change should strongly consider
applying to the DRE for an amended public report15. Using this procedure
may delay the sale of homes and add to the lender’s costs, but the lender
can minimize these problems by retaining an experienced DRE processor,
budget consultant, and legal counsel well versed in DRE requirements. The RRL requires each builder to meet construction standards enumerated in the statute.18 Any builder whose homes fail to meet these standards may be liable for damages for the reasonable value of repairing the violation; the reasonable cost of repairing any damages caused by the repair efforts, repairing and rectifying any damages resulting from the failure of the home to meet the standards, and 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, and reasonable investigative costs for each established violation are also recoverable, as are all other costs or fees recoverable by contract or statute.19 Even if homes do meet the RRL construction standards, the builder may still be liable for (1) claims arising out of a function or component of a structure which cause damage to something other than the component itself;20 (2) claims to enforce a contract or express contractual provision (such as express warranties); (3) claims for fraud; (4) claims for personal injury; and (5) claims for violations of other statutes21. The RRL does appear to eliminate claims based on implied warranties or strict liability beyond what is expressly set forth in the statute, however.22 The RRL also requires the builder to undertake and provide a variety of
tasks and materials, including (but not limited to) a one-year fit and
finish warranty for cabinets, mirrors, flooring, interior and exterior
walls, countertops, paint finishes, and trim in the home, copies of
maintenance materials, warranty information, contact information for
filing claims, notice of whether the builder is opting in or out of the
non-adversarial pre-litigation procedure for resolving claims set forth in
Chapter 4 of the RRL, etc.23 There is no express exclusion for a lender that takes title to a builder’s interest in a residential real estate project through foreclosure.25 Nor does the RRL contain any express provisions shielding construction lenders who take title to property through foreclosure from liability for construction defects.26 Another California statute, Civil Code Section 3434, provides that a lender is not liable for construction defects on newly constructed property financed by the lender unless the lender engages in activities outside the scope of the activities of a lender or the lender has been a party to misrepresentations with respect to such property.27 The qualifier “activities outside the scope of a lender” is key. California Civil Code Section 3434 states:
Since it is not “outside the scope of the activities of a lender of money” for a secured lender to take title to real property through foreclosure and then sell the property to a member of the general public, the statute appears to protect the lender from liability for construction defects in the property. It should be noted, however, that because Civil Code Section 3434 uses the term “lender,” it is possible that the statute could be construed to apply only while the lender remains a lender (i.e., the holder of a note secured by the property) and may not protect the lender from any liability arising out of the lender’s status as the owner of the property28. (Part II of this article will examine whether and under what circumstances
a lender who takes title to a builder’s interest in a residential real
estate project through foreclosure, or a receiver appointed at the request
of a lender may be deemed a “builder” within the meaning of the Right to
Repair Law.) |