Real Estate Litigation

By: Mark Johnson

The California Supreme Court ruled in McMillin Albany LLC et al. v. The Superior Court of Kern County, (1/18/2018) 4 cal. 5^th 241, that California’s Right to Repair Act, California Civil Code sections 895 et seq. (“Act”) is the sole remedy for construction defect claims for economic loss and property damages regarding new residential construction.  The Act establishes a pre-litigation dispute resolution process that must be followed before filing a construction defect action for new residential construction purchased after January 1, 2003. The Act provides a builder with the right to attempt to repair construction defects before litigation is filed.

The Mc Millin ruling resolved a split among two court of appeal decisions regarding the scope of the Act: Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98 and Burch v. Superior Court [(2014) 223 Cal.App.4th 1411.  Those cases held that the Act is not the exclusive remedy for construction defect lawsuits that allege property damage arising from new residential construction. Therefore owners of new residential construction where construction defects had caused property damage were not required to proceed under the Act and instead could proceed with common law claims. Mc Millilin removes that option.

In McMillin, about 37 purchasers of new single-family homes developed by Mc Millin Albany LLC sued Mc Millin for various construction defects.  The original complaint included a claim under the Act as well as common law claims.  Mc Millin requested a stay of the lawsuit to allow the parties to engage in the pre-litigation and defect repair procedures of the Act.  In response to the motion, plaintiffs dismissed their claims under the Act.  The trial court denied Mc Millin’s stay request holding that plaintiffs could proceed with claims outside of the Act.

Mc Millin appealed and the Court of Appeals ruled that the Act is the exclusive remedy for construction defect claims resulting in property damage and that when the Act applies, its pre-litigation procures are mandatory. The Court stated “the Legislature intended that all claims arising out of defects in residential construction involving post-2003 sales of new homes be subject to the standards and requirements of the Act.”

In Mc Millin, the California Supreme Court affirmed this ruling primarily by looking at the legislative history of the Act.  The Court noted that the Act applies to “any action” seeking damages for construction defect with respect to “original construction intended to be sold as an individual dwelling unit.”  The Mc Millin court also noted that damages potentially recoverable under the Act include damages for pure economic loss.

The Mc Millin court also stated that the purpose of the Act would be thwarted if homeowners could avoid the Act’s procedures and sue at common law “for construction defect claims involving damages other than economic loss.”  As a result, the Mc Millin court held defects gave rise to any property damage are subject to the Act’s pre-litigation procedures.”  Therefore, since plaintiffs’ claims were covered by the Act, the Act was the exclusive vehicle available to pursue the claims.

Take Away

Mc Millin makes it clear that the Act is the exclusive remedy for claims regarding construction defects in new residential construction sold after January 2003 regardless of whether the defects have caused property damage; the pre-litigation and defect cure procedures in the Act are mandatory; and if the defects alleged include defects that are covered by the Act, the Act is the exclusive remedy regardless of whether the plaintiff has stated a claim under the Act.  The Act does not apply to construction defect claims for personal injury, breach of contract, or fraud.  However, the Act is the exclusive remedy for all other claims regarding construction defects in new residential construction covered by the Act and the Act’s pre-litigation procedures must be followed.