Lawsuits choke condo building in California, lawmakers stall

The condominium, one of the most affordable housing in California to buy, is an endangered species. Construction of these units is down 90% in key urban centers from just two decades ago.

Yet, for all the talk from Gov. Gavin Newsom and leading Democrats about making California more affordable, the root cause of the condo conundrum goes unaddressed year after year in Sacramento. Meanwhile, sick of the state’s high cost of living, Californians continue to move to other states. It is an exodus that is unparalleled anywhere else in the nation.

There is a lot of talk about affordability these days in political circles, but the state’s condominium shortage is testament to the dearth of meaningful action.

State legislation passed in 2002 that was intended to motivate builders to fix construction defects has led to the near certainty of litigation instead. To avoid lawsuits, construction of new condominiums has plummeted. Given how most Californians can’t afford to buy single family homes, the condo construction trade should be booming.

Anywhere a condominium complex is built in California, “100% of them will be litigated,” said Dan Dunmoyer, president of the California Building Industry Association. “I don’t know of a condo built in California that doesn’t get a defect claim on it.”

How a compromise went awry

Guaranteed litigation was far from the intent of the Legislature back in 2002, when it passed what is known as the “Right to Repair Act.” As its name implies, the goal was to fix any construction problem rather than get lawyers involved.

“The right to repair made intuitive sense,” said Darrell Steinberg, Sacramento’s former mayor who chaired the State Senate Judiciary Committee at the time. He was the brains behind Senate Pro Tempore John Burton’s Senate Bill 800.

A compromise among the builders, insurers and trial lawyers, SB 800 seemingly gave builders a path to fixing a construction problem, with condo owners holding the option of litigation they were dissatisfied with the repair.

“We thought it was a big deal at the time,” said Steinberg in a recent interview. “If the repair is made and it’s made in the right way, then there’s no need for a lawsuit, right?”

For a while, SB 800 appeared to work. Just three years after it passed, condo construction hit an all-time high in California. In Los Angeles County, for example, more than 8,000 condominium units were constructed in 2005. But by 2022, that had plummeted to less than 1,000.

So what happened? The Terner Center for Housing Innovation at UC Berkeley suspects that, over time, SB 800, had some unintended consequences.

The legislation gave condominium homeowner associations a decade to file a claim for a construction defect. So as the deadline approached, the claims started rolling in. And if lawyers get involved, the outcome is typically a foregone conclusion.

“The practice of plaintiffs’ counsel charging contingency fees (which can take up to one-third of a cash settlement) disincentivizes settlements for repairs alone,” Terner reported last year. “The end result is often protracted litigation, where the high costs of discovery and trial preparation mean insurers pay substantial settlements, ultimately driving up both insurance and housing costs.”

Condo builders buy insurance to cover these litigation costs. With a court battle a near certainty, there’s little incentive for a builder to spend money trying first to fix the defect. Sadly, the greatest incentive of all is to never build the condominium in the first place. And those that do get built, Terner said, have typically been higher-end complexes so that builders can better deal with the legal costs.

Reforms die in a Sacramento committee

Any solution to this would inevitably elevate a builder’s right to repair over a homeowner’s right to sue. And therein lies the problem, because in the Legislature, the Democrats tend to avoid anything that looks like it is anti-consumer.

When former State Sen. Steve Glazer tried to reform SB 800 last year to reduce the likelihood of lawsuits, at first Dunmoyer’s builders association was in favor of the legislation. Then, Senate Bill 1470 got to the Senate Judiciary Committee.

Consumer attorneys, Steinberg said, “couldn’t always pass their own legislation. But they could stop it in judiciary committees.”

Sure enough, SB 1470 changed so much in this Senate committee that builders flipped to opposing the bill. “We actually went out and had to kill the bill,” Dunmoyer said. And he did.

Will a lawmaker try again? Dunmoyer isn’t holding his breath. Former State Sen. Bob Hertzberg is floating some changes as part of a $25 billion housing initiative that has been cleared for signature gathering for a future ballot, but “it doesn’t do much,” he said.

Steinberg’s intent some 23 years ago was spot on. It makes all the sense in the world to give the builder the first crack at solving a construction problem, and for litigation to be a backstop. That lawsuits have become a near certainty is proof that SB 800 needs some fixing of its own.

As for truly protecting California consumers, the biggest victims in the state are the millions of residents who cannot afford to buy condominiums, because there’s not nearly enough of them — thanks to Sacramento.