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Unintended consequences of Civil Code Section 1675(f)

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As originally conceived, the aim of 1675(f) was to encourage developers to build condominium projects. The Legislature figured that if developers could take larger deposits from buyers, they could more easily finance their projects and would be incentivized to build.

Of course, the Legislature did not want to unfairly shift the risk that accompanies development solely to buyers. Thus, if a buyer defaults on his purchase of a condominium, 1675(f) requires the developer to prepare an accounting. The developer is then permitted to keep either 3 percent of the purchase price as liquidated damages, or the amount of the developer's damages as shown on the accounting, whichever is greater. Though the legislature likely intended that 1675(f) would provide an efficient and individualized oversight for liquidated damages clauses, the result has been a glut of litigation.

When 1675(f) was enacted, the California real estate market was rising rapidly. Soon, developers were building the large condominium projects envisioned by the Legislature, and taking deposits from buyers who were anxious to invest in a rising real estate market. Unfortunately for both developers and buyers, some of these projects pre-sold in the boom market, but were not constructed until the market had softened. Thus, many buyers who pre-purchased condominiums were ultimately unable or unwilling to close escrow.

When these buyers defaulted on their purchase contracts, section 1675(f) was triggered. What followed were hotly contested disputes over the contents of the accountings. The disputes arose because of the vague statutory description of the accounting. 1675(f) states that the accounting should include costs and revenues related to the construction and sale of the property and any delay caused by the buyer's default. Specific examples of the calculations that should be included in the accounting are set forth only in the legislative history of the bill. Because the difference between these two calculations can be significant, litigation ensued.

Buyers, relying on the broad statutory language, argued that the accountings should compare the cost to construct the unit with the sales price of the unit. Developers, pointing to the specific examples in the legislative history, argued that the difference between the original price and the re-sale price should be included.

Since subdivision (f) went into effect, no published decision has discussed or decided the methodology to be used in a 1675(f) accounting. This is largely because accounting disputes are usually heard in arbitration. Without the guidance of the courts or a reworking of the statute, it is unlikely that 1675(f)'s accounting procedure will ever create the efficient procedure the Legislature intended.

-Mazza is senior counsel at the law firm of Allen Matkins Leck Gamble Mallory & Natsis LLP, where she represents clients in all aspects of real estate development litigation and general business litigation. She can be reached at mmazza@allenmatkins.com. Submitted by Allen Matkins Leck Gamble Mallory & Natsis LLP.

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