Nevada Supreme Court Rules That Arbitration Clause in Common-Interest Community’s Covenants, Conditions, and Restrictions Binds Homeowners  

United States Home Corp. v. Ballesteros Trust, 2018 Nev. LEXIS 28 (Nev. Apr. 12, 2018)

United States Home Corporation (“U.S.H.”) built homes in a Nevada common-interest community, subject to a Covenant, Conditions, and Restrictions agreement (“CC&R”), which provided that any dispute would be resolved by arbitration.

Between August 2013 and February 2015, twelve home purchasers filed pre-litigation notices against U.S.H. for alleged construction defects.  Three of the purchasers had direct purchase and sales agreements with U.S.H. that contained arbitration clauses; the remaining homeowners did not sign such agreements, but took title subject to the CC&R.  U.S.H. demanded arbitration, but the homeowners brought claims in a Nevada district court seeking damages for breach of contract and other claims.  U.S.H. moved to compel arbitration.  The court held that the transaction did not involve interstate commerce, so the Federal Arbitration Act (“FAA”) did not apply, and invalidated the arbitration agreements as unconscionable.

On appeal, the homeowners argued that arbitration cannot be compelled based on the CC&R, because CC&Rs are not contracts, but covenants that run with the land.  U.S.H. argued that by purchasing homes in a common-interest community, the homeowners assented to the obligations in the CC&R, including the arbitration clause.  Citing a comparable decision from California, the Nevada Supreme Court ruled that by purchasing a unit within the common-interest community, the homeowners accepted the CC&R, including its arbitration clause.

Relevant to the Court’s decision was the fact that each of the homeowners received the requisite informational notice that warned them that by purchasing a property encumbered by the CC&R, the purchasers agreed to limitations that could affect their lifestyle and freedom of choice, and that the CC&R bound the owners whether or not they read or had the CC&R explained to them.  The Court emphasized that purchasing property in a common-interest community was a choice that “requires consideration of the CC&R,” which not only bind homeowners, but also the developer and homeowner association.  In essence, “CC&Rs become part of the title of your property” as homeowner, the Court found.

The Court also noted that certain safeguards were in place to protect the homeowners from unwittingly becoming bound.  First, the owners were given copies of the CC&R prior to their purchase as well as informational statements required under Nevada law.  Second, the homeowners had five days to cancel the purchase at their election.  Third, even though the CC&R arbitration agreement was effective, the homeowners could still raise individual defenses, such as unconscionability.

The Court next analyzed whether the FAA applied.  U.S.H. argued that the FAA applied because the underlying home purchases affected interstate commerce.  The homeowners argued that the sale of individual homes was a local issue.  The Court noted that the FAA applies to contracts “evidencing a transaction involving interstate commerce”, with the word “involving” interpreted broadly.  As such, even contracts evidencing intrastate economic activities are governed by the FAA if the activities viewed in the aggregate “substantially affect interstate commerce.”

While the Court was sympathetic to the homeowners’ argument that the CC&R addressed residential real estate, a traditionally local concern, the Court was persuaded by the “larger purpose” of the CC&R, which was to facilitate the creation and governance of a common-interest community consisting of common areas and multiple homes that protect the purchasers’ investments.  The Court concluded that the transactions underlying the CC&R’s arbitration agreement, the construction and sale of multiple homes by out-of-state contractors using out-of-state suppliers, affected interstate commerce and fell under the purview of the FAA.  The Court ruled that Nevada law disfavoring arbitration, therefore, was preempted and reversed the lower court’s holding that the CC&R arbitration agreement was unconscionable.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

–Alex Corey

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