With the rapid development of residential construction in large urban areas of California, many residential "infill" projects are being developed in areas which previously had been operated as an industrial site. A question that has arisen is whether the operator of an industrial site, later converted to residential use by third parties, can be sued by homeowners for operations arising from the (prior) industrial use of the property (such as contamination of soil and ground water). In a decision which provides further guidance as to the scope and application of the 10 year statute of repose for construction defects found in Code of Civil Procedure §337.15, the Court of Appeal in The Estuary Owners Association v. Shell Oil Company (2017) WESTLAW 3172554 ("Estuary case") recently ruled that the trial court improperly applied the 10 year statute of repose for construction defects in granting summary judgment in favor of Shell Oil Company, the original owner of a large industrial site which was sold and later developed by third parties as residential condominiums.1
In the Estuary case, Shell Oil Company operated a bulk fuel facility in the City of San Francisco from 1925 to 1980. The property was then sold to a number of owners for non-residential uses. In 2003, the property was acquired by a real estate developer, Signature at the Estuary, LLC ("Signature"), for the purpose of building a residential townhouse development there. Prior to Signature's acquisition of the property, a Corrective Action Plan was submitted to the California Regional Water Quality Control Board, which was later approved with corrections. That plan was implemented in late 2003 at significant cost. Signature later asserted claims against Shell Oil Company that the oil producer was responsible for contamination of soil and ground water at the property. Without admitting fault, Shell Oil Company agreed to pay $1,250,000 toward remediation expenses at the property as part of a settlement with Signature.
Deed restrictions were then recorded by Signature in November 2004 that detailed the history of contamination and cleanup activities at the property, set forth restrictions on development and use of the property, and required future owners and occupants to execute a written instrument to accompany all purchase agreements or leases related to
1 In an unpublished portion of the Opinion, the Court of Appeal affirmed summary judgment in favor of Shell Oil Company, but only based on the three year statute of limitation for property damage found in Code of Civil Procedure §338.
the property stating recognition that the property “contains hazardous materials in soils and in the groundwater” and is subject to the deed restriction.
The property was then developed as condominiums in the 2004 to 2006 timeframe and were sold shortly thereafter. A series of construction defect lawsuits were filed by the owners association for the development and individual owners alleging construction defects. The owners association and certain owners also sued Shell Oil Company on the basis that Shell Oil Company was responsible for contaminating the soil under their property. The trial court granted summary judgment in favor of Shell Oil Company on multiple bases including that the 10 year Statute of Repose applied and barred claims as to Shell Oil Company because Shell Oil Company had completed its improvements more than 10 years prior to suit being filed.
As for the 10 year Statue of Repose for construction defects, the Court of Appeal ruled that it would have reversed the trial court on the basis that the construction defect statute, or Statute of Repose, found in Code of Civil Procedure §337.15, applies to claims arising from the development of improvements at the property but does not embrace claims arising from the operation of the site. In that regard, the Court ruled that the question (for purposes of Code of Civil Procedure §337.15) was whether the plaintiffs' (appellants') complaints alleged that Shell Oil Company contaminated the property due to a construction defect in the fuel distribution facility (for which the Statute of Repose would apply) or due to ongoing business activities by Shell Oil Company on the site, distinct from the manner in which the facility itself was constructed (for which the Statute of Repose would not apply).2
The holding in the Estuary case appears to limit the scope of the 10 year Statute of Repose under Code of Civil Procedure §337.15 to claims for construction defects involving improvements at the site and leaves open claims arising from the ongoing operations of prior owners at the property.
About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com.
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2 As referenced in footnote 1 above, the Court of Appeal, in an unpublished portion of its Opinion, affirmed the trial court's ruling that the three year statute of limitation for property damage found in Code of Civil Procedure §338 applied and barred the claims against Shell Oil Company.
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