CREJ - Journal

Page 20 —

COLORADO REAL ESTATE JOURNAL

— January 7-January 20, 2015

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Law & Accounting

s we begin to contem-

plate the forthcoming

state legislative session

here in Colorado, one of the lead-

ing issues that continues to arise

is possible legislation regarding

how our construction defect laws

are applied in the context of mul-

tifamily ownership housing (con-

dominiums and planned com-

munities), particularly as they

relate to providing a measure of

advance notice to those impacted

by potential litigation and possi-

ble alternative dispute resolution

in the context of related claims.

There has been much discus-

sion, posturing and claims assert-

ed around this issue and sev-

eral attempts have been made,

and are continuing to be made,

regarding potential solutions to

what has been widely asserted

as one of the major roadblocks

to the development of residential

attached ownership housing in

Colorado during recent years.

Without delving into much of

the background that has been

described and written about

recently concerning this issue,

there are certainly disputes pub-

lically asserted about whether

such reforms as proposed to

date (whether at the state or local

level) would be helpful or hurtful

to the consumer, the person who

had purchased and owns such

multifamily attached housing.

Let us take a brief look at the

major elements of proposals that

have been discussed as measures

to initially address some of the

barriers to the development of

this much-needed housing prod-

uct.

The context is mainly appli-

cable within communities where

there exists a homeowners asso-

ciation that is established in the

community’s governing docu-

ments to manage the affairs of

that community, including the

common areas contained within

the condominium or planned

community. Under our current

statutory scheme (Colorado’s

Common Interest Ownership

Act), if more than one unit owner

has claimed a defect in their unit,

then the HOA has the standing

to pursue such claims against the

developer on behalf of the unit

owners.

This authority of the HOA has

created circumstances whereby

theHOA’s boardof directorsmay

decide, on behalf of all unit own-

ers who may

be similarly

impacted, to

pursue litiga-

tion against

the

devel-

oper.

Not-

wi t h s t and -

ing the well-

intentioned

actions of the

HOA’s board

of directors in

this context,

the remaining

unit owners

are nowburdenedwith an inabil-

ity to refinance or sell their units

in the face of such pending litiga-

tion, at least until the claims are

fully vetted through the courts.

One reasoned solution being

proposed in this particular cir-

cumstance is to provide for the

informed consent of the unit

owners within the communi-

ty who are impacted by such

a decision. Such informed con-

sent would include a couple of

measures. First, the HOA board

would be required to notify the

unit owners of a request for the

HOA to pursue litigation against

the developer, along with infor-

mation regarding the claim itself,

the relative cost and time esti-

mates and the reasoned probabil-

ity of success. Second, following

such notices to the unit owners,

such a measure would require

an affirmative vote of a major-

ity of the unit owners within the

community before commenc-

ing actual litigation, rather than

leaving such a major decision

solely up to the HOA’s board of

directors. Since such a decision

has the real possibility of impair-

ing all of the unit owners, this

approach would fairly allow for

the informed consent of the unit

owners before actual litigation is

filed. This measure does not pre-

vent any aggrieved unit owner

from filing its own separate claim

against the developer; it just pre-

vents the HOAboard of directors

from pursuing such claims with-

out the informed consent of the

majority of impacted unit own-

ers. Reserving certain actions of

the HOA board to unit owner

approval is not a unique matter

in the context of representative

management when such actions

have a material impact on all

owners, as would be the case in

this instance.

It appears as though this mea-

sure is actually one that is a bal-

anced protection of impacted

consumers, while not preventing

other consumers from pursuing

their individual claims. There are

claims by some that such a mea-

sure is, in reality, a disguised (or

maybe not so disguised) protec-

tion of the developer from the

pursuit of valid claims. Since the

proposed measures that I have

seen provide that the majority

vote be made by the nondevel-

oper-owned units such that the

developer-owned units would

not be counted in such a vote, I

do not see that this approach is

one that is geared to protect the

developer so much as to protect

the other impacted unit owners

who, without such informed con-

sent provisions, have no ability to

protect their respective interests

in such matters.

A second issue is one that

addresses alternative dispute res-

olutions in the context of existing

provisions in the respective com-

munity’s governing documents.

This measure would provide

that, to the extent that the govern-

ing documents of the respective

community contain, at the time

that a buyer purchases a unit

within that community, provi-

sions that require a mandatory

arbitration process to settle dis-

putes and claims with the devel-

oper, those provisions are not

subject to later elimination from

those governing documents by

way of amendment by the HOA.

Condo development in Colorado: a perspective on current issues

James M.

Mulligan

Senior real estate

partner, Snell &

Wilmer, Denver

Please see Condo, Page 21

There are certainly

disputes publically

asserted about

whether such reforms

as proposed to date

(whether at the state

or local level) would

be helpful or hurtful

to the consumer,

the person who had

purchased and owns

such multifamily

attached housing.

Our national real estate practice

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