CREJ - Journal

Page 16 —

COLORADO REAL ESTATE JOURNAL

— March 4-March 17, 2015

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or the past several years,

leaders in the Colorado

construction anddevelop-

ment industry have been urging

the Colorado GeneralAssembly to

pass construction defect reform to

tempertheunprecedentedincrease

in lawsuits related to residential

condominium construction. In

2014, the General Assembly’s pro-

posed reforms to the Construction

Defect Action Reform Act failed

when Senate Bill 220 died in com-

mittee. In another attempt to reme-

dy the problem, during the current

2015 session, Senate Bill 177 was

recently introduced to the Senate

Business, Labor and Technology

Committee.

Senate Bill 177 takes a simi-

lar approach to the 2014 bill but

instead focuses on reforms to the

Colorado Common Interest Own-

ership Act, which governs home-

owners’ associations. The 2015

proposed reforms include: (1) limi-

tations on an HOA board’s ability

to edit provisions that protect a

developer in a Declaration of Cov-

enants, Conditions and Restric-

tions without developer consent;

(2) mandatory disclosures to all

unit owners of the risks and costs

associatedwith constructiondefect

litigation; and (3) approval by a

majority of unit owners before an

HOAcan file suit.

The proposed 2015 bill has

gained traction with bipartisan

support from Senate sponsor-

ship by Majority Leader Mark

Scheffel, R-Parker, and Sen. Jessie

Ulibarri, D-Commerce City, and

House sponsorship by Minority

Leader Brian Del Grosso, R-Love-

land, and Rep. Jonathan Singer,

D-Longmont. Despite this initial

momentum, it is uncertain wheth-

er a divided Legislature will suc-

cessfully pass meaningful legisla-

tion in 2015.

Regardless of whether the Gen-

eral Assembly is able to pass con-

structiondefect reform, theColora-

do Court of Appeals may resolve

some of the key issues through

its upcoming decision in Metro-

politan Homes Inc. v. Vallagio

at Inverness Residential Condo-

minium Association Inc. The par-

ties to the case are Metropolitan

Homes, the developer of Valla-

gio, a 250-plus unit condominium

project located near Interstate 25

and C-470, and Vallagio Condo-

minium Association, the common

interest community that Metro-

politan created in 2007.

The dispute began when the

association’s board unilaterally,

without Metropolitan’s consent,

amended the

dec l ara t ion

to remove a

ma nda t o r y

a r b i t r a t i on

provision in

spite of a dec-

laration provi-

sion requiring

the develop-

er’s consent to

any amend-

ment. After

amending the

declaration,

the association subsequently filed

a construction defect lawsuit in

ArapahoeCountyDistrict Court in

violation of the original arbitration

provision. In response, Metropoli-

tan filed amotionwith the court to

force the case back into arbitration.

At the District Court level, Met-

ropolitan argued that the parties

were bound to the mediation and

arbitration requirements stated in

the original declaration because

Metropolitan never consented to

the amendment as the developer.

Metropolitan further contended

that a similar arbitration provi-

sion in the purchase agreements

between the seller of the units

(an affiliate of Metropolitan) and

the unit purchasers also required

arbitration of any construction

defect claim as Metropolitan was

a third-party beneficiary to the

agreements and, accordingly, was

entitled to enforce the arbitration

provision.

Conversely, the association

argued that developer consent

was not required, maintaining that

the association properly amended

the declaration based on a super-

majority vote of the membership

to delete the mediation and arbi-

tration provisions. The association

also claimed that the consent pro-

vision violated CCIOA and that

the association was not subject to

the terms of the purchase agree-

ments because it was not a party

to those agreements.

The District Court denied Met-

ropolitan’smotion to force the case

into arbitration, finding the terms

within the declaration ambiguous

and the consent provision void in

violation of CCIOA. Metropolitan

immediately appealed the deni-

al of the motion to the Colorado

Court of Appeals, which is now

considering the merits of both

sides’ arguments, as well as those

of a “friend of the court” brief filed

on behalf of numerous interested

organizations.

Although it appears on its face

that the association may have the

upper hand on

appeal, other

district courts

in Colorado

have

sided

with the devel-

oper on simi-

lar motions

compel

arbitration.

For instance,

in a Douglas

County Dis-

trict Court case

with similar facts and arguments,

Stonegate North Condo Associa-

tion v. C&A Construction Inc., the

judge ruled in favor of a builder

on a motion to compel arbitra-

tion. Following briefing from both

sides, the judge concluded the

defects and notices all transpired

while the original declaration was

in effect and held that the original

unmodifieddeclaration provisions

applied.

In the wake of such conflicting

rulingsatthedistrictcourtlevel,the

Colorado Court of Appeals (and

ultimately the Colorado Supreme

Court if it decides to accept the

case) has the opportunity to cre-

ate greater certainty in the law for

developers. The result might be

that carefully drafted arbitration

provisions in condominium dec-

larations cannot be modified with-

out developer consent and prop-

erlydraftedprovisions inpurchase

agreements requiring mandatory

binding arbitration are enforce-

able. If the Court of Appeals rules

in favor of the developer on both

issues, it could eliminate the abil-

ity of condominium associations

to amend developer mandated

arbitration clauses despite a con-

sent requirement. This shift could

incentivize developers to once

again consider condominium

developments as a viable product.

Of course, the insurance industry

will also need to warm up to the

idea by bringing insurance premi-

ums to levels that are once again

economicallyviable for developers

to consider building this product.

A decision by the Colorado

Court ofAppeals is expectedwith-

in the next few months. However,

the Colorado Supreme Court may

be the ultimate decision maker if

it accepts the case on a further

appeal. In that event, a decision

will be a year or more away. Until

then, developers and the construc-

tion community will have to look

to the Legislature to resolve this

significant problem.

Senate Bill 177 offers alternative to construction defect reform

Ryan Warren

Shareholder,

Polsinelli, Denver

Michael Kolesar

Associate, Polsinelli,

Denver

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