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Page 22 — COLORADO REAL ESTATE JOURNAL — June 17-June 30, 2015
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Law & Accounting
I t is no secret there is a his-
torical low in residential
properties for sale in the
Denver metropolitan area. One
of the key economic causes of the
housing market’s current state is
the almost absent construction of
condominiums.
According to Metrostudy, for
example, at the peak of the mar-
ket in 2005, more than 4,000 con-
dos were either built or converted
in the Denver-metro area, where-
as, in 2014, a mere 289 condos
were built. This drop was not the
product of a decline in demand;
to the contrary, 2014 was a record
year for re-sales (about 9,900) of
existing condos. Condos provide
an affordable housing option in
a robust economy, especially for
the growing millennial workforce
in Colorado and the aging work-
force looking to downsize as they
become empty-nesters and retir-
ees. However, construction defect
litigation – including the near cer-
tain prospect of litigation – has
stifled new development.
During the last three legisla-
tive sessions, attempts to reform
Colorado’s construction defect
laws – in particular, the Colorado
Common Interest Ownership
Act, known as CCIOA, which
governs condo communities and
homeownersʼ associations – failed
to reach the governor’s desk.
The most recent effort to fall
short was Senate Bill 177, a bipar-
tisan effort in the Colorado Sen-
ate to address critical construction
defect issues. The bill specifically
took on an all-too-common prob-
lem concerning arbitration provi-
sions in community declarations.
Developer-declarants, those who
build the condo community and
establish the HOA, routinely
include in the declaration a provi-
sion requiring binding arbitration
of construction defect disputes.
CCIOAexpressly permits arbitra-
tion of such disputes and Colo-
rado law has long favored arbi-
tration as an alternative to civil
actions in court. In conjunction
withthearbitrationrequirement,a
provision requiring the declarant
to consent to any future amend-
ment or removal of the arbitration
clause would be included in the
declaration. Despite these devel-
oper efforts in the governing doc-
uments, HOAs would later vote
to remove the arbitration require-
ment without obtaining the req-
uisite consent and then proceed
to court with
construction
defect claims.
Senate Bill 177
was meant
to address
these issues
and make
the declarant-
consent provi-
sions enforce-
able. The bill
passed the
Senate and
was believed
to have suf-
ficient bipar-
tisan sup-
port to pass
a vote of the
entire House
of Represen-
tatives. But
the bill failed
to escape a
House com-
mittee known
as a “kill com-
mittee.”
On May 7,
less than 24
hours after
the Colorado
legislative ses-
sion ended
and just over
a week after
Senate Bill
177 died
in a House
commi t t e e ,
the Colo-
rado Court
of Appeals
issued its pub-
lished decision in the Vallagio
at Inverness Residential Condo-
minium Association Inc. v. Met-
ropolitan Homes Inc., et al. case, a
construction defects lawsuit that
reached the appellate court. In
this appellate case, the authors
of this article drafted and filed an
amicus curiae brief – a “friend of
the court” brief – on behalf of a
coalition of developers, chambers
of commerce, trade organizations
and business organizations, pre-
senting arguments that declara-
tions requiring declarant consent
prior to the removal of an arbitra-
tion provision by homeowners
are valid and enforceable under
CCIOA. This published appel-
late decision addressed a major
problem in Colorado’s construc-
tion defect laws that Senate Bill
177 was designed to correct: If
the declaration includes a require-
ment that an arbitration clause
cannot be removed without the
declarant’s consent, that declara-
tion means what it says, and that
requirement is enforceable.
In Vallagio, a condominium
homeowners’ associationbrought
a lawsuit against the developer/
declarant alleging construction
defects. The declaration included
a mandatory arbitration provi-
sion specifically for construction
defect claims. That section stated
that its provisions “shall not ever
be amended without the written
consent of Declarant and without
regard towhetherDeclarant owns
any portion of the Real Estate
at the time of the amendment.”
After the declarant turned over
control of the project to the asso-
ciation, the unit owners voted to
amend the declaration to remove
the entire mandatory arbitration
provision, without ever obtaining
the declarant’s consent. Soon after
the declaration was amended,
the association filed a lawsuit in
district court. The district court
denied the declarant’s motion
to compel arbitration, ruling the
declarant consent requirement
violated CCIOA and was void
and unenforceable.An appeal fol-
lowed.
The Court of Appeals reversed
on the CCIOA issues. The Court
of Appeals opinion echoed the
arguments in the amicus brief
with respect to the CCIOA issues.
Notably, the appellate court
held the declarant’s consent was
required to amend the arbitra-
tion provision under the terms
of the original declaration, and
the consent requirement was not
void and unenforceable under
CCIOA. The appellate court fur-
ther held that requiring declarant
consent for amendments does not
limit any “power” of a homeown-
ers’ association and that CCIOA
does not prohibit a declaration
from imposing the requirement
of declarant consent for amend-
ments. The court concluded:
“Because the unit owners did not
obtain Metro Inverness’ written
consent, their attempt to remove
the declaration's arbitration pro-
vision was ineffective.”
The court went on to acknowl-
edge that there may be intended
third-party beneficiaries to the
arbitration requirement within
Richard M.
Murray
Associate, Polsinelli,
Denver
Amy Hansen
Shareholder,
Polsinelli, Denver
Ryan Warren
Shareholder,
Polsinelli, Denver