Page 20 —
COLORADO REAL ESTATE JOURNAL
— November 4-November 17, 2015
Law & Accounting
F
rustrated by the unsuc-
cessful statewide efforts
to pass construction
defect litigation reform (this
year’s statewide bill died in
the House State, Veterans and
Military Affairs Committee),
several Colorado local govern-
ments have taken matters into
their own hands with ordinanc-
es and proposals for similar
efforts at the local level. See-
ing little movement on a state-
wide change, the city councils
of Aurora, Arvada, Commerce
City, Littleton and Lone Tree
all passed ordinances this year;
Lakewood and Parker passed
ordinances in 2014, and Denver
is currently considering a new
ordinance in the same vein.
The risks and costs associated
with construction defect litiga-
tion have made new condomin-
ium construction increasingly
rare in Colorado – a problem the
new measures seek to address.
Condominiums in Denver, for
example, now represent only
4 percent of new owner-occu-
pied construction – a significant
problem for the many new and
existing residents looking for
affordable housing in the city.
Similar situations exist in other
areas throughout Colorado,
which, as a state, is experienc-
ing one of the highest rates of
population growth in the Unit-
ed States.
At the root of the construction
defect problem is a constella-
tion of laws that have evolved
over the years to make Colo-
rado fertile ground for costly
construction defect litigation.
Statewide consumer protection
legislation, for example the 2007
Homeowner Protection Act, has
driven construction defect liti-
gation by making it easier for
plaintiffs to recover on claims
based exclusively on “techni-
cal” building code violations.
Using strict-liability theories
endorsed by the courts, con-
struction defect plaintiffs have
been able to recover on claims
that pose little threat to health,
safety or property values. While
everyone agrees that truly
defective construction should
be actionable, these opportunis-
tic lawsuits – driven by the laws
currently in place – have had a
significant chilling effect on the
development of condominium
housing that would otherwise
be built in a
healthy and
vibrant hous-
ing market
such as ours.
D e n v e r ’ s
reform mea-
sure, which
went before
the
City
C o u n c i l ’ s
B u s i n e s s
Development
Commi t t e e
Oct. 27, takes
direct aim at
the issue and goes several steps
beyond the legislation that has
been proposed at the state level.
First, the ordinance would curb
plaintiffs’ ability to use techni-
cal building code violations to
claim damages in court. Colora-
do’s Construction Defect Action
Reform Act already restricts
claims for negligent construc-
tion to situations where a plain-
tiff can show “actual damage”
beyond a technical code viola-
tion. This includes bodily inju-
ry; property damage; risk of
bodily injury; and threats to the
life, health or safety of occu-
pants. Denver’s proposed ordi-
nance would go a step further
and require a similar showing
for any type of claim against
homebuilders, not just claims
sounding in negligence. This
would include claims brought
under theories of breach of
express or implied warranties
and the Colorado Consumer
Protection Act, as well as the
negligence claims already cov-
ered by CDARA. The ordinance
also would clarify that the city
of Denver’s building codes at
the time of construction are the
only codes that apply and that
violations of other building
codes cannot be the basis for
claiming a defect.
Second, the proposed Den-
ver ordinance would buttress
the enforceability of covenants
attached to new developments
requiring binding arbitration
for construction defect claims.
The ordinance would require
that specific language be
included informing each owner
that the provisions regarding
binding arbitration were a “sig-
nificant inducement” to the
developer’s willingness to sell,
and that the developer would
not have been willing to sell
the units for the original prices
without the arbitration cove-
nants. This section would make
clear that homeowners’ associa-
tions cannot unilaterally amend
the arbitration covenants in
their declarations, and in effect
codifies the Colorado Court of
Appeals’ recent decision in Val-
lagio at Inverness Residential
Condominium Association Inc.
v. Metropolitan Homes Inc.,
which upheld a binding arbitra-
tion clause in a common-inter-
est declaration as enforceable
against the HOA.
Third, the ordinance would
still allow HOAs to file litiga-
tion, but would require the
“informed consent” of a major-
ity of condo owners in a devel-
opment before an HOA could
initiate construction defect liti-
gation. The HOA board would
be required to provide noti-
fication to the owners about
the possible costs and benefits
of proceeding – including the
terms of any contingency-fee
arrangements, and the risk that
it will become impossible to
refinance or sell during the liti-
gation – before holding a vote
of owners on whether to move
forward with litigation.
These changes, should they
become law, would signifi-
cantly change the landscape for
developers in Denver by lower-
ing the risk of sometimes merit-
less litigation based on purely
technical violations and/or
opportunistic HOAs. At the
same time, Denver’s ordinance
preserves owners’ rights to pur-
sue effective litigation where
truly defective homes cause
real injuries or property dam-
age. Denver’s effort – as well as
the efforts of the municipalities
that have already passed reform
measures – is an important step
toward the desperately needed
statewide reform. Should the
Denver measure become law,
other cities and state lawmak-
ers will surely be watching
closely to see whether the pace
of new condominium develop-
ment increases after the ordi-
nance takes effect. A success
in Denver could possibly spur
similar efforts by other local
governments around the state
and could also pave the way for
a renewed statewide effort.
s
Dietrich Hoefner
Associate, Lewis
Roca Rothgerber LLP,
Denver
