Page 28 —
COLORADO REAL ESTATE JOURNAL
— February 17-March 1, 2016
Law & Accounting
A
partment projects con-
tinue to dominate the
multifamily market
with condominium construc-
tion at historic lows. The most
recent data indicates that condo-
miniums make up just 3.4 per-
cent of the new home sales in
the Denver metropolitan area,
compared to nearly 23 percent
in 2007. While some may argue
otherwise, it is clear that the lack
of condominium construction is
primarily caused by defects liti-
gation. Owners, developers and
contractors involved in the con-
struction of apartments often ask
whether these projects will later
be converted to condominiums.
The implicit question is, “Can
construction defect liability be
avoided if an apartment project
is converted to condominiums
after the running of the statute of
repose?” We will review a case
example to assist in analyzing
that question but first a basic
review of condominium conver-
sions.
n
What is a conversion?
The
term “condominium conver-
sion” is not statutorily defined.
The Subdivision Developer’s
Act, however, defines a “sub-
division” as any real property
divided into 20 or more interests
intended solely for residential
use and offered for sale, lease or
transfer. This definition includes
the “conversion of an existing
structure into a common interest
community of 20 or more resi-
dential units.” (See C.R.S. §12-61-
401 et seq.) The law requires that
certain subdivisions (including
condominium conversions and
their developers) must register
with the Colorado Real Estate
Commission prior to selling,
leasing, transferring or negotiat-
ing to sell or lease a part of that
subdivision. For more informa-
tion, refer to the Commission’s
Subdivision Developer Program
.
n
Statute of repose.
The stat-
ute of repose requires that any
defect claim must be brought
within six years from the date of
substantial completion with only
one exception. That is, claims
discovered in the fifth and sixth
year following substantial com-
pletion may be brought within
two years. Thus, all defect claims
brought more than eight years
after substantial completion are
time barred.
The phrase
“substantial
completion”
is not statuto-
rily defined;
however, a
recent Colora-
do appellate
decision con-
cluded that
subs t an t i a l
completion is
the date when
a certificate of
occupancy is issued. The issu-
ance of the certificate of occupan-
cy is an official verification that
a building is in full compliance
with current building codes and
is safe for occupancy.
n
Case example.
Across the
country there are few appellate
court cases that address the lia-
bility of the parties involved in
the construction of a later con-
verted project. Perhaps the lack
of court cases represents some
anecdotal evidence that such lia-
bility can be difficult to establish.
An example of how the statute
of repose can protect the par-
ties involved in the original con-
struction is the case of Sandy v.
Superior Court (1988) 201 Cal.
App. 3d 1277. Sandy was an
architect who rendered services
for an apartment project. Years
after the project was substantial-
ly complete, it was purchased by
a new owner for the purpose of
converting the project to condo-
miniums. The converter under-
took massive renovation and
reconstruction. As the units were
sold, a homeowners association
was created. The converter never
had any relation or contact with
Sandy. Subsequently, the associa-
tion sued the converter for dam-
ages resulting from construction
defects in the condominiums.
The converter filed a complaint
for indemnification naming
some 40 defendants, including
the subcontractors with which
the converter contracted for the
renovation of the project, as well
as many individuals and entities
who were only involved in the
original construction. The latter
group included Sandy.
Sandy moved for summary
judgment, asserting that the
claims against him were made
after the expiration of the statute
of repose. The converter coun-
tered that since he was time-
ly sued by the association, his
defect claims against Sandy were
also timely. The court rejected the
converter’s argument and grant-
ed summary judgment in San-
dy’s favor. The court’s analysis
was traditional in that it applied
the statute of repose to bar the
claims based on the date of sub-
stantial completion and the date
the claims were filed. Of impor-
tance, the court found that there
was no connection between the
parties involved in the original
construction and the converter.
The scenario could present itself
in defect claims in Colorado.
n
Conclusion.
It is anticipated
that a traditional application of
the statute of repose will likely
be used to bar defect claims in
the context of condominium con-
versions. If a project is converted
into condominiums and more
than eight years have passed
since original construction, then
any defect claims are likely time
barred as to the parties involved
in theoriginal construction. There
are numerous fact changes to
this case example that could cre-
ate a different result. What if an
owner, developer or contractor
was involved in warranty work
after substantial completion? Or
what if years later these parties
were involved in repairs at the
project? Simply stated, a party’s
continued or increased involve-
ment may result in increased lia-
bility. Similarly, parties involved
in a construction project that is
premapped as condominiums or
that appears postured for later
conversion should be cautious
to take on any increased involve-
ment.
Finally, some owners, lend-
ers and contractors involved
in apartment construction may
address the potential for condo-
minium conversions by includ-
ing contractual promises not to
convert, indemnification clauses
and letters of credit to secure
payment of liability insurance
for a converted project. This arti-
cle does not address the impact
these methods may have on the
parties’ liabilities. Similarly, the
liability of the “converter” is not
addressed here. The converter,
and other parties involved in
the conversion process, may be
subject to liabilities based any
disclosure requirements at the
point of sale, negligence and
other construction defect theo-
ries of liability.
s
Timothy E. Reilly
Director, Fairfield and
Woods PC, Denver
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