Page 12
— Multifamily Properties Quarterly — August 2016
D
evelopers and contractors
in Colorado have, for several
years, sounded the alarm
over the chilling impact
of Colorado’s construction
defect laws on the construction of
affordably priced condominiums in
the state. In 2013, the Denver Region
Council of Governments published a
study quantifying that impact. The
DRCOG study estimated the threat
of costly construction defect litiga-
tion resulted in an increase cost to
developers of $15,000 per unit, signifi-
cantly diminishing expected returns
and making affordable condominium
development largely unfeasible. Many
developers and contractors now sim-
ply refused to build such projects.
The need for affordable condomini-
um developments has only increased.
Colorado continues to see rapid
migration into the state, particularly
in large Front Range communities
such as Denver, Colorado Springs and
Aurora, where condominium devel-
opment is most relevant. Governor
John Hickenlooper weighed in on the
issue in his January State of the State
Address. He identified construction
defect reform as one of his top priori-
ties and implored state lawmakers to
take action.
Industry groups actively lobby for
statewide construction defect litiga-
tion reform, and the last few legisla-
tive sessions have seen various bills
introduced to address the problem.
None of them have passed, and
many failed even to survive commit-
tee hearings.
In the 2015 session, for instance,
the Senate passed a bill that included
key reforms, such as strengthening
arbitration provisions in condomin-
ium declarations
and requiring writ-
ten consent of a
majority of owners
prior to initiating
litigation. That bill
died in a House
committee and
never came to a
vote.
The most recent
session saw more
of the same. With
just a few weeks
left in the session, it
appeared that negotiations between
democratic and republican lawmak-
ers might finally result in legislative
action. The negotiations centered on
the enactment of affordable housing
legislation in exchange for passage of
construction defect litigation reform
bills. The most important of those
bills sought comprehensive reform
and contained many of the provi-
sions seen in previous attempts, such
as heightened notice and consent
requirements to approve litigation
and increased enforcement of arbi-
tration provisions.
The package also included a bill to
establish a construction defect litiga-
tion study group. The study group’s
mandate under the law would have
been to recommend statutory chang-
es to current laws governing defect
litigation and to develop a pilot pro-
gram for a dedicated construction
defect court. The court would, at least
in theory, streamline construction
defect litigation and lower the cost
of defending against defect claims.
Despite a flurry of negations at the
session’s close, only the study group
bill was introduced. It died quickly in
the House State, Veterans and Mili-
tary Affairs committee.
It is unclear whether legislators will
introduce defect reform legislation in
the upcoming session. Much of the
uncertainty arises from the fact that
three of the four key legislators push-
ing reform are leaving the General
Assembly. Senate Majority Leader
Mark Sheffel and House Minority
Leader Brian DelGrosso have reached
their term limits, and Senator Jessie
Ulibarri announced in February he
would not run for a second term.
In the absence of statewide legisla-
tive action, owners and developers
have pursued other means to miti-
gate the risk of defect litigation. One
approach was to include protections
in condominium declarations. Colo-
rado courts, most notably the Colo-
rado Court of Appeals in the Vallagio
v. Metropolitan Homes case, decided
in May 2015, have thus far upheld
this approach.
In Vallagio, the homeowners asso-
ciation challenged the enforcement
of provisions in the declarations that
required the developer’s consent
before the HOA could remove the
declarations’ arbitration provision.
The Court of Appeals held the con-
sent requirement was enforceable
under Colorado law, which means
developers can effectively veto the
removal of arbitration provisions in
declarations and keep defect claims
out of the courts.
Yet this issue remains unsettled.
Last month, the Colorado Supreme
Court announced it would hear the
HOA’s appeal to address two ques-
tions – if the consent provision vio-
lates the Colorado Common Interest
Ownership Act and if claims brought
under the Colorado Consumer Pro-
tection Act, which are common in
condominium defect litigation, can
be decided in arbitration proceed-
ings. The Supreme Court has not yet
scheduled oral argument on Vallagio,
and it will be several months before
the decision is published.
Several Front Range municipalities
have addressed the General Assem-
bly’s lack of action by enacting
construction defect reform through
municipal ordinances. Lakewood
passed the first of these in October
2014, and several other municipali-
ties, including Denver, Lone Tree, Lit-
tleton, Parker and Colorado Springs,
followed suit throughout 2015. The
specifics provision in the ordinances
vary significantly from city to city,
but they all have the same objec-
tive – to provide increased protection
to developers and builders against
condominium defect claims in an
effort to increase affordable housing
development and to spur the General
Assembly to enact statewide reform.
It remains to be seen whether they
will be successful. Anecdotal evi-
dence indicates increased interest
in building affordable condominium
projects, but that could change if the
Supreme Court overturns Vallagio
and the General Assembly continues
to reject legislative change.
With the Vallagio decision pend-
ing and the changes in the General
Assembly, it could be some time
before owners, contractors and their
insurance companies are confident
enough to significantly increase
development and bring the supply of
affordable condominium in line with
demand.
s
Jared E. Berg
Member, Sherman
& Howard LLC,
Denver
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