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Page 12 — Multifamily Properties Quarterly — May 2017
Legal
F or the last several years, the
Colorado General Assem-
bly has attempted to pass
construction defect reform,
especially for multifamily
construction.When past efforts failed,
numerous Colorado municipalities
passed their own municipal codes and
ordinances to address construction
defect issues. Such local codes and
ordinances primarily addressed con-
struction defects associated with mul-
tifamily construction. There are unre-
solved questions about whether those
local codes and ordinances are valid
based on several legal issues, such as
the home rule authority of munici-
palities to legislate on construction
defects and preemption by Colorado
statutes.While the Colorado General
Assembly recently passed House Bill
17-1279 to address some aspects of
construction defect reform, there are
unanswered questions about its effec-
tiveness to reduce construction defect
actions and jumpstart condominium
construction.
Without meaningful construction
defect reform from the Colorado Gen-
eral Assembly and lingering questions
surrounding local codes and ordinanc-
es, the case of Vallagio at Inverness
Residential CondominiumAssocia-
tion, Inc. v. Metropolitan Homes, Inc.,
becomes all the more important for
multifamily construction.
InVallagio, the defendant developer
recorded a declaration that required
mandatory arbitration for construc-
tion defect claims. The declaration
also required the developer’s consent
to amend the mandatory arbitration
provision. After the last unit sold, the
developer turned the project over to
the plaintiff asso-
ciation. At least
67 percent of unit
owners voted to
amend the declara-
tion to remove the
mandatory arbitra-
tion provision. The
plaintiff association
then filed a lawsuit
against the defen-
dant developer and
general contractor
for a number of
construction defect
claims. The defendants moved to
compel arbitration based on the man-
datory arbitration provision. The Arap-
ahoe County District Court denied the
motion, and the defendants appealed
to the Colorado Court of Appeals.
On appeal, the Colorado Court of
Appeals primarily addressed whether
the declaration’s consent provision for
the removal of the mandatory arbitra-
tion provision violated the Colorado
Common Ownership Interest Act. One
key CCOIA section over which the
parties argued was C.R.S. § 38-33.3-
217(1)(A)(I), which capped the percent-
age necessary to amend a declaration
at 67 percent.
The Colorado Court of Appeals
found C.R.S. § 38-33.3-217(1)(A)(I)
only addressed permissible percent-
ages and did not prohibit additional
requirements for declaration amend-
ments. Ultimately, the Colorado Court
of Appeals upheld the consent provi-
sion as enforceable and consistent
with CCOIA. The plaintiff association
appealed to the Colorado Supreme
Court.
Following briefing by the parties
and many interested third parties,
the Colorado Supreme Court heard
oral arguments March 7. The Colorado
Supreme Court asked many prob-
ing questions of the developer. For
instance, Justice Brian Boatright asked
whether developers could abuse the
arbitration process specified in decla-
rations. Justices Monica Marquez and
Richard Gabriel were concerned about
how their decision could be applied
outside the context of an arbitration
provision. Finally, Chief Justice Nancy
Rice and Justice Gabriel inquired
whether a consent provision in a dec-
laration was an improper device for
developers to control associations.
The developers were not the only
party on the receiving end of the
Colorado Supreme Court’s questions.
For instance, as to the argument about
whether the 67 percent cap in C.R.S.
§ 38-33.3-217(1)(A)(I) prohibited a
consent requirement, Justice Gabriel
asked the association if it was an
issue to be addressed by the Colorado
General Assembly. Justice Gabriel also
noted it appeared to be unseemly for
homeowners to agree to a declaration
that included a mandatory arbitration
provision with a consent requirement,
but later argue the provision is invalid.
Whether one party receives more
probing or difficult questions does not
necessarily determine how the Colo-
rado Supreme Court will rule. This
author is not going to look into his
magic eight ball and venture a guess
as to whether the Colorado Supreme
Court upholds or invalidates the con-
sent requirement for the removal of a
mandatory arbitration provision from
a declaration. However, if the Colorado
Supreme Court upholds the consent
requirement, it likely will limit the
decision to arbitration and may even
put some limitations on the scope of a
valid arbitration provision.
All this lawyering aside, Vallagio is
an important case to the multifam-
ily construction community. Senate
Bill 17-156 would have codified much
of the holdings inVallagio. It passed
the Senate, but was sent to the House
State, Veterans and Military Affairs
Committee. Some members of the
construction community refer to this
committee as the “kill committee.” On
April 20, Senate Bill 17-156 was post-
poned indefinitely.
The only way for developers to
maintain their ability to include
mandatory arbitration provisions is
through a favorable ruling by the Col-
orado Supreme Court inVallagio. The
Colorado Supreme Court should rule
within the next two to four months.
While waiting for the ruling, mul-
tifamily professionals should not
avoid including mandatory arbitration
provisions in declarations. The Court
of Appeals’ holding inVallagio is still
good law. However, multifamily pro-
fessionals should be mindful of the
Colorado Supreme Court’s concern
about expanding the scope of consent
provisions outside of the arbitration
context. Multifamily professionals
also should not include potentially
unfair procedures in mandatory arbi-
tration provisions, such as where the
developer selects the arbiter without
any input from the association.
As the Colorado General Assembly
wrestles with construction defect
reform legislation, the best hope
for assistance is from the Colorado
Supreme Court.s
Ryan J. Klein
Member, Sherman
& Howard LLC,
Colorado Springs