Colorado Real Estate Journal - March 4, 2015
For the past several years, leaders in the Colorado construction and development industry have been urging the Colorado General Assembly to pass construction defect reform to temper the unprecedented increase in lawsuits related to residential condominium construction. In 2014, the General Assembly’s proposed reforms to the Construction Defect Action Reform Act failed when Senate Bill 220 died in committee. In another attempt to remedy the problem, during the current 2015 session, Senate Bill 177 was recently introduced to the Senate Business, Labor and Technology Committee. Senate Bill 177 takes a similar approach to the 2014 bill but instead focuses on reforms to the Colorado Common Interest Ownership Act, which governs homeowners’ associations. The 2015 proposed reforms include: (1) limitations on an HOA board’s ability to edit provisions that protect a developer in a Declaration of Covenants, Conditions and Restrictions without developer consent; (2) mandatory disclosures to all unit owners of the risks and costs associated with construction defect litigation; and (3) approval by a majority of unit owners before an HOA can file suit. The proposed 2015 bill has gained traction with bipartisan support from Senate sponsorship by Majority Leader Mark Scheffel, R-Parker, and Sen. Jessie Ulibarri, D-Commerce City, and House sponsorship by Minority Leader Brian Del Grosso, R-Loveland, and Rep. Jonathan Singer, D-Longmont. Despite this initial momentum, it is uncertain whether a divided Legislature will successfully pass meaningful legislation in 2015. Regardless of whether the General Assembly is able to pass construction defect reform, the Colorado Court of Appeals may resolve some of the key issues through its upcoming decision in Metropolitan Homes Inc. v. Vallagio at Inverness Residential Condominium Association Inc. The parties to the case are Metropolitan Homes, the developer of Vallagio, a 250-plus unit condominium project located near Interstate 25 and C-470, and Vallagio Condominium Association, the common interest community that Metropolitan created in 2007. The dispute began when the association’s board unilaterally, without Metropolitan’s consent, amended the declaration to remove a mandatory arbitration provision in spite of a declaration provision requiring the developer’s consent to any amendment. After amending the declaration, the association subsequently filed a construction defect lawsuit in Arapahoe County District Court in violation of the original arbitration provision. In response, Metropolitan filed a motion with the court to force the case back into arbitration. At the District Court level, Metropolitan argued that the parties were bound to the mediation and arbitration requirements stated in the original declaration because Metropolitan never consented to the amendment as the developer. Metropolitan further contended that a similar arbitration provision in the purchase agreements between the seller of the units (an affiliate of Metropolitan) and the unit purchasers also required arbitration of any construction defect claim as Metropolitan was a third-party beneficiary to the agreements and, accordingly, was entitled to enforce the arbitration provision. Conversely, the association argued that developer consent was not required, maintaining that the association properly amended the declaration based on a supermajority vote of the membership to delete the mediation and arbitration provisions. The association also claimed that the consent provision violated CCIOA and that the association was not subject to the terms of the purchase agreements because it was not a party to those agreements. The District Court denied Metropolitan’s motion to force the case into arbitration, finding the terms within the declaration ambiguous and the consent provision void in violation of CCIOA. Metropolitan immediately appealed the denial of the motion to the Colorado Court of Appeals, which is now considering the merits of both sides’ arguments, as well as those of a “friend of the court” brief filed on behalf of numerous interested organizations. Although it appears on its face that the association may have the upper hand on appeal, other district courts in Colorado have sided with the developer on similar motions to compel arbitration. For instance, in a Douglas County District Court case with similar facts and arguments, Stonegate North Condo Association v. C&A Construction Inc., the judge ruled in favor of a builder on a motion to compel arbitration. Following briefing from both sides, the judge concluded the defects and notices all transpired while the original declaration was in effect and held that the original unmodified declaration provisions applied. In the wake of such conflicting rulings at the district court level, the Colorado Court of Appeals (and ultimately the Colorado Supreme Court if it decides to accept the case) has the opportunity to create greater certainty in the law for developers. The result might be that carefully drafted arbitration provisions in condominium declarations cannot be modified without developer consent and properly drafted provisions in purchase agreements requiring mandatory binding arbitration are enforceable. If the Court of Appeals rules in favor of the developer on both issues, it could eliminate the ability of condominium associations to amend developer mandated arbitration clauses despite a consent requirement. This shift could incentivize developers to once again consider condominium developments as a viable product. Of course, the insurance industry will also need to warm up to the idea by bringing insurance premiums to levels that are once again economically viable for developers to consider building this product. A decision by the Colorado Court of Appeals is expected within the next few months. However, the Colorado Supreme Court may be the ultimate decision maker if it accepts the case on a further appeal. In that event, a decision will be a year or more away. Until then, developers and the construction community will have to look to the Legislature to resolve this significant problem.