Colorado Real Estate Journal - November 4, 2015
Frustrated by the unsuccessful 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 governments have taken matters into their own hands with ordinances and proposals for similar efforts at the local level. Seeing little movement on a statewide 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 litigation have made new condominium 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-occupied 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 experiencing one of the highest rates of population growth in the United States. At the root of the construction defect problem is a constellation of laws that have evolved over the years to make Colorado fertile ground for costly construction defect litigation. Statewide consumer protection legislation, for example the 2007 Homeowner Protection Act, has driven construction defect litigation by making it easier for plaintiffs to recover on claims based exclusively on “technical” building code violations. Using strict-liability theories endorsed by the courts, construction 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 opportunistic 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 housing market such as ours. Denver’s reform measure, which went before the City Council’s Business Development Committee 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 technical building code violations to claim damages in court. Colorado’s Construction Defect Action Reform Act already restricts claims for negligent construction to situations where a plaintiff can show “actual damage” beyond a technical code violation. This includes bodily injury; property damage; risk of bodily injury; and threats to the life, health or safety of occupants. Denver’s proposed ordinance 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 covered 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 Denver 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 “significant 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 covenants. This section would make clear that homeowners’ associations cannot unilaterally amend the arbitration covenants in their declarations, and in effect codifies the Colorado Court of Appeals’ recent decision in Vallagio at Inverness Residential Condominium Association Inc. v. Metropolitan Homes Inc., which upheld a binding arbitration clause in a common-interest declaration as enforceable against the HOA. Third, the ordinance would still allow HOAs to file litigation, but would require the “informed consent” of a majority of condo owners in a development before an HOA could initiate construction defect litigation. The HOA board would be required to provide notification 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 litigation – before holding a vote of owners on whether to move forward with litigation. These changes, should they become law, would significantly change the landscape for developers in Denver by lowering the risk of sometimes meritless litigation based on purely technical violations and/or opportunistic HOAs. At the same time, Denver’s ordinance preserves owners’ rights to pursue effective litigation where truly defective homes cause real injuries or property damage. 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 lawmakers will surely be watching closely to see whether the pace of new condominium development increases after the ordinance 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.