Colorado Real Estate Journal - January 6, 2016
Common-interest communities are governed through boards of homeowners that serve the association. After a certain period of time, the developer must transition the control of the board to homeowners who own units in the project. The city and county of Denver has joined the city of Lakewood and the city of Aurora in passing an ordinance that addresses construction defect claims in common interest communities in its Council Bill No. 15-0811. The provisions apply to any common interest community created in the city and county of Denver after Jan. 1, 2016. The stated goals of the ordinance are to promote a diverse housing supply and transit-oriented development and to create sustainable neighborhoods. However, the ordinance does not address how a diversity in price points or development near transportation will occur. It is not clear how either issue will be resolved by the ordinance since the results benefit all condominium projects, not just those that create a diversity of housing or are transit-oriented. The ordinance, does, however provide several provisions aimed at protecting development parties in the development of condominiums, including architects, contractors, subcontractors, developers, declarants and their affiliates, builders, vendors, engineers or inspectors. First, the ordinance ends strict liability for development parties in building code violations and provides that no city building code violation will support a construction defect claim based upon strict liability. Any improvements to real property regulated by city code and installed in substantial compliance with the code is not considered to be defective to prove a construction defect claim. A violation of a city building code does not create a private cause of action for failure to comply with a building code. Second, at least 60 days before service of notice of a construction defect claim, the board is required to send additional information to unit owners, including information about the statute of limitations, the amount the association expects to recover if the association prevails, the amount of the contingency fee to be paid to the attorneys and the costs of the consultants and litigation. There also must be included in the notice a statement that if the association makes a claim and does not win, the board expects that the association will have to pay for its own attorney fees, consultant fees, expert witness fees and other costs, plus defendant’s consultant fees, expert witness fees and court costs. This part of the ordinance is confusing because it does not address the fact that in most contingency fee cases there are not attorney fees if the party does not prevail, and generally the law in Colorado is that each side pays its own costs, unless shifted by statute or contract. It is not clear from the ordinance if this statement is not factually accurate if it still must be included in the notice. The ordinance does not provide any fee-shifting provisions. The notice also must include a statement that if the association does not recover from the defendants, it may have to pay to repair or replace the defective work. Again this is confusing, because if repairs are required to common elements, such repairs are required by law to be made by the association in any event (see CRS 38-33.3-307). Associations must maintain the common elements in a common-interest community by law. The notice must also include a statement that until the claimed defective work is repaired or replaced or the claim is concluded the market value of the affected units will be adversely affected and until the claimed defective construction work is repaired or replaced, or until the claim is concluded, owners will have difficulty refinancing and potential buyers will have difficulty obtaining financing. The notice must also include a statement that certain federal underwriting standards prevent refinancing or obtaining a new loan in projects where a construction defect is claimed and that certain lenders as a matter of policy will not refinance or provide a new loan in projects where a defect is claimed. The notice requirements that the board must send require that the notice contain assertions and conclusions that may or may not be factually accurate in a particular association. However, the ordinance fails to provide for this possibility. Third, the ordinance requires that the board must obtain written consent from a majority of homeowners to approve the board’s proposed actions, and in the written consent, the homeowner must acknowledge receipt of the notice provisions required by the ordinance. Fourth, the ordinance sets forth certain provisions related to enforcement of covenants requiring alternative dispute resolution for construction defect claims. If a declaration in a common-interest community requires any form of alternative dispute resolution for construction defect claims asserted by the association, by the board or by any unit owner and the declaration expressly prohibits any future amendments to the declaration that would modify or eliminate the requirements for alternative dispute resolution without the consent of the declarant, any attempt to modify or eliminate the requirement for alternative dispute resolution by the association, by the board or by unit owners absent consent of the declarant shall be deemed ineffective, an abrogation of a contractual obligation and void against public policy. This provision is contrary to CRS 38-33.3-217, which provides a statutory mechanism to amend declarations. A declaration may be amended only by the affirmative vote or agreement of unit owners of units to which more than 50 percent of the votes in the association are allocated or any larger percentage, not to exceed 67 percent. Any provision in the declaration that purports to specify a percentage larger than 67 percent is declared void as contrary to public policy. The ordinance prohibits an amendment to a declaration by a vote of 67 percent of unit owners that is permitted, if not required, by Section 217. By requiring the consent of the declarant to amend the declaration, a higher percentage than 67 percent is required. The prohibition of amending the declaration only applies if the declaration contains precise disclaimer language set forth in Section 10-204(1) that the owner, by taking title to a unit, acknowledges and agrees that the terms of the declaration requiring alternative dispute resolution are a significant inducement to the declarant’s willingness to develop and sell the units for the prices paid by the original purchasers. The declaration also must include provisions that the alternative dispute resolution of construction defect claims benefits other development parties, that the alternative dispute resolution provisions are consistent with the Colorado Uniform Arbitration Act, that the mediation or arbitration be held at a mutually agreeable location in the city and county of Denver and the arbitration be governed by the substantive law of Colorado with regard to any remedy and, if the remedy is substantially affected by the arbitrator’s failure to follow the substantive laws of Colorado, a court my vacate or refuse to confirm the arbitrator’s award on that basis.