CREJ - Multifamily Properties Quarterly - August 2016
Developers 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 litigation resulted in an increase cost to developers of $15,000 per unit, significantly diminishing expected returns and making affordable condominium development largely unfeasible. Many developers and contractors now simply refused to build such projects. The need for affordable condominium 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 development 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 priorities and implored state lawmakers to take action. Industry groups actively lobby for statewide construction defect litigation reform, and the last few legislative sessions have seen various bills introduced to address the problem. None of them have passed, and many failed even to survive committee hearings. In the 2015 session, for instance, the Senate passed a bill that included key reforms, such as strengthening arbitration provisions in condominium declarations and requiring written 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 lawmakers 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 provisions seen in previous attempts, such as heightened notice and consent requirements to approve litigation and increased enforcement of arbitration provisions. T he package also included a bill to establish a construction defect litigation study group. The study group’s mandate under the law would have been to recommend statutory changes to current laws governing defect litigation and to develop a pilot program 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 Military 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 pushing 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 legislative action, owners and developers have pursued other means to mitigate the risk of defect litigation. One approach was to include protections in condominium declarations. Colorado courts, most notably the Colorado Court of Appeals in the Vallagio v. Metropolitan Homes case, decided in May 2015, have thus far upheld this approach. In Vallagio, the homeowners association 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 consent 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 questions – if the consent provision violates the Colorado Common Interest Ownership Act and if claims brought under the Colorado Consumer Protection Act, which are common in condominium defect litigation, can be decided in arbitration proceedings. 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 Assembly’s lack of action by enacting construction defect reform through municipal ordinances. Lakewood passed the first of these in October 2014, and several other municipalities, including Denver, Lone Tree, Littleton, 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 objective – 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 evidence 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 pending 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.