CREJ - Multifamily Properties Quarterly - May 2017
For the last several years, the Colorado General Assembly 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 construction defects associated with multifamily construction. There are unresolved questions about whether those local codes and ordinances are valid based on several legal issues, such as the home rule authority of municipalities 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 effectiveness to reduce construction defect actions and jumpstart condominium construction. Without meaningful construction defect reform from the Colorado General Assembly and lingering questions surrounding local codes and ordinances, the case of Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., becomes all the more important for multifamily construction. In Vallagio, the defendant developer recorded a declaration that required mandatory arbitration for construction 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 association. At least 67 percent of unit owners voted to amend the declaration to remove the mandatory arbitration provision. The plaintiff association then filed a lawsuit against the defendant developer and general contractor for a number of construction defect claims. The defendants moved to compel arbitration based on the mandatory arbitration provision. The Arapahoe 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 arbitration 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 percentage 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 percentages and did not prohibit additional requirements for declaration amendments. Ultimately, the Colorado Court of Appeals upheld the consent provision 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 probing questions of the developer. For instance, Justice Brian Boatright asked whether developers could abuse the arbitration process specified in declarations. 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 declaration 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 Colorado 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 consent 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 multifamily construction community. Senate Bill 17-156 would have codified much of the holdings in Vallagio. 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 postponed indefinitely. The only way for developers to maintain their ability to include mandatory arbitration provisions is through a favorable ruling by the Colorado Supreme Court in Vallagio. The Colorado Supreme Court should rule within the next two to four months. While waiting for the ruling, multifamily professionals should not avoid including mandatory arbitration provisions in declarations. The Court of Appeals’ holding in Vallagio is still good law. However, multifamily professionals 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 arbitration 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.