Colorado Construction Defect Legal Update 2017

A Breakthrough for Construction Defect Law Reform in Colorado Takes Effect on September 1, 2017.

At the outset of 2017, Colorado’s current construction defect laws were widely perceived to have increased costs related to construction defects litigation and the cost and availability of construction insurance. This, in turn, according to Denver Regional Council of Governments (DRCOG), was a significant factor influencing the lack of recovery for the construction of for-sale attached housing products. While there have been many explanations for the downturn in condominium development, most factors have dissipated except for real or perceived costs associated with construction defects and attendant litigation.

Legislation dating back to 2001 made significant changes to Colorado construction defect law, starting with HB 01-1166 which created CDARA (Construction Defect Action Reform Act) and HB 03-1161, dubbed CDARA II, amending the original CDARA to provide damage limits and notice requirements in response to numerous class action lawsuits awarding excessive damages to claimants. HB 07-1338 then voided the waiver of rights contained in CDARA or the Colorado Consumer Protection Act. HB 10-1394 was subsequently enacted to require insurance companies to broadly interpret their duty to defend the insured in a construction defect context. These laws went into effect prior to and simultaneous with a halt in housing construction during the economic recession of 2009. Since 2010, a variety of bills have been introduced by the General Assembly to amend those construction defect laws, but the bills failed every time. In spite of increasingly strong support and efforts to reach compromise in increasingly tight market conditions, legislators were still unable to reach a middle ground to pass ameliorative legislation prior to 2017.

As in prior years, both Democratic and Republican leaders identified construction defect laws reformation as a top priority for the 2017 legislative session. Six bills were introduced in the Colorado Senate and House in a piecemeal attempt to break the longstanding deadlock, each attempting to address different issues perceived to have stymied the construction of affordable multifamily housing. While only one bill made it to the Governor’s desk for signature, House Bill 17-1279 makes significant amendments to CRS §38-33.3-303.5 and requires HOA boards to satisfy specific disclosure, meeting and voting requirements as prerequisites to HOA construction defect lawsuits. This legislation, coupled with the Colorado Supreme Court’s decision in Vallagio at Inverness Residential Condo. Ass’n. v. Metro. Homes, Inc., 15 SC 508, 2017 CO 69 (Colo. June 5, 2017), should favorably alter the construction defect litigation landscape.

Sources

See DRCOG’s Denver Metro Area Housing Diversity Study, October 29, 2013, pp. 38-46

HB 17-1279 Construction Defect Actions Notice Vote Approval
For the text of Bill that was signed into law, follow the link here

Official Bill Summary

HB 17-1279 concerning the requirement that a unit owners’ association obtain approval through a vote of unit owners before filing a construction defect action is summarized as follows:
The bill requires that before the executive board of a unit owners’ association (HOA) commences litigation against a developer or builder on behalf of unit owners based on a defect in construction work not ordered by the HOA itself, the board must:
Notify all unit owners and the developer or builder against whom the lawsuit is being considered;
Call a meeting at which the executive board and the developer or builder will have an opportunity to present relevant facts and arguments and the developer or builder may, but is not required to, make an offer to remedy the defect; and
Obtain the approval of a majority of the unit owners after giving them detailed disclosures about the lawsuit and its potential costs and benefits.
The meeting of unit owners commences a 90-day voting period during which the HOA will accept votes for or against proceeding with the lawsuit. Statutes of limitation are tolled during this period. The HOA is required to keep copies of its mailing list and maintain records of the votes received. The voting period may end in less than 90 days if sufficient votes are received to approve the lawsuit before 90 days have elapsed.
See Colorado General Assembly website here.

Bill History

HB 17-1279 was introduced in the House on March 17, 2017 with bipartisan support as opposed to two earlier bills regarding similar subjects that were introduced in the Senate in mid-February (SB 17-156 introduced by Republican sponsors and SB 17-157 introduced by Democratic sponsors). The earlier bills also sought to impose prerequisites of notification, disclosure, and voting requirements prior to the authority of a unit owners’ association to commence litigation involving alleged construction defects. In addition, the Republican-sponsored bill pushed mandatory alternative dispute resolution. The earlier partisan bills contained provisions offensive to the other side and both were targeted for destruction. Once it was clear that the two earlier bills had little chance for success, HB 17-1279 came together over language concentrating on the more unifying provisions in the other two bills. This bipartisan method, along with a commitment to negotiate and revise the bill on multiple occasions resulted in an approach that struck a balance between protecting the rights of homeowners while addressing issues which had kept homebuilders out of the affordable housing market in recent years. In order to foster a more amenable environment for the legislation, the language of HB 17-1279 was the subject of intense negotiations throughout April of 2017 and its committee hearing was delayed by mutual agreement as the sponsors worked out compromises vital to its ultimate passage. During this time period, the bill sponsors also garnered support from industry participants and Governor John Hickenlooper to further stimulate collaboration on the language and to help create a bill that was viewed as fair and transparent to all sides in a construction defect dispute. The House approved the bill unanimously on April 24, 2017 and after final revisions were made, the Senate also approved the bill unanimously on May 4, 2017. HB 17-1279 was signed into law by Governor Hickenlooper on May 23, 2017 and will take effect on September 1, 2017.

Scope of HB 17-1279

HB 17-1279 applies to “any civil action or arbitration proceeding for damages, indemnity, subrogation, or contribution brought against a construction professional to assert a claim…for damages or loss to, or the loss of, real or personal property or personal injury caused by a defect in the design or construction of an improvement to real property, regardless of the theory of liability….” The scope also includes any related claims and any claim for breach of fiduciary duty by a member of an association’s executive board that arises from an alleged construction defect. The term “construction professional” as set forth in CDARA at CRS §13-20-802.5(4) is adopted for use in this new law.
Unit Owner Notice Prior to Commencement of a Construction Defect Action
Prior to commencement of a construction defect action, an association’s executive board is required to mail or deliver written notice regarding the anticipated action to each unit owner at the last-known address in the association’s records and to the last-known address of each construction professional against whom a construction defect action is proposed.
The notice must call a meeting of the unit owners which must be held at least 10 days after the mailing date of the notice, but no more than 15 days after the notice. The meeting so noticed does not require a quorum and the vote required must be concluded within 90 days.

The notice must contain the following information:

The conclusion of the required meeting commences the voting period when the association will accept votes for and against proceeding with the construction defect action. The voting period ends 90 days after the mailing date of the notice for the meeting or when the association determines that the construction defect action is either approved or disapproved, whichever occurs first.
The construction professional(s) against whom the construction defect claim is proposed will be invited to attend the meeting and will be given the opportunity to address the unit owners concerning the alleged construction defect(s).
The construction professional(s) or their designee(s) presenting at the meeting may, but are not required to, include an offer to remedy any defect in accordance with CDARA (CRS §13-20-803.5(3)).
A description of the nature of the construction defect action which identifies alleged defects with reasonable specificity, the relief sought, a good-faith estimate of the benefits and risks involved, any other pertinent information and the following disclosures.

Disclosures

The alleged construction defects might result in increased costs to the association in maintenance or repair or cause an increase in assessments or special assessments to cover the cost of repairs.
If the association does not file a claim before applicable legal deadlines, the claim will expire.
Until the alleged defects are repaired, sellers of units within the common interest community might owe unit buyers a duty to disclose known defects.
The executive board (intends to enter) (has entered) into a fee arrangement with the attorneys representing the association and the nature and terms of the fee agreement (eg contingency fee, hourly fee or fixed fee and the amount to be paid per the agreement).
In addition to attorney fees, the association may incur up to $______ for legal costs which include expert witnesses, depositions, and filing fees. The amount specified in the disclosure will not be exceeded without the executive board’s further written authority. If the association does not prevail on its claim, the association may be responsible for paying these legal expenses.
If the association does not prevail on its claim, the association may be responsible for paying its attorney fees.
If the association does not prevail on its claim, a court or arbitrator may award costs and attorney fees to the opposing party(ies). If that occurs the association may be responsible for paying such fees and costs.
There is no guarantee that the association will recover enough funds to repair the claimed construction defect(s). If the claimed defects are not repaired, additional damage to property and a reduction in the useful life of the common elements may occur.
Until the claimed construction defects are repaired, or until the construction defect claim is concluded, the market value of the units in the association might be adversely affected.
Until the claimed construction defect(s) are repaired, or until the construction defect(s) claim is concluded, owners in the association might have difficulty refinancing and prospective buyers might have difficulty obtaining financing. Also, certain federal underwriting standards or regulations prevent refinancing or obtaining a new loan in projects where a construction defect is claimed, and certain lenders, as a matter of policy will not refinance or provide a new loan in projects where a construction defect is claimed.

Notice to construction professional(s)

At least 5 business days prior to mailing the required Unit Owner Notice (see above), the association must notify each construction professional against whom a construction defect action is proposed. The notice must be sent via the mail to the last-known address of the construction professional and must provide the date and time of the meeting called to consider the construction defect action proposed in the Unit Owner Notice.
Maintenance of a Verified Owner Mailing List
The association is required to maintain a verified owner mailing list that identifies each owner and the address where the association mailed the required pre-meeting notice. The association is also required to provide a copy of this verified owner mailing list to each construction professional at the owner meeting. If the association commences a construction defect action against a construction professional, the association shall also file the verified owner mailing list along with records of votes received from the owners during the voting period.

Amendments to the Substance of the Proposed Construction Defect Action

The substance of a proposed construction defect action may be amended or supplemented after the owner meeting, but this does not extend the voting period. The association’s executive board must give notice to the unit owners regarding any amendment or supplementation and shall maintain records of its communications with the unit owners. Owner approval is not required for amendments or supplements to a construction defect action that are made after the pre-meeting notice. These provisions recognized that new defects or additional information about defects may arise after the notice is sent and that a unit owners vote is intended to allow for some flexibility for the association’s board to later address this.

Approval by Unit Owners Required for Initiation of a Construction Defect Action

Notwithstanding any provision of law or any requirement in the association’s governing documents, the executive board may only initiate a construction defect action if authorized within the voting period by unit owners to which a majority of votes in the association are allocated. Each owner may vote only once and the vote may be in “any written format confirming the owner’s vote to approve or reject the proposed construction defect action.” The association shall maintain a record of all votes until the conclusion of the construction defect action, including all appeals.
For the purposes of calculating the required majority vote of the unit owners, the following votes are explicitly excluded:
Any votes allocated to units owned by a development party (a contractor, subcontractor, developer or builder responsible for any part of the design, construction or repair of any portion of the common interest community or any of their affiliates including an entity controlled or owned, in whole or in part, by any person that controls or owns a development party, or by the spouse of a development party)
Any votes allocated to units owned by banking institutions, unless a vote from such an institution is actually received by the association
Any votes allocated to units of a product type in which no defects are alleged, in a common interest community whose declaration provides that common expense liabilities are not shared between the product types
Any votes allocated to units owned by owners who are deemed nonresponsive. If the status of the nonresponsive unit owner is challenged in court, the court shall consider whether the executive board has made diligent efforts to contact the unit owner regarding the vote and may consider: (1) whether a mailing was returned as undeliverable; (2) whether the owner appears to be residing at the unit; and (3) whether the association has used other contact information, such as an e-mail address or the telephone number for the owner.

Exceptions to the Unit Owner Approval Requirement

Two exceptions to the unit owner approval requirement are (1) where the construction defect pertains to a facility that is intended and used for nonresidential purposes with a repair cost not to exceed $50,000.00; and (2) where the association was the contracting party for the performance of labor or purchase of materials in the construction defect action.
Tolling Statutes of Limitation
While this statute does not alter the tolling provisions in CDARA (CRS §13-20-805), all other statutes of limitation applicable to claims based on the defects alleged and described in the owner notice, including amendments and supplements to the same, are tolled from the date the notice is mailed until either the 90 day voting and disclosure period ends or until the association determines that the construction defect action is either approved or disapproved, whichever occurs first. This provision should not preclude application of the statute of limitations to claims precluded before the notice is mailed.
Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., 15 SC 508, 2017 CO 69 (Colo. June 5, 2017)
Right on the heels of the successful bipartisan construction defect litigation signed into law on May 23, 2017, the Colorado Supreme Court upheld a May 7, 2017 Court of Appeals ruling that overturned an Arapahoe County District Court determination that a consent to amend provision in Vallagio’s declaration violated Colorado law.
Vallagio determined whether the Colorado Common Interest Ownership Act (“CCIOA”) permits a developer-declarant to retain a right of consent to later proposed amendments to a common interest community’s declaration. The pertinent amendment involved a provision of the original declaration required that all construction defect claims be resolved through binding arbitration and that this particular provision “shall not ever be amended” without the declarant’s written consent. The Association in question filed a civil action shortly after the unit owners voted to amend the declaration without the declarant’s consent and delete the provisions related to required arbitration. The declarant then moved to compel arbitration arguing that the attempt to amend the declaration without consent was invalid and, therefore, the Association was bound by the arbitration provision in the original declaration.
The Supreme Court first found that the declaration’s consent to amend provision was consistent with CCIOA and then determined that claims subject to the Colorado Consumer Protection Act (“CCPA”) can still involve a waiver of the right to a civil action and can be arbitrated. The Supreme Court rejected the Association’s argument that the consent to amend provision violated CCIOA because it exceeded the 67% voting threshold for amending a declaration or is a devise intended to evade the 67% limitation. Moreover, although the CCPA establishes a right to a “civil action,” there is no non-waiver provision in the CCPA, unlike other statutes that grant the right to a civil action. Noting that arbitration and ADR provisions are generally looked upon favorably, the Supreme Court noted this decision is fully consistent with Colorado’s public policy favoring arbitration as a mechanism of ADR. Therefore, the Court found that neither CCIOA nor the CCPA will invalidate enforcement of a mandatory arbitration clause.

Based on this reasoning, the Supreme Court ultimately found that by failing to obtain the declarant’s written consent to remove the declaration’s arbitration clause, the attempted amendment was ineffective. This ruling has the potential for far-reaching implications for builders and homeowners. As the construction industry favors binding arbitration as a more cost-effective and streamlined process for dealing with construction defect allegations, it should be expected that future common interest community declarations will contain provisions that comport with the ruling in the Vallagio case. As to smaller value claims for construction defects, HOA’s may find the cost of arbitrator retention to be cost-prohibitive if the shared cost of arbitration is for a panel of three arbitrators. With reasonable assurance that these arbitration clauses will be upheld, insurers may be encouraged to respond to the market needs and bring down premiums. This, in turn, coupled with the ability to avoid high-cost and lengthy litigation, may lead to developers and subcontractors to refocus efforts on condominium projects.

The combination of the new legislation and the Supreme Court’s ruling in the Vallagio case represents a significant shift in the legal landscape surrounding construction defect litigation in Colorado. Further, while the issue of mandatory arbitration was not resolved in the last legislative session, due to the ruling in Vallagio, it should be expected that the issue will be revisited next year. Colorado legislators are likely to want to add arbitration provision requirements to add clarity to their application. Consumer rights advocates and HOA’s who are unhappy with the Court’s decision, will likely introduce legislation to prevent developers from having unfettered, long-standing control over an association and to prevent self-dealing in declarations. The need for compromise on these issues may stimulate further discussion in other areas of construction defect law reform that have previously been at a standstill.

Please feel free to contact Dan Singel at djs@mccollumlaw.com should you have any questions.

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