Mountain Law: Construction defect reform advocates lose at state house, then win in court
When a new condominium project is built in Colorado, there is a high possibility that the developer will eventually be sued for construction defects. As a result, many developers say that it is simply not economical for them to build condominiums for sale. Instead, many developers construct condominiums and lease them as apartments, at least until the statute of limitations has run for construction-defect claims. This arguably contributes to a shortfall of affordable housing for those who can afford to purchase a condominium but not a single-family home.
Developers (and groups allied with them) say that they need construction-defect law reform before they can create such needed affordable housing. However, critics say that reforms are designed to strip condominium owners of their ability to recover for legitimate construction defects.
With this backdrop, developers and their supporters have made numerous attempts to effect statutory changes to construction defect law in Colorado. The most recent attempt was SB15-177, which passed the Senate in the last session and then died in the Democrat-controlled House. At its heart, the bill sought to make it more difficult for condominium associations to file suit against developers. It attempted to do so in two primary ways:
First, under current law, a condominium association may file suit at the direction of its executive board (with a special notice first given to the condominium owners providing them with certain information about the suit). In practice, this means that the suit can be authorized by as few as two members of a three-member executive board. In contrast, SB15-177 would have required consent of a majority of the condominium owners to file suit. This would have stripped the executive board of its authority and created, at a minimum, a procedural hurdle to filing suit.
Second, one way that developers try to discourage construction defect lawsuits is to insert language in the recorded declaration for the condominium project requiring any construction-defect claims to be submitted to an out-of-court resolution process known as arbitration. The general belief is that arbitration favors developers. The problem with such mandatory arbitration provisions is that condominium owners can potentially amend the language out of the declaration after-the-fact and then file suit in court anyway. SB15-177 would have addressed this issue by allowing developers to set such language in stone, making any amendment ineffectual to remove mandatory arbitration language from the declaration.
Here’s where irony comes in: On May 7, less than 24 hours after the Colorado legislative session ended and just over a week after SB15-177 died in a House committee, the Colorado Court of Appeals issued its decision in Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., et al. The case basically says that a developer can, at least in certain circumstances, put language in the declaration requiring developer consent to future amendments. Specifically, a declaration may require that construction defect suits be submitted to arbitration and then further require developer consent to amend that requirement. This basically allows developers to set mandatory arbitration provisions in stone, which was one of the failed goals of SB15-177.
In short, the construction industry lost at the state House and then won at the courthouse (presuming the Colorado Supreme Court does not grant a further appeal).
In the wake of Vallagio, two outcomes seem likely. One is that developers will begin inserting mandatory arbitration provisions that may not be amended without developer consent into condominium declarations on a regular basis; this may force many future construction defect claims into arbitration. The other is that there will be a push by the same groups who opposed SB15-177 to legislatively undo the outcome.
It will be interesting to see how this plays out.
Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.
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