Mountain Law: Cracking Colorado’s condo conundrum (column)
June 20, 2017
In a July 1, 2015, article titled, "Construction defect reform advocates lose at state house, then win in court," I wrote about Colorado condominium developers who lost an effort to pass legislation that would have reformed construction defect law but then shortly thereafter obtained a favorable court decision that accomplished one of their goals anyway. This article updates developments on both fronts.
To start with the court case, known as Vallagio at Inverness Residential Condo. Ass'n, Inc. v. Metro. Homes, Inc., the issue was whether a condominium developer can place in the project's governing document a provision requiring that any dispute with the developer be submitted to binding arbitration and forbidding the condominium unit owners from amending the document to remove that provision. This is important because the private resolution process known as arbitration arguably favors developers. The Colorado Court of Appeals ruled back in 2015 that developers have the right to compel arbitration in this manner. In a recent ruling, the Colorado Supreme Court affirmed the lower court in a 5-2 decision.
Developers have also had better luck recently with their effort to obtain favorable legislation. This has been a perennial issue of discussion in the Legislature because condominium housing once reflected about 20 percent of new construction in the Denver area but now reflects somewhere between 2-4 percent. Condominium associations are typically corporations, meaning that most important decisions are made by an executive board. Traditionally, this meant that a handful of board members controlled the decision whether to initiate construction defect litigation against the developer that could have wide-ranging impacts on the unit owners. Developers argued that the decline in condominium construction was because Colorado law made it too easy for condominium governing boards to sue them.
Under new legislation, designated House Bill 1279, which was signed into law by Governor Hickenlooper on May 23, 2017, the decision whether to initiate construction-defect litigation against any construction professional is now subject to a process under which a majority of the unit owners must approve such litigation before it is filed. One interesting aspect of this process is that it requires the association to invite the construction professional to a meeting to discuss the contemplated lawsuit against that person. That should be interesting! (There doesn't have to be a quorum at the meeting and the meeting must be held on the relatively short time of no more than 15 days' notice.) Another interesting aspect of the process is that certain votes may be excluded for purposes of calculating the majority, including votes for bank-owned units, units owned by the developer and "nonresponsive" unit owners.
The new statute makes it more difficult for associations to sue developers for alleged construction defects. The statute will almost certainly spur litigation concerning its proper interpretation, constitutionality and whether it was properly followed in each case.
In sum, both the Colorado Supreme Court's recent decision in Vallagio and HB 1279 make it more difficult, if not impossible, for condominium unit owners to sue developers for alleged construction defects. Depending on one's perspective, this will either help developers to deliver more affordable housing or harm unit owners by forcing them to put up with shoddy construction.
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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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