Colorado’s legislature this spring enacted legislation designed to encourage residential construction in the state, in particular construction of new condominium units. The legislation is designed to reduce litigation risk associated with building condos by requiring a majority of actual condo unit owners, as opposed to a majority of the HOA board members, to approve the filing of a lawsuit over construction defects. While the new statutory provision may help spur condo development in Colorado, and may help reduce insurance rates for these projects, the legislation cannot be viewed as sweeping reform. Every little bit helps, though, and future legislative sessions will undoubtedly see additional efforts to reform construction defect litigation.
Residential construction, especially multi-family condominium construction, has lagged in Colorado over the last several years. Data indicates that builders in Colorado are not building many condos, even though the economy and new home construction is thriving. One report revealed that new condo availability in the Denver metro area was just three percent, falling well short of the 23 to 27 percent in comparable cities. Condos accounted for only two percent of all new home construction in 2015, compared to eight percent in 2003.
The mantra of the supporters of construction defect reform this legislative session was that developers and builders will not build condos because current law makes it too easy for a small minority of unit owners in a condo project to decide, without a majority vote, to file a defect lawsuit against the developer-owner and builder. One impact of construction defect litigation is that owner-developers in Colorado have avoided development and construction of multifamily condominium projects and, instead, have elected to retain ownership of new construction by building apartment buildings and complexes. The thought is that owner-developers will continue to own their projects through expiration of Colorado’s statute of repose and, therefore, rent the units to tenants instead of selling them to new owners. After expiration of the repose period, the apartment buildings and complexes can then be converted to condominium units for sale to individuals. By renting the units, owner-developers retain ownership, thereby eliminating the risk of being sued by the board of a homeowners’ association.
For the last several years, various groups and coalitions have attempted to pass legislation that could be perceived as lessening the risk of construction defect litigation. Those favoring legislative reform have been business groups, mayors from metropolitan Front Range municipalities, and affordable housing advocacy groups. Opposition to change has been led by construction defect plaintiff’s attorneys and homeowners’ associations and their management companies.
This spring, the legislature passed and Governor Hickenlooper signed, HB 1279 which immediately amends Colorado’s statutory framework. The most significant change is a new requirement a majority of condo owners in a development vote to approve the filing of a lawsuit. This changes current law which allows a majority of the HOA’s board of directors, not a majority of the unit owners, to approve filing suit. The legislation also requires the HOA board to notify all condo unit owners and builders about plans to pursue a construction lawsuit. It further requires the HOA board to hold a meeting to allow the board and the developer to present facts and arguments to the individual condo unit owners, including arguments of the potential benefits and detriments of filing a lawsuit.
In general, younger adults and aging baby boomers wanting to downsize have been most impacted by the lack of condo construction in Colorado. Requiring a majority vote of actual condo owners, who have been appropriately advised on the potential benefits and pitfalls of litigation, is viewed as a way to regenerate builders’ interest in developing condo projects and to reduce insurance rates for those projects. Because condos are usually the most affordable entry point into home ownership, the legislative initiative benefitted from a belief that reform is necessary to afford younger adults an opportunity to purchase entry-level housing.
This legislation resulted from a significant compromise between the legislature’s two chambers and between the parties.In the end, the legislation was unanimously passed by both the House and Senate, a remarkable feat in itself.
An additional initiative of proposed reform was to require binding arbitration of construction defect claims, in lieu of litigation. This proposal had been presented in legislative proposals the last couple years. The Colorado Senate passed a bill earlier in the 2017 session that included an arbitration requirement, but the House-passed measure did not. Ultimately, the enacted legislation does not require arbitration. It can be expected that future legislatures will again wrestle with crafting legislation to subject construction defect disputes, at least for condos, to binding arbitration as opposed to litigation.
Aside from the legislative initiatives undertaken this spring, the Colorado Supreme Court will be ruling in 2017 on an issue impacting developer-owner liability for construction defects. An issue in Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc. (No. 15SC508, Colorado Supreme Court) is whether Colorado’s Common Interest Ownership Act allows a developer-declarant to reserve the power to veto a majority vote of unit owners to change the common interest community declarations, even after it has sold the last unit in the complex. The Colorado Court of Appeals (No. 14CA1154) held that a developer-declarant does have this power, which in this case it attempted to invoke to block a change to the mandatory arbitration provision in the declarations. Regardless of how the Colorado Supreme Court rules on this issue, it is likely that the Colorado legislature will be presented with proposals to tweak the impact of the Court’s ruling.
Colorado’s passage of legislation requiring a majority of unit owners to approve initiating construction defect litigation will hopefully spur condominium construction. There is no doubt that additional statutory reform would further motivate owner-developers to build condos, but those efforts are now tabled until the 2018 legislative session. It remains to be seen how effective the new majority-of-unit-owners requirement will be in decreasing developers’ concerns of being sued and whether it will stimulate condominium construction in Colorado.