CO Supreme Court Holding Adopts Construction Defects Policy Sticking Point

The Colorado Supreme Court’s decision in the Vallagio case may blunt the impact of a recent, and celebrated, legislative compromise

by Duane Gall

Colorado is a wonderful place to live. Buying a home here, however, can be expensive and difficult. Due to the short supply and high prices of existing homes, as well as tighter credit and a slump in new construction, it’s hard to find your personal Carrington Mansion. The situation is particularly dire with regard to condominiums, which are usually the most affordable properties. Of all the multifamily dwellings sprouting up in Denver and elsewhere in the state, this year only about three percent are condos; the rest are apartments. That’s down from about 20 percent in 2005.

First-time buyers suffer the most. They may earn enough, in theory, to afford a reasonable monthly mortgage payment. But if they have to wait months or years for a suitable home to come onto the market, and in the meantime continue to pay rent at ever-increasing rates, their hopes of owning a home can wither.

Homebuilders cite the risk and cost of construction-defect litigation as a major disincentive to new home construction. With the majority of new homes (whether detached or condo) being in planned communities that are developed by a single company, any construction defect that is identified in one unit will likely be found in others—resulting in a multiplicity of lawsuits or even a class action.

Notably, the traditional barriers to a “class action” may not apply to a planned community because the executive board of a unit owners’ association (HOA) is authorized under Colorado law to sue “on behalf of . . . two or more unit owners on matters affecting the common interest community.” (Section 38-33.3-302(1)(d), C.R.S.)

Builders say that the risk of litigation, including actions instituted by HOAs, increases their insurance premiums and other related costs by $20,000 or more per unit—pricing first-time buyers out of the market and inducing builders to construct apartments rather than condos.

In seeking to promote affordable new home construction, the Colorado General Assembly has tended to focus on deterring, or at least delaying, such lawsuits.

In 2001, the Construction Defect Actions Reform Act (“CDARA”) prohibited courts from awarding punitive damages and imposed prerequisites to the filing of a lawsuit against a construction professional. The prerequisites include giving the construction professional advance notice, a detailed list of the alleged defects, and an opportunity to remedy the defects or offer a settlement. If the parties cannot agree within a specified period, the lawsuit can proceed.

A subsequent amendment to CDARA, dubbed the “Homeowner Protection Act of 2007,” clarified that a contractual waiver of the claimant’s rights under CDARA or under the Colorado Consumer Protection Act (“CCPA”) would not be effective.

But further significant legislative action stalled, mainly over the details of whether and how to limit the ability of an HOA’s executive board to sue a builder. For example, in 2014, S.B. 14-220 would have required a board to provide to all of its unit owners advance notice and disclosure of the projected costs, duration, and financial impact of any proposed litigation, and then obtain the written consent of a majority of the unit owners before proceeding. The bill also would have invalidated any attempt by the unit owners to change the association’s governing documents, in accordance with existing law, to remove a clause requiring arbitration or mediation of a construction-defect claim against a builder.

This latter provision, the “arbitration piece,” was cited as the poison pill for S.B. 14-220. Opponents successfully argued that it would give builders carte blanche to write self-serving, binding arbitration clauses into the DNA of every new condo or subdivision, knowing that they would never have to face a court trial for alleged construction defects—even if the claim was well-founded, and even if the unit owners voted to eliminate this restriction on their legal rights concerning what was now their property.

Other legislative attempts at compromise failed along similar lines: One or more elements of each proposed bargain proved either too pro-builder or too permissive of expensive lawsuits.

In the 2017 session, however, the General Assembly broke the logjam with a successful deal. H.B. 17-1279 omitted the “arbitration piece” and codified acceptable procedures for the notice, disclosure, and ratification vote requirements of S.B. 14-220. The issue seemed settled, at least for the moment. But was it?

Governor Hickenlooper signed the hard-won compromise into law on May 23, 2017. Two weeks later, on June 5, in Vallagio at Inverness Residential Condominium Association, Inc., v. Metropolitan Homes, Inc., the Colorado Supreme Court essentially adopted as law the “arbitration piece” that the General Assembly had struggled with for four years and finally rejected.

To be fair, the Court did not flatly assert that a binding arbitration clause could never be removed by an HOA. But it did allow the defendant builder to control the amendment process in a way that achieved the same result.

Here is the background: In 2007, defendant Metro Inverness, LLC—the developer, a/k/a the “declarant,” as defined in the Colorado Common Interest Ownership Act (“CCIOA”)—recorded the necessary declaration and plat maps to construct the Vallagio at Inverness planned community near I-25 and Dry Creek Road. The declaration contained procedures for future amendments to the community’s governing documents after control of the community was transferred from the declarant to the purchasers (unit owners) and the HOA. Generally, amendments could be made by an affirmative vote of 67% of the unit owners, in accordance with CCIOA. But this was subject to two exceptions:

  1. Until a specified date (now long past), any change required the declarant’s consent; and
  2. In perpetuity, any change to the dispute-resolution procedures governing claims against the declarant for construction defects, including the requirement for binding arbitration, required the declarant’s written consent.

In essence, Metro Inverness, LLC, granted itself the same right by contract that S.B. 14-220 would have granted by statute, had the bill passed. When the HOA discovered what it considered construction defects and sought to sue Metro, it obtained the affirmative votes of 67% of the unit owners to remove the arbitration clause. Needless to say, Metro did not consent.

At trial, Metro moved to dismiss the case, arguing that the removal of the arbitration clause was invalid without Metro’s written consent. The HOA maintained that the consent requirement conflicted with CCIOA, which establishes the sole and exclusive procedure for amending a declaration. Specifically, section 38-33.3-217 (1)(a)(I), C.R.S., requires only “the affirmative vote or agreement of unit owners of units to which more than fifty percent of the votes in the association are allocated or any larger percentage, not to exceed sixty-seven percent, that the declaration specifies. Any provision in the declaration that purports to specify a percentage larger than sixty-seven percent is hereby declared void as contrary to public policy, … “. (Emphasis added.)

The trial judge agreed with the HOA and refused to dismiss the case. However, Metro appealed and won on this point. The Colorado Supreme Court focused on the term “percentage” and cited other provisions of CCIOA placing non-percentage-based conditions on the ratification of an amendment. Therefore, the Court implied, Metro’s addition of its own non-percentage-based conditions in this case did not violate CCIOA and the Court gave it legal effect.

It’s tempting here to quote Robert Burns’s well-known line, “The best-laid schemes o’ mice an’ men gang aft a-gley.” What is not so well known is the context of that line, made clear in the title of the poem in which it appears: “To A Mouse, On Turning Her Up In Her Nest With The Plow.” Our Supreme Court, dutifully plowing in the fields of litigation, has inadvertently scattered the General Assembly’s meticulous creation, the compromise called H.B. 17-1279. Will the General Assembly now abandon the site and let nature reclaim it? Or dig in again and rebuild?