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The Colorado Supreme Court ruled today that developers can retain control over community covenants in perpetuity by recording a covenant that requires declarant consent to any amendments. Although the Colorado Common Interest Ownership Act (CCIOA) states that such controls should be void, the court nevertheless ruled that a declarant may veto amendments that alter the dispute resolution procedures for construction defect actions at any time.

The case of Vallagio at Inverness Residential Condominium Ass’n v. Metropolitan Homes, Inc., __ P.3d __, 15CO508, arose when the community’s members discovered widespread construction defects. When the declarant developed the project, it had recorded a declaration of covenants that purported to waive the homeowners’ right to a jury trial and instead require that any construction defect disputes be resolved by a private arbitration panel. The declaration also prohibited the homeowners from recovering attorney fees and costs, and it limited the declarant’s liability for damages. Consistent with CCIOA, the declaration allowed the homeowners to amend their covenants by a 67% vote, but it recited that the declarant could veto any such amendment prior to the sale of the last unit to a homeowner. The covenants further stated that the declarant must consent to any amendment that altered the construction defect restrictions.

When the developer refused to make acceptable repairs to the defects, the Vallagio homeowners voted to amend their covenants to eliminate the restrictions and liability limitations. Their vote occurred after the sale of the last unit and passed with a 67% majority, but the declarant did not provide its consent. Shortly thereafter, the association filed suit to recover the cost of repairing the defective work and damages for violating the Colorado Consumer Protection Act (CCPA), and it demanded a jury trial. The association named the declarant as a defendant along with the community’s general contractor and two former board members.

The defendants moved to compel arbitration and argued that the homeowners’ vote was ineffective without the declarant’s consent. They further argued that arbitration clauses in homeowners’ individual purchase agreements bound the association. In response, the association asserted that the homeowners’ vote was valid, that the requirement of declarant consent was void under CCIOA’s provisions for amending covenants, that only the declarant (not the other defendants) had standing to enforce the arbitration covenants, that the homeowners’ individual purchase contracts did not bind the association, and that CCPA claims were not arbitrable. The district court agreed with the association and denied the defendants’ motion.

The defendants appealed, and a division of the Colorado Court of Appeals reversed. The division concluded that, although CCIOA prohibits a declarant from recording covenants that require more than a two-thirds majority vote to amend a declaration, CCIOA did not invalidate a covenant that required a declarant’s consent to such an amendment. The court rejected the defendants’ argument that the purchase contracts bound the association, but it held that CCPA claims could be subject to arbitration on remand. The division remanded the case for determination of whether the other defendants had standing to enforce the arbitration covenant, or whether this term only protected the declarant itself from suit.

After granting certiorari review, the supreme court affirmed the court of appeals. The court held that the provisions of CCIOA that invalidate higher voting percentages for declaration amendments did not preclude declarants from adding a separate requirement that they consent to amendments that passed with the required 67% majority. The court found support for its decision in other sections of CCIOA that require declarant consent, apparently choosing to ignore the statutory language that creates express exceptions for those situations.

The court also rejected the association’s argument that declarant-consent provisions violate CCIOA’s prohibitions on terms that favor the declarant over other unit owners. The court declined to consider the association’s alternative argument that perpetual declarant control violates CCIOA’s other provisions that impose a time limit on exercise of declarant rights, prohibit unconscionable contract clauses, and allow an association to terminate contracts with a declarant; the court found that these issues had not been fully briefed.

Finally, the court ruled that CCPA claims can be subject to binding arbitration, and that public policy does not prohibit a contractual waiver of a consumer’s right to file such claims in court.

Justices Márquez and Coats dissented from the majority. They recognized that, while CCIOA contemplates the possibility of declarant consent, the consent-to-amend provision at Vallagio evades the limitations and prohibitions of CCIOA “by effectively allowing the Declarant to grant itself permanent veto power over a supermajority of unit owners and thus unilaterally control the Association’s ability to amend the Declaration, even after the Declarant’s control period ends.” They further recognized that, while the majority’s decision arose in the context of a construction defect dispute, “its logic will permit declarants to control homeowners’ associations’ affairs into perpetuity simply by drafting self-serving provisions and then including a consent-to-amend provision that allows the declarant to demand consent to the amendment of any provision in the declaration.” This goes directly against CCIOA and the protections that the legislature enacted for homeowners.

Arbitration can be a quick, effective means of dispute resolution between sophisticated parties who choose to engage in alternative dispute resolution. Parties with equal bargaining power can specify what discovery is needed, how quickly the case must be resolved, and whether to limit administrative fees. Unfortunately, many corporations see arbitration as a way to avoid state consumer protection remedies, and they try to foist complicated, slow, costly procedures on consumers by inserting unfair arbitration clauses into form contracts. In the homebuilding context, national developers have begun to record such clauses in community declarations, giving homeowners zero opportunity to negotiate the terms or opt out of unfavorable terms. The Vallagio case provides one such example of this tactic. Unfortunately, Colorado courts have now ruled that this is permissible.

How this will affect homebuilding in the state remains to be seen. Last month,the General Assembly passed a compromise bill on construction defect litigation intended to spur housing construction by requiring homeowner association boards to provide additional notice to their members before filing suit over negligent work. This law, coupled with the Vallagio decision, may embolden some developers to cut corners on quality control and offer more cheap multifamily homes in the name of affordable housing.

Today’s decision comes on the heels of two other cases in which the Colorado Supreme Court ruled that CCIOA offers little protection for homeowners against developers who draft self-serving declarations, Ryan Ranch Community Ass’n v. Kelley, 380 P.3d 137 (Colo. 2016), and Pulte Home Corp. v. Countryside Community Ass’n, 382 P.3d 821 (Colo. 2016). The supreme court has now made clear that it will enforce covenants and statutes that benefit developers while ignoring covenants and statutes that benefit homeowners. Unless the legislature acts to strengthen CCIOA and make clear that the courts must uphold its consumer protection terms, this trend is unlikely to stop.

Colorado passes compromise bill on construction defects

Wednesday, April 19, 2017 @ 09:04 PM
Author: Jesse Witt
Suzanne Leff speaks to the media

Attorney Suzanne Leff speaks to the media about HB17-1279, flanked by Senator Jack Tate, Representatives Alec Garnett, Cole Wist, and Lori Saine, and Governor John Hickenlooper.

After four failed attempts, Colorado legislators have finally reached a compromise on construction defect legislation.

This afternoon, HB17-1279 gained unanimous approval from the House Committee on State, Veterans, and Military Affairs. The bill is expected to pass both chambers easily and be signed into law by Governor John Hickenlooper.

Proponents say that a bill is needed spur more condominium construction in the state. They contend that homebuilders have been reluctant to construct multifamily projects in recent years based on a perceived fear that small groups of homeowners can file lawsuits in the name of their community associations without adequate the consent of other members. A 2013 study found that quality control and insurance costs only reduce homebuilder profits by a small amount, but concerns about litigation have nevertheless prompted some construction professionals to focus on constructing apartments and other products.

Many of these arguments date back to 1991, when the General Assembly enacted the Colorado Common Interest Ownership Act. After hearing testimony that there were not enough building inspectors to keep up with the fast pace of construction in the early 1990’s, legislators empowered community associations to bring suit for construction defects on behalf of their members. Since then, homebuilders have repeatedly tried to roll back these protections and reduce their exposure to liability for defective work. In 2001 and 2003, the General Assembly enacted the Construction Defect Reform Act, which requires association boards to disclose a list of claimed defects and advise their members before filing suit. Some contended, however, that these changes were not enough.

Lawmakers rejected bills requiring binding arbitration and supermajority vote requirements in 2013, 2014, and 2015. Efforts to introduce a similar bill in 2016 fell apart. In 2017, however, the stakeholders were able to agree on a compromise that assuaged the homebuilders’ remaining fears while still maintaining adequate protections for homebuyers.

With several amendments made in committee, the 2017 bill establishes several new requirements for community associations. Before an association files a construction defect suit, it must first make certain disclosures and gain the approval of 51% of its members, subject to exceptions for properties owned by development parties or banks. The association has ninety days to hold a meeting and conduct its vote, and the statutes of limitation and repose are tolled during this time. The responsible construction professionals must be allowed attend the meeting and speak to the membership. The bill provides that its requirements supersede higher vote thresholds recited in covenants or local ordinances; this should add a new and important protection for homeowners.

Speaking today at the State Capitol along with Hickenlooper and others, Community Associations Institute attorney Suzanne Leff acknowledged that this was a compromise bill with sacrifices on both sides. Nonetheless, while it may not immediately change the landscape, HB17-1279 should finally end the argument that homeowner association boards are filing lawsuits without proper notice and consent. Now, the burden shifts to the homebuilders to make good on their promise to deliver quality, affordable condominiums to Colorado buyers.

One of the key reasons for builders to maintain liability insurance is to cover the cost of hiring defense counsel and paying litigation costs in the event of a construction defect lawsuit. If a builder loses a lawsuit, it will typically be responsible for paying the plaintiff’s litigation costs. Today, the Colorado Court of Appeals clarified that the “supplementary payments” section of a standard Commercial General Liability (CGL) insurance policy covers such costs, even if the carrier has reserved the right to dispute whether it has a duty to indemnify the actual damages awarded.

This may seem counter-intuitive, insofar as a carrier may end up paying costs even if it does not cover the underlying loss, but the court’s decision is consistent with the plain language of the CGL form that most carriers use. Furthermore, while the court focused on the plain contract language without regard to public policy concerns, the decision may be seen to recognize the role that insurance defense counsel plays in the costs of litigation. If an insurance defense firm eschews offers of settlement and engages in aggressive discovery, for example, it may increase the insured’s chances of winning while also increasing the risk that the insured will face a larger cost bill at the end of the case. In such a scenario, it is fair and equitable to require the carrier to pay costs, regardless of any determination of coverage.

The opinion in Mt. Hawley Insurance Co. v. Casson Duncan Construction, Inc., 2016COA164, is available on the court’s website.

For the last four years, the homebuilders’ lobby has been aggressively pushing the idea that consumer protection laws are stifling condominium construction in Colorado. The lobbyists claim that the fear of liability for construction defects has forced many local developers to build apartments instead of condominiums. They have dismissed the notions that the shift to apartments merely reflects supply and demand, or that modern families might actually prefer to rent rather than buy. To support this theory, they have touted high condominium sales in other states. A new story from NPR’s Here & Now refutes this claim, however.

Contrary to what the lobbyists have been saying, data now confirm that large numbers of Americans prefer to rent, not buy, their homes. NPR reported today that home ownership in the U.S. fell to its lowest rate since 1965, while the share of U.S. households who rent is nearing a 50-year high. This trend appears nationwide and can hardly be blamed on consumer protection laws in Colorado.

This boom in apartments, furthermore, has not been bad for the construction industry. On the contrary, the report notes that demand for apartments is fueling a “construction resurgence,” and H.U.D. recently announced a new high in nationwide housing starts. In a recent interview, the chairman of the National Association of Home Builders credited apartment construction for this rise: “New household formations are upping the demand for rental housing, which in turn is spurring the growth of multifamily production…. Meanwhile, single-family housing continues to hold firm.”

Colorado legislators should remember these statistics next session, when the homebuilders make their annual pilgrimage to the Capitol to complain about how the state’s consumer protection laws are killing the construction industry. Just because builders are profiting from record-high demand for apartments does not mean that lawmakers should strip away consumer protections for those who choose to buy new homes.

Insuring the risk of construction defects

Wednesday, May 22, 2013 @ 01:05 PM
Author: Jesse Witt

This month, the Denver University Law Review published a new article on construction insurance by Jesse Witt and Marci Achenbach of The Witt Law Firm. Entitled “Insuring the Risk of Construction Defects in Colorado: The Tenth Circuit’s Greystone Decision,” the article reviews the evolution of liability insurance policies in the construction industry and examines how such policies have been interpreted in Colorado. The article explains how the insurance industry intended to provide builders with a means of insuring against the risk that their subcontractors would produce defective work, and it considers what construction defects can arise from an “occurrence” under standard policy language. It concludes with an analysis of the Tenth Circuit’s decision in Greystone Construction, Inc. v. National Fire & Marine Insurance Co. and recent applications of this holding in state court.

Mr Witt and Ms Achenbach hope that their article will be prove to be a valuable resource for lawyers and other professionals who desire a better understanding of construction insurance. The article appeared in the Law Review’s spring edition as part of its annual survey of significant decisions from the United States Court of Appeals for the Tenth Circuit.

Click here to read the full text.

Senate committee rejects Colorado SB 13-052

Thursday, April 18, 2013 @ 09:04 AM
Author: Jesse Witt

On 17 April 2013, the Colorado Senate’s judiciary committee rejected SB 13-052, which would have severely limited legal protections for homeowner associations located near public transit.
As originally drafted, the bill would have defined any homeowner association within a half mile of a bus or light rail stop as a “Transit-Oriented Development.” Such associations would lose the right to recover any damages in court for building code violations or other negligent construction, and the developers of such communities would gain absolute immunity from claims for environmental hazards or pollution. A last-minute amendment from the bill’s sponsor would have limited the bill’s scope to communities near light rail and removed provisions requiring private arbitration of disputes, but the three Democrats on the committee remained concerned about the lack of data supporting the bill and the risk that it would harm consumers. The committee’s two Republicans voted in favor of the bill.
Jesse Witt of The Witt Law Firm testified on behalf of the Community Associations Institute in opposition to the bill. Mr Witt asserted that, although the proponents of the bill had argued that an insurance crisis was hindering the construction of new homes near public transit, SB 13-052 would do nothing to improve the insurance climate. Instead, the bill would reward the incompetent builders who cut corners, refuse to take care of their customers, and expect their insurance companies to “clean up the mess.” These builders cause insurance premiums to rise for everyone, including the many quality builders in Colorado who take the time to do things right. Making homeowner associations increase their dues to fix negligent builders’ mistakes was not, according to Mr Witt, the right policy for Colorado.
The stakeholders agreed to meet over the summer to discuss other options to encourage new construction and ensure the availability of affordable insurance without unfairly penalizing homeowners. Please check this site or contact The Witt Law Firm for updates on this process.

Colorado SB 13-052 would gut homeowner rights in construction defect disputes

Tuesday, January 29, 2013 @ 12:01 PM
Author: Jesse Witt

The Colorado General Assembly is considering a bill that would gut legal protections for many homeowner associations in the Denver Metro Area. Entitled the “Transit-oriented Development Claims Act of 2013,” the bill claims to encourage the construction of new multi-family communities near light rail stations. In reality, however, the bill would simply make builders immune from legal responsibility for many negligent acts.

Sponsored by Senator Mark Scheffel (R-Douglas), Senator Bill Cadman (R-El Paso), and Representative Brian DelGrosso (R-Larimer), SB 13-052 would create a special procedure to be followed whenever a homeowner or HOA identifies potential construction defects in a “transit-oriented development” project. In any such community, the builder responsible for the defects would have a broad right to enter the property and make whatever repairs the builder felt were appropriate, without approval or consent from the homeowners. If the repairs were inadequate, the homeowners’ only option would be to participate in binding arbitration before a private dispute resolution service; the homeowners’ right to trial by impartial judge or jury would be forfeited. In addition, builders would enjoy complete immunity from any claims for environmental contamination, excess sound transmission, mold, odors, humidity, smoke, or fumes, and builders would have no obligation to repair such problems.

The real catch in this bill, however, is the definition of “transit-oriented development.” The bill does not limit its scope to communities near light rail; instead, the bill comprises all multi-family projects within “within one-half mile of any commuter rail stop, commuter light rail stop, or commuter bus stop.” By including bus stops in this definition, the bill could potentially ensnare hundreds of condominium and townhome communities within the RTD zone, including numerous projects that are nowhere near any light rail lines.

Whether the bill would apply to existing communities or merely affect future construction is unclear. The bill would also amend the statute of limitations and repose to make it easier for builders to sue subcontractors for indemnity.

At The Witt Law Firm, we represent a broad client base of contractors, homeowners, and associations. We support efforts to improve construction law, particularly where such efforts balance the rights of construction professionals and homeowners. Construction professionals should absolutely be able to build quality projects without the fear of litigation, just as homeowners should be able to expect homes that are built in compliance with local codes and industry standards. We do not believe that SB 13-052 would further either of these goals. By shielding builders from liability for their own negligence, this bill would reward those who use cheap materials and unqualified workers, and it would make it harder for honest, competent contractors to stay competitive.

If our legislators want to create incentives for building near light rail, we would encourage them to look at other options besides creating immunity for shoddy construction work. Expanding resources for building code education and stricter contractor licensing standards, for example, could help weed out negligent contractors and thereby reduce overall litigation. Offering special financing to those who build quality homes in designated areas could help draw developers to this market. There are many valid ways to approach this issue without penalizing innocent homeowners. Erecting leaky homes with environmental hazards near our train and bus stops, however, is not the answer.

Update: The Senate Judiciary Committee rejected SB 13-052 on 17 April 2013. Click here for more information.