Archive for the ‘Blog’ Category

New article published on construction defect statute of repose

Thursday, October 12, 2017 @ 02:10 PM
Author: Jesse Witt

The Colorado Trial Lawyers Association published a new article from Jesse Witt this week. The article discusses the history of Colorado’s statute of repose for construction defect claims and analyzes a recent decision that corrects a flaw in the statute that has nettled litigators since 1986. Click here to read the full text.

The article expands on comments that first appeared in this blog.

Colorado’s new construction defect law officially takes effect this month. Although HB 17-1279 was passed in May, the statutory text provides that it only applies “with respect to events and circumstances occurring on or after September 1, 2017.” With that date now upon us, practitioners should be mindful of the law’s new requirements.

The law applies to any lawsuit wherein a homeowner association files a construction defect action on behalf of two or more of its members. “Construction defect action” is defined broadly to include any claims against construction professionals relating to deficiencies in design or construction of real property. Before an association may commence such an action, its board must follow several steps.

First, the board must schedule a meeting of all homeowners and notify the affected construction professionals of the time and place.

Second, after waiting at least five days, the board must deliver notice of the meeting and the potential construction defect action to all homeowners at their last known addresses. This notice must also go to the construction professionals. The notice must include a description of the alleged construction defects with reasonable specificity, the relief sought, a good-faith estimate of the benefits and risks involved, and a list of mandatory disclosures concerning assessments, attorney fees, and the marketability of units affected by construction defects.

Third, the board must conduct the actual meeting of the homeowners. The construction professionals named must be allowed to attend and address the unit owners during the meeting. The construction professionals may make an offer of repairs to the homeowners at that time, but they are not obligated to do so. The meeting must occur between ten and fifteen days after the mailing of the second notice, or else the subsequent vote will be void. There is some ambiguity in the statute, and boards may therefore wish to schedule this meeting exactly ten days after mailing to avoid future challenge.

Fourth, the board must tally the votes of all homeowners on whether to proceed with the construction defect action. The vote can occur by any written means but must occur within ninety days of the mailing of the notice, and this time period may not be extended. Subject to certain exceptions, the association may only proceed with the construction defect action if a majority of voting homeowners approve the construction defect action. Some homeowners are excluded from this vote: The Association need not count votes from the developer or its affiliates, banks that own homes, owners deemed to be nonresponsive, or owners of homes of a type in which no defect is alleged in communities where common expenses are not shared.

The law contains a number of nuances and technical requirements not discussed in this summary, and associations considering a potential construction defect action should contact a qualified attorney to ensure compliance with its provisions. Some associations may also have to follow other requirements contained in their covenants or in local ordinances, to the extent such terms are not preempted by state statutes.

HB 17-1279 does not obviate the existing requirement that an association serve a construction professional with a notice of claim and consider an offer of repairs prior to commencing a lawsuit or arbitration. The new law contemplates that the notice of claim would be sent first, and that the meeting and vote would occur if the construction professional’s response to the notice of claim was inadequate. The statutes of limitation and repose remain tolled during both the notice of claim period and the subsequent voting period.

The new law was enacted to address builders’ perceived fear that HOA boards were filing construction defect lawsuits without notifying their members. Opponents of the bill noted that the first Construction Defect Action Reform Act had already established mandatory notice requirements back in 2001, but builders claimed that these requirements did not go far enough. Stakeholders on both sides of the debate agreed to support HB 17-1279 as a compromise in 2017 in hopes of spurring more condominium construction without sacrificing consumer protections.

Attorney Jesse Witt was active in negotiations over the content of HB 17-1279 at the state capitol, and The Witt Law Firm is available to assist board members and others with questions about the new requirements of HB 17-1279. The firm also maintains strategic partnerships with specialists in homeowner association elections and voting requirements, and it has construction experts available to evaluate potential claims. Please visit www.witt.law for more information.

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.

New Jersey courts sign “death knell” for 1979 Weedo decision

Monday, March 2, 2015 @ 04:03 PM
Author: Jesse Witt

A new blog post from Kilpatrick Townsend & Stockton discusses two recent decisions limiting the holding of Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979), a New Jersey case that has generated decades of commentary and debate, in my own writing as well as that of many others (at least 1880 citations, according to the blog).

Weedo interpreted a 1973 insurance policy form. Although its holding was not particularly remarkable on its face, many courts would later apply Weedo as precedent in disputes arising under newer policies that had been written to expand coverage for property damage arising from a contractor’s defective work. It is well time that the case be retired and no longer cited as precedent.

Update: In August 2016, the Supreme Court of New Jersey affirmed one of the decisions discussed above, effectively driving the final nail in the Weedo coffin. The court relied in part on Colorado’s seminal Greystone decision to hold that the term “occurrence” in standard CGL policies encompasses unanticipated damage to nondefective property resulting from a subcontractor’s poor workmanship. Cypress Point Condo. Ass’n v. Adria Towers, L.L.C., ___ A.3d ___, 2016WL4131662 (N.J. Aug. 4, 2016).