Time For Celebration? Important New Developments In Colorado Condominium Construction Defect Law

On May 22, 2017, the Colorado Governor signed new Colorado statutory provisions designed to encourage construction of more condominiums in the state by purportedly making it more difficult to file construction defect lawsuits without the well-informed approval of a majority of condominium owners. Two weeks later, the Colorado Supreme Court decided a case that is likely to further encourage new condominium development. But, there may be limits.

The expected effect of the newly-enacted statutory provision is to require that a majority of condominium owners, rather than their association board of directors, knowingly agree to proceed with construction defect litigation. The knowingly construct of the law is the requirement that unit owners be given detailed written meeting notices and cautions before voting on litigation. The targets of the litigation under consideration (developers, contractors and design professionals) must also be invited to attend owner meetings where they will be allowed to speak and propose resolutions if they wish.

Importantly, meeting notices must also alert condominium owners to consider the potential economic consequences, including future defect repair and maintenance costs, as well as potential increase in or special assessments against them and time limitations for commencing defect litigation. Also, the notices must describe the specific defects being considered, the monetary relief that would be sought in litigation along with a “good-faith estimate” of the benefits and risks to be involved in a litigation.

Additionally, meeting notices must notify unit owners (1) of proposed fee arrangements with attorneys and estimated litigation costs that could not be exceeded without board approval; (2)that legal costs may or may not be recovered in litigation; (3)that there is a potential that their association (and owners) may be liable for attorney fees and court costs that either may not be recoverable or that may be recovered against their association and them personally; (4)that there would be no guaranty of recovery in litigation; and (5)that the market value of their condominiums and the ability of owners to refinance their units, or prospective buyers to obtain financing, might be adversely affected by the defects and potential or ongoing defect litigation.

The notice requirement has the objective of having informed condominium owners better able to make informed decisions about whether to proceed with litigation or to resolve their issues directly with their developers, contractors or others without litigation — or to simply bite the bullet and remedy the defects themselves without litigation. Owners have 90 days following the meeting notice date within which to vote. Whether they may change their votes during that period or may be voting by proxy is not addressed.

The Colorado Supreme Court decision, made on the heels of the newly-passed condominium defect provisions, was in the case of Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc. The Supreme Court ruled that the condominium declarations involved in that project (governance rules and regulations) requiring that construction defect claims be decided in arbitration rather than court were enforceable and could not be changed by the owners if the declarations also had a provision that the developer had to consent to a change of the arbitration requirement. The expected effect of that decision is that condominium developers and their construction team members may not be subjected to generous jury awards against them.

Although “condominiums” are discussed here, it is to be noted that the new statutory provisions and Supreme Court decision would also apply to residential developments in “common interest communities” — typical subdivisions that have community associations and commonly-owned amenities such as clubhouses, swimming pools, etc.

These two important legal developments have been the subject of debate, efforts and controversy for years. In the eyes of the development and construction industry they are gratifying. However, the new laws do not solve all issues. There are several questions about what effect they may have on construction defect claims and the concerns of developers, contractors, design professionals, insurance companies and attorneys involved in construction defect issues. Here are a few questions:

• (1) Many internal condominium governing papers called “declarations” or “covenants, conditions and restrictions” in effect in the state now require a 67% vote (“supermajorities”) of condominium owners to proceed with defect litigation. The new Colorado statute reduces that approval number to a simple majority. On the surface it appears that the simple majority rule would make defect litigation more, rather than less, likely;
• (2) Majority vote appears to be determined by the number of owners actually voting, not the number of owners. That would mean that if there are 100 owners but only 80 vote, a majority would be 41 affirmative votes.
• (3)Future condominium development governance rules and regulations (“declarations”) that will be prepared by developers will undoubtedly provide for arbitration of construction defects and prohibit the elimination of that requirement without the consent of the developers;
• (4)It is not entirely clear what affect the new Colorado statute will have upon local ordinances in over a dozen Colorado cities (including Denver and Colorado Springs) that have similar, but not identical, provisions for condominium defect litigation. The state statute would probably prevail, but this may need to be decided in court;
• (5) There appears an ambiguity in the statutory provisions concerning their application. They are said to apply “. . . with respect to events and circumstances occurring on or after September 1, 2017.” Does that mean that the alleged defective work must have been performed after that September date, or something else?

Undoubtedly, future developers and members of the construction industry are pleased with the recent actions of the Colorado General Assembly and Supreme Court. Those steps may result in more condominium projects to serve the too many people moving to this great state and clogging its streets and highways! Stay tuned!