Colorado Supreme Court Rules in Favor of Condominium Developers in Construction Defects Cases

On June 5, 2017, the Colorado Supreme Court issued a decision in Vallagio at Inverness Residential Condo. Ass’n v. Metro Homes, Inc., 2017 CO 69, June 5, 2017 (“Vallagio”) that will likely benefit condominium developers in Colorado by helping to alleviate litigation costs related to construction defects claims, thereby incentivizing new construction of condominiums along the Front Range.

For the past several years, the Colorado General Assembly has ardently debated construction defects reform. Senate Bill 156, introduced earlier this year, was intended to make arbitration mandatory for construction defects claims, but failed to pass. House Bill 1279 requiring the consent of the majority of condominium unit owners to bring a claim, as opposed to just the HOA board, passed this session. Developers supported both of these bills as a means to decrease the amount of construction defects claims that would be brought, thereby spurring more condominium projects in Colorado.

Developers and builders have blamed expensive and time-consuming litigation brought by homeowners associations (“HOAs”) for the drastic decrease in condo construction in the Denver metro area over the last ten years. They often weigh the potential for litigation and cost of insurance when planning projects, and, as of late, have more often than not decided against pursing a project due to the risk of incurring those costs borne from construction defect claims. Many in the industry feel that the ruling in Vallagio will help to reverse that trend. Scott Smith, CEO of the Colorado Association of Home Builders, speaking to the Denver Post, was enthusiastic about the decision, and hoped that it would “start to reduce the risk of unnecessary and costly litigation, hopefully will encourage insurers to respond to the market, and eventually will lead to the development of attainable condo projects.”

The Vallagio decision examines language in a condominium declaration and allows condominium developers to reserve rights to themselves. In this case, a developer executed a condominium declaration containing a provision stating that the declaration could not ever be amended without the written consent of the declarant (i.e., the developer) (the “consent-to-amend” provision). The declaration also included a requirement that all construction defect claims be submitted to binding arbitration (the “arbitration provision”). When a subsequent construction defect claim arose, the unit owners voted to amend the declaration to remove the arbitration provision without the consent of the developer, and then the HOA board filed a lawsuit against the developer for the defect in lieu of binding arbitration.

In the 5-2 ruling, the Court, affirming the ruling of the Colorado Court of Appeals, held that the developer can retain in the declaration creating the condominium project a right to consent to any proposed amendments to the declaration by the HOA. Specifically, the Court held that (1) the Colorado Common Interest Ownership Act (“CCIOA”), codified at §§ 38-33.3-101 to -402, C.R.S. (2016), permits a condominium developer to retain the right to consent to the HOA’s declaration mandating arbitration of a construction claims, and (2) the Colorado Consumer Protection Act (“CCPA”), codified at §§ 6-1-101 to -1121, C.R.S. (2016), does not preclude arbitration of claims asserted under that Act.

Writing for the majority, Justice Richard Gabriel, describing the language and legislative intent of CCIOA and CCPA, noted that, in adopting CCIOA, the General Assembly specifically endorsed and encouraged associations, declarants and other parties to make use of public and private dispute resolution. In addition, he wrote that “[i]ndeed, the consent-to-amend provision appears to be fully consistent with both CCIOA and Colorado’s public policy favoring arbitration as a mechanism of alternative dispute resolution.” Justice Gabriel concluded “that because the unit owners did not obtain the Declarant’s consent to remove the arbitration provisions, the attempted removal was ineffective and the declaration’s arbitration agreement remains in force.”

However, the two dissenting justices believe that the majority opinion in Vallagio gives developers too much power to control HOAs indefinitely. In her dissenting opinion, Justice Monica Marquez expressed concern that the majority’s interpretation of the consent-to-amend provision gave the developer too much power over the unit owners. She argues that the majority’s “logic will permit declarants to control HOA affairs in 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.”

HOA advocates are also disappointed with the ruling. In a statement, Build Our Homes Right chairman Jonathan Harris said “[t]he court has decided that powerful developers can control homeowners associations until the end of time, not only in construction defect claims, but on everything from their right to a jury trial in any kind of dispute, to issues relating to assessments and how homeowners use their own homes. That is outrageously unfair.”

Through the reduction in construction defects claims expected from the combination of House Bill 1279 and the Vallagio decision, developers will likely begin to invest in more condominium projects, which should help to fill the high demand for Front Range housing. However, it remains to be seen whether this ruling will tip the scales towards condominium owners to the detriment of the rights of HOAs and unit owners.