On May 22, 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 most 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 most 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) also must 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 increases in, or special assessments against, them and time limitations for starting 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 litigation.
Additionally, meeting notices must notify unit owners of the following:
- That proposed fee arrangements with attorneys and estimated litigation costs that could not be exceeded without board approval;
- That legal costs may or may not be recovered in litigation;
- The potential that their association (and owners) may be liable for attorneys’ fees and court costs that either may not be recoverable or that may be recovered against their association and them personally;
- That there would be no guarantee of recovery in litigation; and
- 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 seeks to inform condominium owners so they can better make informed decisions about whether to proceed with litigation or resolve their issues directly with the 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 vote by proxy is not addressed.
High Court Ruling
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 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, and so on.
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 of those questions:
- Many internal condominium governing papers called “declarations” or “covenants, conditions and restrictions” that are in effect in the state now require a 67% vote (“supermajority”) 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.
- Majority vote appears to be determined by the number of owners 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.
- 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.
- It is not entirely clear what effect the new Colorado statute will have upon local ordinances in more than 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.
- 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.
Albert B. Wolf is a principal in the Denver law firm of Wolf Slatkin & Madison PC.