Colorado Real Estate Journal - June 17, 2015
It is no secret there is a historical low in residential properties for sale in the - Denver metropolitan area. One of the key economic causes of the housing market’s current state is the almost absent construction of condominiums. According to Metrostudy, for example, at the peak of the market in 2005, more than 4,000 condos were either built or converted in the Denver-metro area, whereas, in 2014, a mere 289 condos were built. This drop was not the product of a decline in demand; to the contrary, 2014 was a record year for re-sales (about 9,900) of existing condos. Condos provide an affordable housing option in a robust economy, especially for the growing millennial workforce in Colorado and the aging workforce looking to downsize as they become empty-nesters and retirees. However, construction defect litigation – including the near certain prospect of litigation – has stifled new development. During the last three legislative sessions, attempts to reform Colorado’s construction defect laws – in particular, the Colorado Common Interest Ownership Act, known as CCIOA, which governs condo communities and homeowners' associations – failed to reach the governor’s desk. The most recent effort to fall short was Senate Bill 177, a bipartisan effort in the Colorado Senate to address critical construction defect issues. The bill specifically took on an all-too-common problem concerning arbitration provisions in community declarations. Developer-declarants, those who build the condo community and establish the HOA, routinely include in the declaration a provision requiring binding arbitration of construction defect disputes. CCIOA expressly permits arbitration of such disputes and Colorado law has long favored arbitration as an alternative to civil actions in court. In conjunction with the arbitration requirement, a provision requiring the declarant to consent to any future amendment or removal of the arbitration clause would be included in the declaration. Despite these developer efforts in the governing documents, HOAs would later vote to remove the arbitration requirement without obtaining the requisite consent and then proceed to court with construction defect claims. Senate Bill 177 was meant to address these issues and make the declarantconsent provisions enforceable. The bill passed the Senate and was believed to have sufficient bipartisan support to pass a vote of the entire House of Representatives. But the bill failed to escape a House committee known as a “kill committee.” On May 7, less than 24 hours after the Colorado legislative session ended and just over a week after Senate Bill 177 died in a House committee, the Colorado Court of Appeals issued its published decision in the Vallagio at Inverness Residential Condominium Association Inc. v. Metropolitan Homes Inc., et al. case, a construction defects lawsuit that reached the appellate court. In this appellate case, the authors of this article drafted and filed an amicus curiae brief – a “friend of the court” brief – on behalf of a coalition of developers, chambers of commerce, trade organizations and business organizations, presenting arguments that declarations requiring declarant consent prior to the removal of an arbitration provision by homeowners are valid and enforceable under CCIOA. This published appellate decision addressed a major problem in Colorado’s construction defect laws that Senate Bill 177 was designed to correct: If the declaration includes a requirement that an arbitration clause cannot be removed without the declarant’s consent, that declaration means what it says, and that requirement is enforceable. In Vallagio, a condominium homeowners’ association brought a lawsuit against the developer/ declarant alleging construction defects. The declaration included a mandatory arbitration provision specifically for construction defect claims. That section stated that its provisions “shall not ever be amended without the written consent of Declarant and without regard to whether Declarant owns any portion of the Real Estate at the time of the amendment.” After the declarant turned over control of the project to the association, the unit owners voted to amend the declaration to remove the entire mandatory arbitration provision, without ever obtaining the declarant’s consent. Soon after the declaration was amended, the association filed a lawsuit in district court. The district court denied the declarant’s motion to compel arbitration, ruling the declarant consent requirement violated CCIOA and was void and unenforceable. An appeal followed. The Court of Appeals reversed on the CCIOA issues. The Court of Appeals opinion echoed the arguments in the amicus brief with respect to the CCIOA issues. Notably, the appellate court held the declarant’s consent was required to amend the arbitration provision under the terms of the original declaration, and the consent requirement was not void and unenforceable under CCIOA. The appellate court further held that requiring declarant consent for amendments does not limit any “power” of a homeowners’ association and that CCIOA does not prohibit a declaration from imposing the requirement of declarant consent for amendments. The court concluded: “Because the unit owners did not obtain Metro Inverness’ written consent, their attempt to remove the declaration's arbitration provision was ineffective.” The court went on to acknowledge that there may be intended third-party beneficiaries to the arbitration requirement within declarations – i.e., construction and design professionals – so long as they are specifically intended within the declarations. CCIOA is modeled after a national uniform act – the Uniform Common Interest Ownership Act. The Vallagio decision may have profound effects on similar issues on a national level. One of the characteristics of uniform acts such as UCIOA is that the adopting states are to look to one another on interpretation issues with a goal of maintaining uniformity across state lines. The clarity provided by the Colorado Court of Appeals, assuming the Colorado Supreme Court does not grant a request to review and overrule it, provides much needed guidance on a critical issue in Colorado construction defect law.