Proposed legislation to reduce the cost of construction defect claims and encourage condominium construction has been introduced in the Colorado legislature. The long-awaited bill, Senate Bill 14-220, sponsored by Sen. Jessie Ulibarri (D-Commerce City) and others, was introduced on April 30, just one week before the current legislative session ends on May 7. If the bill becomes law, it could reduce the number of construction defect claims filed against developers, contractors and others involved in condominium projects and other types of common interest communities and would result in more claims being decided by arbitration instead of jury trial.

Background

The bill is the culmination of months of discussion and study by various people and organizations that have an interest in the development of condominiums and other communities governed by the Colorado Common Interest Ownership Act (or “CCIOA”) [1]. In October 2013, the Denver Regional Council of Governments issued a study that concluded construction defect claims add $15,000 to the cost of every condominium unit [2]. The same study reported that in 2012 and 2013 (through the report date), no permits were issued for new condominium construction in downtown Denver [3]. Various organizations and public officials have supported legislative action to address construction defect claims and encourage new home construction.

What the Bill Does

1. Promote Alternative Dispute Resolution. The bill would result in more arbitration of construction defect claims involving homes in CCIOA communities. Many CCIOA declarations recorded for those communities include provisions requiring arbitration of construction defect claims. However, after an alleged defect is discovered, it is common for a homeowners’ association (“HOA”) to amend the declaration to delete the arbitration provision and then sue in court and demand a jury trial. This is permissible under current law if the declaration or bylaws governing the community do not restrict amending or deleting an arbitration provision [4]. Senate Bill 220 would change existing law to provide that any amendment to a CCIOA community’s declaration, bylaws or rules and regulations that would modify or delete a requirement for arbitration or mediation would not apply to construction defect claims based on alleged acts or omissions that occurred before the amendment. Thus, if the declaration or bylaws contain an arbitration provision, in most situations the parties involved in constructing the project (and their insurers) could be more confident that any claims would go to arbitration and not litigation. The bill also says that claims will be resolved by the arbitration service provider specified in the declaration, bylaws or rules unless the HOA proves the arbitration service provider is unqualified.
2. Require More Pre-Claim Disclosure to Unit Owners. Currently, before serving a construction defect lawsuit, the HOA must provide information to all unit owners regarding the nature of the action, the relief sought and anticipated fees and expenses [5]. Some view these existing disclosures as inadequate. The proposed legislation would require more disclosure to unit owners before an HOA serves a notice of claim or hires experts. The disclosures would address attorneys’ fees, expert fees and other costs of pursuing the claim; the claim’s impact on marketability and value of units and the ability to get financing; the duration of the claim process; and the likelihood of success on the claim. These disclosures would have to be drafted by someone other than the HOA’s construction defect attorney. The bill also requires that contracts for the sale of homes in CCIOA communities notify buyers that disputes may be required to be resolved by binding arbitration.
3. Require Majority Vote to Commence an Action. The bill would put in statute a requirement that a simple majority of unit owners consent to filing a construction defect action. This provision may conflict with the voting provisions in some declarations, which currently may be drafted to require 67% (or some lesser supermajority) of unit owners to approve filing a defect action. If the bill becomes law as currently drafted, it might be construed to override supermajority provisions in existing declarations and likely would prohibit future declarations from requiring more than a simple majority vote to file a defect action.

Prospects and Potential Impact

The bill’s prospects in the legislature are unclear. It has substantial support and substantial opposition. Being introduced so late in the session, the bill's prospects for passage appear low, but the bill may help frame the future debate on construction defects.

Arbitration has long been a favored method of dispute resolution under Colorado law [6]. CCIOA expressly allows a common interest community’s declaration, bylaws or rules and regulations to require disputes be resolved by binding arbitration [7]. Many construction-related contracts contain arbitration provisions. Accordingly, many contractors and others in the construction industry are expected to support the bill.

If the bill passes and becomes law, the most significant impact is likely to be that more defect claims will go to arbitration instead of litigation. Some lawyers believe that defect claim arbitration awards generally are lower than jury verdicts. Arbitration sometimes is less expensive than litigation. For these reasons, the bill may tend to reduce the total cost of construction defect claims.

The bill’s impact on the insurance industry remains to be seen. It is possible insurers will view the legislation favorably to the extent they believe its provisions will reduce the overall cost of construction defect claims. If so, the bill may induce insurers to expand construction coverage operations in Colorado. However, like other aspects of the bill, the reaction of the insurance industry to the bill is not yet clear.

For the reasons stated above, passage of the bill could be good news for developers and their lenders and investors. To the extent the bill can lend some certainty to the process of planning, negotiating and budgeting for development, the real estate industry and its buyers should benefit.

Conclusion

Developers, contractors, insurers, attorneys and others interested in common interest community construction defect claims will want to monitor what happens with Senate Bill 220. Sherman & Howard’s construction, real estate and insurance recovery groups will be closely following the bill and its impact on real estate development, construction defect claims and insurance.

[1] C.R.S. §§ 38-33.3-101 through -402.

[2] Economic & Planning Systems, Inc., Denver Metro Area Housing Diversity Study at 43 (Oct. 29, 2013), at http://www.drcog.org/documents/123065-Report 102913_final.pdf.
[3] Id. at 18.
[4] See Eagle Ridge Condominium Ass’n v. Metropolitan Builders, Inc., 98 P.3d 915, 918 (Colo. Ct. App. 2004), abrogated on other grounds, Ingold v. AIMCO/Bluffs, L.L.C. Apartments, 159 P.3d 116 (Colo. 2007). At least one district court has distinguished Eagle Ridge, and held it did not apply, where a declaration expressly required the consent of the developer and contractor to amend or delete the arbitration provision.
[5] C.R.S. § 38-33.3-303.5(2)(b).
[6] See, e.g., C.R.S. § 13-22-201 through -230 (Uniform Arbitration Act); City and County of Denver v. District Court, 939 P.2d 1353, 1361 (Colo. 1997) (arbitration long recognized as “a convenient, speedy and efficient alternative to settling disputes by litigation”) (citation omitted).
[7] C.R.S. § 38-33.3-124(3).