Court Gives A Boost to Builders in Construction Defects Battle
Industry now could begin to meet pent-up demand
In a ruling that could stir near-dormant condo construction in Colorado, the state Supreme Court on Monday ruled that a homeowners association was wrong to sue a builder after disregarding bylaws that require binding arbitration to settle claims of construction defects.
The association's key misstep, the court said in a 5-2 ruling, involved its bid to change the rules to allow litigation without getting the consent of the development's builder.
"Because the unit owners did not obtain the Declarant's written consent to remove the declaration's arbitration provision, the attempted amendment was ineffective," the court majority ruled. "Consequently, the Association remains bound by the arbitration agreement..."
The ruling in the case Vallagio at Iverness Residential Condo Association vs. Metropolitan Homes Inc. has potentially far-reachinf implications for both homeowners and builders. Advocates of homeowner's associations have steadfastly argued for owners' right to sue over slipshod workmanship on what is often their biggest life investment.
Conversely, the construction industry has long blamed litigation — and the heavy costs of defending a defects case in court — for slowing new condo projects in the metro area to a trickle. Data show that condos consisted of roughly 1 in 5 housing starts in the state a decade ago but are around 3 percent of all starts today.
The building industry favors binding arbitration as a more streamlined way of dealing with allegations of defects, like leaky windows and sinking foundations. It cites the inevitability of being sued for construction flaws as one of the major reasons for declining condominium starts.
"Our members consider many factors, including the risk and expense of litigation and the coast of insurance, when making investments and taking on the risks of projects like condos," said Scott Smith, CEO of the Colorado Association of Home Builders.
He said Monday's ruling should "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."
Conversely, the homeowners advocacy group Build Our Homes Right said it was "deeply disappointed" by the ruling.
"The 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, "Build Out Homes Right chairman Jonathan Harris said in a statement. 'That is outrageously unfair."
A dissent from two of the justices, in an opinion written by Justice Monica M. Márquez, warned that letting builders rely on a "consent to amend" provision in the declarations of a condo project gives builders a "perpetual veto power" over how the community is governed.
Mari Perczak, the lead attorney representing the Vallagio HOA, said the court effectively gave additional license to builders that the legislature had never intended under state laws governing homeowners associations.
"It opens up the field for abuse and encourages self-dealing in the declarations by builders," Perczak said. "Now every new declaration will have these consent provisions."
Worse still, she contends, builders will likely stack the deck in their favor when it comes to binding arbitration by laying out in the founding documents a panel of arbitrators that put their interests first. Homeowner challenges will be nearly impossible under Monday's Supreme Court ruling, she said.
Amy Hansen, an attorney with Polsinelli Lawyers, said the ruling was a "major win for our state." Hansen's firm represented the builder in the Vallagio case.
"Now, if an association wants to change the rules of the game, the developer has to have a seat at the table," she said. "It brings certainty back to the development community in the way in which issues related to construction will be resolved."
Monday's ruling upholds one issued by the Colorado Court of Appeals in May 2015. That court overturned a decision by an Arapahoe County district court that determined that the consent-to-amend stipulation in Vallagio's founding documents violated Colorado law.
Monday's ruling was long awaited by those on all sides of the issue. Construction defects reform has been a hotly debated issue at the legislature for half a decade, and an attempt earlier this year to make arbitration mandatory in resolving disputes — in the form of Senate Bill 156 — came up short in the state legislature.
Lawmakers did manage to pass a single defects reform measure this session requiring the consent of a majority of homeowners — rather than just a development's homeowner's association board — before a claim can be lodged against a builder for shoddy workmanship. BAckers of House Bill 1279 said it's only fair to give homeowners a voice on proposed legal action that could prevent them from selling or refinancing their home.
Rep. Alec Garnett, D-Denver, was a chief sponsor HB1279. He said the ruling Monday puts Colorado in line with other states that have dealt with similar condo construction challenges. He said stakeholders, including the legislature should give the Supreme Court ruling a chance to play out before pointing fingers.
The combination of HB 1279 and the Supreme Court ruling on Vallagio, Garnett said, should give builders confidence that the legal environment around construction defects has significantly shifted in Colorado. And he called on developers to respond in kind.
"It's on the industry to break ground and meet the pent-up demand we're seeing across the Front Range," he said.
By John Aguilar for the Enterprise (6/12/17)
In a ruling that could stir near-dormant condo construction in Colorado, the state Supreme Court on Monday ruled that a homeowners association was wrong to sue a builder after disregarding bylaws that require binding arbitration to settle claims of construction defects.
The association's key misstep, the court said in a 5-2 ruling, involved its bid to change the rules to allow litigation without getting the consent of the development's builder.
"Because the unit owners did not obtain the Declarant's written consent to remove the declaration's arbitration provision, the attempted amendment was ineffective," the court majority ruled. "Consequently, the Association remains bound by the arbitration agreement..."
The ruling in the case Vallagio at Iverness Residential Condo Association vs. Metropolitan Homes Inc. has potentially far-reachinf implications for both homeowners and builders. Advocates of homeowner's associations have steadfastly argued for owners' right to sue over slipshod workmanship on what is often their biggest life investment.
Conversely, the construction industry has long blamed litigation — and the heavy costs of defending a defects case in court — for slowing new condo projects in the metro area to a trickle. Data show that condos consisted of roughly 1 in 5 housing starts in the state a decade ago but are around 3 percent of all starts today.
The building industry favors binding arbitration as a more streamlined way of dealing with allegations of defects, like leaky windows and sinking foundations. It cites the inevitability of being sued for construction flaws as one of the major reasons for declining condominium starts.
"Our members consider many factors, including the risk and expense of litigation and the coast of insurance, when making investments and taking on the risks of projects like condos," said Scott Smith, CEO of the Colorado Association of Home Builders.
He said Monday's ruling should "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."
Conversely, the homeowners advocacy group Build Our Homes Right said it was "deeply disappointed" by the ruling.
"The 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, "Build Out Homes Right chairman Jonathan Harris said in a statement. 'That is outrageously unfair."
A dissent from two of the justices, in an opinion written by Justice Monica M. Márquez, warned that letting builders rely on a "consent to amend" provision in the declarations of a condo project gives builders a "perpetual veto power" over how the community is governed.
Mari Perczak, the lead attorney representing the Vallagio HOA, said the court effectively gave additional license to builders that the legislature had never intended under state laws governing homeowners associations.
"It opens up the field for abuse and encourages self-dealing in the declarations by builders," Perczak said. "Now every new declaration will have these consent provisions."
Worse still, she contends, builders will likely stack the deck in their favor when it comes to binding arbitration by laying out in the founding documents a panel of arbitrators that put their interests first. Homeowner challenges will be nearly impossible under Monday's Supreme Court ruling, she said.
Amy Hansen, an attorney with Polsinelli Lawyers, said the ruling was a "major win for our state." Hansen's firm represented the builder in the Vallagio case.
"Now, if an association wants to change the rules of the game, the developer has to have a seat at the table," she said. "It brings certainty back to the development community in the way in which issues related to construction will be resolved."
Monday's ruling upholds one issued by the Colorado Court of Appeals in May 2015. That court overturned a decision by an Arapahoe County district court that determined that the consent-to-amend stipulation in Vallagio's founding documents violated Colorado law.
Monday's ruling was long awaited by those on all sides of the issue. Construction defects reform has been a hotly debated issue at the legislature for half a decade, and an attempt earlier this year to make arbitration mandatory in resolving disputes — in the form of Senate Bill 156 — came up short in the state legislature.
Lawmakers did manage to pass a single defects reform measure this session requiring the consent of a majority of homeowners — rather than just a development's homeowner's association board — before a claim can be lodged against a builder for shoddy workmanship. BAckers of House Bill 1279 said it's only fair to give homeowners a voice on proposed legal action that could prevent them from selling or refinancing their home.
Rep. Alec Garnett, D-Denver, was a chief sponsor HB1279. He said the ruling Monday puts Colorado in line with other states that have dealt with similar condo construction challenges. He said stakeholders, including the legislature should give the Supreme Court ruling a chance to play out before pointing fingers.
The combination of HB 1279 and the Supreme Court ruling on Vallagio, Garnett said, should give builders confidence that the legal environment around construction defects has significantly shifted in Colorado. And he called on developers to respond in kind.
"It's on the industry to break ground and meet the pent-up demand we're seeing across the Front Range," he said.
By John Aguilar for the Enterprise (6/12/17)
Trenton H. Cotney
Florida Bar Certified Construction Lawyer
Trent Cotney, P.A.
8621 E. Dr. Martin Luther King, Jr. Blvd
Tampa, FL 33610
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