Bill Introduced to Strip Homeowners of Ability to Recover for Construction Defects

With one week remaining in the 2014 legislative session, Senate Bill 14 – 220 (“SB 220”) was introduced yesterday evening in the Colorado Senate. While it may seem to some that this bill was introduced too late in the session to have any chance of passage, with relaxed rules in place for the end of the session, a bill can technically make it through the entire legislative process in three days. This bill has been assigned to the Senate State, Veterans & Military Affairs Committee and the Senate Judiciary Committee. 

Sponsored by Senator Jesse Ulibarri (D-Commerce City) and Senator Mark Scheffel (R-Parker), the bill seeks to spur the construction of condominiums in Colorado. Unfortunately, the bill is so extreme that it would guarantee that owners of homes in HOAs would have no recourse against builders for defective construction. 

 

As introduced, here’s what the bill provides:

 

HOAs are not permitted to remove or amend mandatory arbitration provisions placed in declarations by developers. 

The language of the bill says that a requirement within the declaration to mediate or arbitrate “represents a commitment on the part of the unit owners and the association on which a developer, contractor, architect, or other person involved with construction is entitled to rely.” This choice of language is interesting; these mandatory arbitration provisions are placed in declarations unilaterally by developers and the homeowners have no ability to negotiate whether arbitration is an appropriate alternative to a jury trial. 

 

Unless the association can prove that the arbitration provider is unqualified, construction defect claims must be resolved by the arbitration service provider named in the declaration by the developer. 

 

It is not unusual for developers to require the use of arbitration service providers who are known for providing low awards for construction defects. This results in a very one-sided arbitration process and provides HOAs with no ability to participate in choosing the individuals who will sit on the arbitration panel. Further, in addition to the strong likelihood that the arbitration award for the defects will be much lower than a verdict from a jury, the association’s responsibility for the costs of the arbitration panel are taken off the top of the award for the defects. Taken together, this means an association victimized by defects will not be awarded enough money to make the required repairs. 

 

Regardless of what is required in the declaration, the arbitrator must be a neutral third-party as described by Colorado law. 

 

Colorado law provides that an arbitrator “who has a known, direct, and material interest in the outcome of the arbitration proceeding or a known, existing, and substantial relationship with a party may not serve as an arbitrator if the agreement requires the arbitrator to be neutral.”  This added requirement in the bill provides slim consolation because there is no “agreement” between the HOA and developer that the arbitrator must be neutral. In addition, it is highly unlikely that arbitration panels would be found not to be neutral, even when they are known for providing low awards to HOAs for construction defect claims.

 

If an HOA intends to institute any legal action (which would include proceeding to arbitration) for construction defects, the association would be required to prepare and provide the following disclosures to owners without the assistance of construction defect counsel:

           

The expenses and fees that the board anticipates will be incurred, directly or indirectly, in prosecuting the action, including:

 

·         Attorney fees, consultant fees, expert witness fees, and court costs, whether incurred by the association directly or for which it may be liable if it is not the prevailing party or that the association will be required, pursuant to an agreement with its attorney or otherwise, to pay if it elects not to proceed with the claim;

·         The impact on the value of the units that are the subject of the action, both during the pendency of the litigation and after its resolution;

·         The impact on the marketability of units that are not the subject of the action, including the impact on the ability of owners to refinance and buyers to get financing, both during the pendency of the litigation and after its resolution;

·         The manner in which the association proposed to fund the cost of the litigation, including any proposed special assessments or use of reserves; and

·         The anticipated duration of the litigation and the likelihood of success.

 

Without the assistance of construction defect counsel, how could an association possibly answer these questions and provide owners with meaningful disclosures? In addition, without first going through the initial phases of testing and working through the Notice of Claims process with the developer, it would be impossible for the association to provide meaningful notice on many of these issues. Frankly, these disclosure requirements set boards up for breach of fiduciary duty lawsuits. 

 

The mandatory disclosures outlined above must be provided to owners at least 60 days before the HOA is permitted to provide notice of potential claims to developers as required by the Construction Defect Action Reform Act (“CDARA”). 

 

If the defects were discovered late, the timing of these disclosures could result in an association not complying with applicable statutes of limitations and repose. This means that the association would be barred from pursuing construction defect claims against the developer. 

 

The disclosures outlined above must also be provided to owners before an HOA hires any experts or consultants or incurs or agrees to pay expert fees or consultant fees in connection with the construction defects. 

 

It is impossible to comply with some of the required disclosures without first obtaining the input from experts and consultants. Without their help, how could an association possibly provide a disclosure regarding the costs of consultation fees, expert witness fees, and the likelihood of success against the developer? 

 

Associations are not permitted to pursue developers for construction defects unless the association obtains written consents from owners holding at least a majority of the total voting rights in the association. This consent must be obtained directly from the owners and proxies are not permitted to be utilized

  

Obviously, it’s extremely challenging to obtain written consents in associations. This is magnified when attempting to obtain written consents from 51% of owners in large scale communities, mountain communities where owners literally can live all over the nation and the world, and communities that are largely made up of individuals in the military who may be deployed. This provision alone will make it impossible for many HOAs to ever pursue construction defect claims against developers. 

 

Every purchase and sales contract for a home in an HOA must include the following disclosure in bold-faced type:

 

The property is located within a common interest community and is subject to the declaration for such community. The owner of the property will be required to be a member of the owner’s association for the community and will be subject to the bylaws and rules and regulations of the association. The declaration, bylaws, and rules and regulations will impose financial obligations upon the owner of the property, including an obligation to pay assessments of the association. If the owner does not pay these assessments, the association could place a lien on the property and possibly sell it to pay the debt. The declaration, bylaws and rules and regulations of the community may prohibit the owner from making changes to the property without an architectural review by the association (or a committee of the association) and the approval of the association. The declaration for the community or the bylaws or rules and regulations of the association may require that certain disputes be resolved by mandatory, binding arbitration. Purchasers of property within the common interest community should investigate the financial obligations of members of the association. Purchasers should carefully read the declaration for the community and the bylaws and rules and regulations of the association. 

 

 

While this disclosure is not objectionable, we all know that purchasers of new homes rarely read these types of disclosures.   

 

When taking all of these provisions together, it becomes abundantly clear that this bill would successfully strip away all rights of homeowners living in HOAs from being able to hold developers responsible for their construction defects. This means that homeowners will be left paying the tab to repair such defects through special assessments or significant assessment increases. Without taking these difficult financial steps, the defects will go unrepaired and owners will be required to disclose the defects as part of any sales transaction. 

 

Keep your eye out for an important Call to Action from CAI on this extremely damaging piece of legislation that CLAC is calling the “Horrors of Homeownership Act.” 

 

 

Molly Foley-Healy is Chair of CAI’s Colorado Legislative Action Committee.