Rebecca W. Dow | Holland & Hart LLP | May 23, 2017
Construction defect litigation reform will take a small step forward this week when Gov. John Hickenlooper signs HB 1279 on May 23, 2017. HB 1279 will go into effect immediately after signature by the Governor, and developers and residential builders will need to be aware of certain aspects of the law. HB 1279 has been much touted as a bipartisan effort toward addressing the housing squeeze in Colorado, as reflected by just 3.4 percent of new housing starts in 2016 being for sale condominiums in the Denver metro area. HB 1279 passed unanimously by both the House and the Senate on May 4, 2107. This is the first piece of legislation passed in the last several years to address any aspect of construction defect litigation reform, although during that time more robust construction defect reform ordinances have been passed by approximately 12 cities and counties in Colorado. HB 1279 offers some pluses to developers/builders, but also contains some pitfalls, as discussed below. Finally, this article will provide some practical pointers for residential construction under HB 1279.
PLUSES OF HB 1279:
- Majority approval of the owners is required to bring construction defect litigation in a common interest community, as compared to the current approval of only the board of the homeowners association (typically three owners).
- Owners are required to be provided notice of a proposed construction defect action, together with 10 specified disclosures, including the potential for increased costs for repair of alleged defects; the applicable legal deadline for filing the claim; that owners might owe a duty to disclose known defects until repaired; the fee arrangement with the association’s counsel; disclosure of other costs related to the action, such as expert fees; that if the action does not prevail then owners may be responsible for paying their own fees and the fees of the opposing party; that the association may not recover enough funds to repair the claimed defects; until claimed defects are repaired the market value of the units might be adversely affected; and until claimed defects are repaired, owners might have difficulty refinancing or buyers might have difficulty obtaining financing.
- Prior to the vote by the homeowners, a meeting must be held and the developer/builder is invited to attend and will have an opportunity to address the owners concerning the alleged defect, which developer/builder may, but is not required to, include an offer to remedy the defect.
PITFALLS OF HB 1279:
- Homeowners associations and their attorneys are expressing dissatisfaction with the breadth of the required notice, citing costs and expertise to make such disclosures, and are arguing that such disclosure requirement is potentially a violation of the First Amendment’s prohibition of forced speech, which means basically, that the government cannot compel a corporation to make statements of value, opinion, endorsement, or statements of fact that the corporation would rather avoid.
- State preemption of the numerous city and county ordinances under an argument that construction defect reform is a matter of state interest, as evidenced by HB 1279, has become a greater threat.
- Majority approval by the owners does not include “nonresponsive” owners, which is not defined other than to state that if the vote is challenged, the court shall consider whether diligent efforts were made to contact the owner, whether mail was undeliverable, whether the owner is occupying the unit, and if other contact information such as email or a phone number were used. The majority vote also does not include owners of home types different from the product type subject to the claimed defects, even if in the same association. Votes of lender-owned units are not counted, nor are units owned by a broad list of development parties, including any person responsible for any part of the design, construction or repair of any portion of the community and their affiliates and spouses.
- The statute of repose and limitations is tolled during the voting process, and the association has 90 days after mailing of the notice to the owners in which to obtain the vote.
- No vote is required if the defect is in a nonresidential facility and the cost to repair does not exceed $50,000. Approval by the owners is not required for the association to proceed with litigation “when the association is the contracting party for the performance of labor or purchase of services or materials”. This appears to refer to work performed by the association; however, the drafting is overbroad and could arguably exempt owner approval for litigation if the association is the contracting party to repair the claimed defect.
PRACTICAL POINTERS FOR HB 1279:
- Developers/builders will need to continue to implement numerous strategies to attempt to mitigate risks of construction defect litigation, such as third-party inspections; owner-controlled or contractor-controlled wrap insurance programs; imposing binding arbitration through plat notes, declarations, and retail sales contracts; avoidance of common interest communities when possible; and best practices as to reserve studies, disclosures to homebuyers and turnover procedures to associations.
- Many current declarations contain notice and voting procedures with requirement of 67% approval by owners to bring litigation, and will conflict with HB 1279. These declarations should be reviewed, and if possible, amended; particularly to separate binding arbitration provisions from notice and vote provisions that may conflict with HB 1279. Future declarations should be updated to reflect the new law, with the caveat that HB 1279 may be challenged in court due to the “pitfalls” noted above.