Two weeks ago, the Colorado legislature voted to kill Senate Bill 177, the reform bill intended to correct laws in Colorado related to construction defect litigation. Due to the current, well-documented need for affordable “for sale” homes and condos in Colorado, developers and homebuilders may decide they cannot wait any longer to meet this need. This client alert provides tips and tactics for our developer and builder clients to help limit the risks of construction defect litigation against residential projects.
Tip No. 1 – Select a friendly municipality or county in which to develop, or convince your municipality to adopt construction defect reform.
Tip No. 2 – Benefit by last week’s Vallagio at Inverness Residential Condominium Association, Inc. vs. Metropolitan Homes decision by the Colorado Court of Appeals, upholding binding arbitration with properly drafted declarations of covenants, conditions and restrictions (CC&Rs).
Tip No. 3 – Control your insurance coverage.
Tactic No. 1 – Avoid use of a common interest community in your project.
Tactic No. 2 – Use third-party plan reviews and inspectors.
Tactic No. 3 – Limit your personal liability.
This client alert discusses only a few of the tips and tactics for a developer or builder in Colorado to mitigate the potential risk of construction defect litigation.
Tip No. 1 (back to top)
Currently, Lakewood, Parker, Lone Tree and Littleton have adopted ordinances requiring binding arbitration for construction defect claims and allowing a builder a right to repair. Other governmental entities – such as Douglas County – allow plat notes requiring binding arbitration on each plat. In 2015, more than 33 mayors, the Metro Mayors Caucus, the Colorado Municipal League, and the Douglas County Commissioners were members of the Homeowner Opportunity Alliance coalition in support of SB 177 that proposed legislative construction defect reform. SB 177 proposed: (1) mediation and arbitration as speedy and more affordable dispute resolution processes for construction defect claims; (2) additional disclosure requirements to homeowners of potential costs and impact of the claims; (3) allowing a majority of the homeowners to vote to approve litigation instead of two or three owners on the association board; and (4) specifying that if binding arbitration is amended out of the CC&Rs, such an amendment could not be applied retroactively against prior construction defect claims. SB 177 died in House Committee in late April 2015, but just days later, the Littleton City Council joined Lakewood, Parker and Lone Tree in approving an ordinance allowing builders a right to repair, upholding binding arbitration, specifying increased notice and requiring a majority vote of homeowners to initiate a construction defect lawsuit. Developers should encourage additional municipalities and counties to adopt similar construction defect reform.
Tip No. 2 (back to top)
The Vallagio Court, in its published opinion, upheld a provision in the CC&Rs that required consent of the declarant to any amendment of the CC&Rs to remove binding arbitration. Based on the Vallagio decision and other Colorado court decisions, we recommend that you:
- Include a binding arbitration clause in the CC&Rs and a well-drafted dispute resolution section.
- Specify in the CC&Rs that the binding arbitration provision cannot be amended without the consent of declarant (seeVallagio at Inverness vs. Metropolitan Homes, Inc., Colo. Court of Appeals Case No. 2014CA1154, decided May 7, 2015, at 2015COA65).
- Include language in the CC&Rs that the homeowners’ association (HOA) cannot incur any construction defect claim-related costs, retain a construction defect attorney or engineer, or institute a construction defect claim without obtaining the express written approval of a majority of all homeowners. Also, the CC&Rs should require that the HOA provide disclosure to all homeowners of the potential market value impact and estimated fees and expenses for such litigation. In addition, the CC&Rs should specify that any amendment to take out the arbitration provision will only be applicable to a future claim and not the current claim.
- Include a requirement in the CC&Rs that declarant/builder be provided with meeting minutes from HOA meetings through the statute of repose and limitations (the later of eight years after the (i) sale of the last home or (ii) turnover of control of the HOA).
- In the CC&Rs, allow declarant/builder the right, but not the obligation, to attend HOA meetings through the statute of repose and limitations.
- Do not include a prevailing party attorneys’ fee provision in the CC&Rs.
- Add a provision to the CC&Rs that declarant/builder is a third-party beneficiary through the statute of repose and limitations.
- Include the same protective provisions in the bylaws as are in the CC&Rs.
Tip No. 3 (back to top)
- Determine how the work will be insured. Do not allow exclusions for multi-family, residential or condominium construction in the insurance policy.
- Obtain an Owner Controlled Insurance Program (OCIP) or Contractor Controlled Insurance Program (CCIP).
- If there is an OCIP or CCIP, determine whether it covers design and construction or construction only. Confirm proper coverages and limits.
- If the OCIP or CCIP covers construction only, require that design professionals have proper coverages and limits.
- If there is no OCIP or CCIP, the general contractor must provide additional insured certificates (obtain binders) naming the developer as an additional insured, and the subcontractors must provide additional insured certificates (obtain binders) naming the developer and the general contractor as additional insureds─all for both ongoing and completed operations through the statute of repose and limitations (i.e., eight years).
Tactic No. 1 (back to top)
- Consider using a district in lieu of a common interest community or homeowners’ association (HOA) formed under the Colorado Common Interest Ownership Act (CCIOA). If you elect to use a CCIOA community, consider the size of the HOA and not using subassociations if both single-family and multi-family homes are to be built in the community (i.e., smaller HOAs have smaller budgets and resources for litigation; mixing product type may prevent a vote to bring a construction defect lawsuit under the CC&Rs if a majority of all homeowners must approve).
- Use a metropolitan or special improvement district to enforce the CC&Rs and to provide maintenance services without establishing an HOA under CCIOA, under a district’s broad statutory covenant enforcement powers.
- Consider using a party-wall agreement for townhomes and attached homes without establishing an HOA under CCIOA. This is accomplished by recording party-wall agreements against each building, requiring the owners to provide their own maintenance services.
Tactic No. 2 (back to top)
- Obtain a third-party peer review of the plans and specifications, especially key systems such as HVAC, exterior and structural components.
- Use a quality assurance/quality control (QA/QC) expert to oversee construction and conduct third-party inspections while the project is being built. Consider using one of the experts used by construction defect litigation attorneys. To select the appropriate QA/QC company, determine the ultimate goals to be achieved by hiring such a company. Interview the potential companies at length and define their scope of work to maximize the protection afforded. Adopt best practices and standards to be applied to the project.
Tactic No. 3 (back to top)
Consider use of a single purpose limited liability company for each project and/or building or phase. However, be mindful that this is not “bullet-proof” and that the corporate entity may not prevent individual liability. See “Piercing the Veil of an LLC or a 325Corporation,” by Herrick K. Lidstone, Jr., The Colorado Lawyer (August 2010, Vol. 39, No. 8, page 71). Consult with an attorney who specializes in entity creation and asset protection.