Holme Roberts & Owen LLP wants to alert you to an imminent change in Colorado law that will have potentially significant effects on everyone directly or indirectly involved in residential development, including builders, contractors, architects, engineers, lenders, investors, and insurance companies. The current star of Colorado real estate development, mixed-use (including, transit-oriented) development, will be in jeopardy.

House Bill 07-1338 (“HB 1338”) threatens to arrest such development in Colorado by removing protections for construction professionals against liability for construction defects. Construction professionals include developers, builders, architects, contractors, subcontractors, engineers and construction inspectors. HB 1338 was prepared and promoted by construction defect lawyers. Although proponents of HB 1338 (strategically mis-named the “Homeowner Protection Act of 2007”) claimed the bill was intended to protect buyers of single-family homes, we expect that construction defect lawsuits filed in the future primarily will target condominium and town home projects, due to their high-dollar value and potential for larger settlements.

HB 1338 has passed both houses of the Colorado Legislature and was sent to the Governor. The Governor is required by law to sign or veto the bill within ten days. HB 1338 will become law before the end of the month, unless the Governor can be convinced to veto it. HRO is informing you about the content and implications of HB 1338 at this critical time so that you can voice your concern to Governor Ritter and consider changes in how you will do business if HB 1338 becomes law. A brief summary of the most troubling aspects and implications of HB 1338 is below:

Expanded Liability: Negotiated Limits on Liability are Illegal

HB 1338 voids any express waiver of, or limitation on, a residential property owner’s legal rights, remedies, or damages associated with an alleged construction defect. Although the bill does not specify particular waivers that will be invalid, we expect that several types of waivers typically contained in sales contracts (and also condominium declarations) and construction and design contracts would become illegal, including provisions that: (1) require owners to assert claims for alleged defects within one or two years after closing the purchase of the home; (2) require owners to waive certain types of damages, including triple damages under the Colorado Consumer Protection Act, consequential damages (i.e., lost profits), and non-economic damages (i.e., “pain and suffering”); (3) require owners to waive implied warranties (because the builder typically provides express warranties in lieu of the implied warranties); and (4) limit the amount a construction professional can be liable for to a specific maximum amount. To the extent a construction professional’s express warranty limits an owner’s rights, the warranty provisions also would be void. As a result, we expect many builders to consider dropping their express warranty programs. Other common provisions will be thrown into uncertainty and likely will be the subject of years of litigation to determine which provisions, if any, remain legal. This category includes: (1) provisions that allow a builder to repurchase a home from a buyer in order to resolve the buyer’s complaints about alleged defects; (2) provisions that allow a builder an absolute right to attempt to repair alleged defects; and (3) provisions in declarations that require owners in a homeowners’ association to vote in favor of commencing a construction defect lawsuit before the suit is filed. Moreover, these problems will apply not only to future developments, but also to previously completed and ongoing projects as well.

Immediate Unpredictability: HB 1338 is Effective Retroactively

If the concern about discouraging future development is not troubling enough, HB 1338 poses a separate problem for completed and ongoing projects. If enacted, HB 1338 will become effective immediately and will apply to actions filed on or after the date of passage. As a practical matter, that means that in many cases construction defect lawyers would be able to bring claims regarding homes that were built as long as eight years ago. Construction professionals could immediately face liability for alleged construction defects despite having entered into contracts that would have ended their liability exposure years earlier or would have limited it to a specified amount, for which the construction professional may have set aside a reserve. The development community has not prepared for this risk of exposure, and HB 1338 leaves it with little legal basis to rely on the terms of previously negotiated contracts. There are strong reasons to believe that HB 1338 is unconstitutional for this reason, and we expect a court challenge to be filed.

Potential Outcome: Arrested Development in Colorado

The heightened and unknown liability risk created by HB 1338 will chill development in Colorado. We expect that insurance companies providing liability coverage to construction professionals will exit the market or raise premiums substantially. We are also concerned that construction lenders (who would face liability exposure if they foreclose and complete projects) and equity investors will be very concerned and will restrict their involvement in the Colorado market. Given the complexity of developing and financing condominium projects (particularly, mixed-use projects), and especially those done as transit-oriented developments, these types of projects will be hit hardest. Unfortunately, this will come at a time when many municipalities are looking at transit-oriented developments, and other mixed-use projects, as the most desirable method of revitalizing distressed areas and promoting local economic development. Other communities that are likely to suffer are resort areas, with their heavy dependence on more dense residential and mixed-use development. California’s experience with construction defect claims is not comforting. Between 1986 and 1993, the number of building permits obtained in California for multi-family projects fell by more than 90%. In an effort to avoid a similar fate in Colorado, HRO would like to make you aware of HB 1338 and offer assistance in answering your questions and revising your business model in response to this legislation.