Colorado: heated controversy over how to handle construction defect claims

By Deborah Goonan, Independent American Communities Blog

Suppose you purchase a condo in the Denver metropolitan area, and after a few years, you and several of your neighbors discover water leaks, resulting in damage to your units? After multiple complaints, your condo association hires an expert to get to the root cause of the problem, and discovers construction defects in the roof or plumbing.

What can owners do?

Colorado state law allows the HOA Board, acting on behalf of its members, to file a defect claim and to pursue reimbursement for repairs from the developer and construction companies, within the warranty period.

But critics of the current statute say the law makes it too easy for Associations to engage in expensive construction defect lawsuits. They say too many of the claims are frivolous, and that the lawsuits drag on for years, and make it difficult to sell condo units during that time. Developers complain that they can no longer obtain affordable liability insurance in Colorado, because the state experienced a spike in claims after laws made it easier for condo owners to seek financial restitution and compensation for damages.

On the other hand, condo owners say they are victims of shoddy construction that was not discovered prior to occupancy. Why was there no quality control? Where were City and County Code Inspectors? Why should owners now have to pay to repair the damage done, the high costs to “make it right,” and allow the responsible parties to escape liability?

How might special interest legislation affect condo owners?

The controversy in Colorado is a result of a tug-of-war that has been going on for at least the past decade. It pits developers and construction companies – aligned with City Mayors – against condo owners and state Legislators that want to preserve rights of owners to file a civil lawsuit – or a class action on behalf of association owners – in order to obtain financial relief.

For the past three years, without success, City Mayors and developer interests have been pushing hard to reduce the likelihood of construction defect lawsuits. Here’s what they want to do, and what it means for condo owners:

• By statute, require all condo associations to engage in binding arbitration to settle construction defect disputes, with no option to pursue a civil suit. The rationale for this according to supporters: it will reduce legal costs for home builders, make insurance policies affordable, and make condo construction more “affordable.”

The question is, affordable for whom? It might make construction costs lower, and possibly translate to lower prices for home buyers. But what good is an “affordable” home if the quality is poor, and it’s riddled with defects that become costly to repair? Who wants to live with that hassle and stress?

• Uphold provisions in Condominium governing documents that require binding arbitration, and prevent Association members from amending those documents, unless the home builder also approves the amendment removing his/her right to Arbitration-only settlements.

Now, let’s use some common sense. No home builder will willingly expose him- or herself to additional potential liability. Owners lose again. This is the kind of one-sided provision that should be legally prohibited in Association-Governed Residential Community documents in the first place. Instead, it’s buried in pages of a legally binding, non-negotiable “contract” and called a Declaration of Condominium or Covenants, Conditions, & Restrictions. (CC&Rs)

• Force Association Boards to notify owners of a pending lawsuit (a good thing), and then require a majority vote of condo owners before proceeding with litigation (not so good).

Let’s consider the reality of collective ownership in a condominium association. First of all, if the developer still owns most of the units – because they remain unsold or leased by the developer to tenants – obtaining a majority vote from the owners experiencing construction defect problems is highly unlikely.

And then there’s the typical infighting. If a leaky roof is the problem, the owners on the top floors will be directly affected and might favor litigation, but owners on lower floors might be swayed away from a civil suit, because there’s no damage to their units, and what if they want to sell?

The Association’s Board is supposed to act on behalf of all owners. Of course, the roof is a major part of the building’s infrastructure, and therefore the fact that not every member is directly affected by water leaks should not be an issue. It’s a matter of cost to repair vs. long-term benefit of pursuing litigation to the association. But that’s likely to be undermined by skewed agendas and internal politics. Requiring a member vote just takes the heat off Condo Board and gives the false illusion of a democratic process.

Is there a fair middle ground? Tell me what you think.