CO Supreme Court decision may please home builders, but can home buyers count on safe, well-built homes?
By Deborah Goonan, Independent American Communities
A recent Supreme Court decision in Colorado proves, once again, that stakeholders in the real estate industry such as developers and home builders, hold an unfair legal advantage over homeowners.
The fix was in when governing documents for Vallagio at Inverness Residential Condo Association’s were created by Metropolitan Homes, Inc. – before the project even broke ground or sold a single unit.
Seeking to avoid the possibility of construction defect litigation in the future, Metropolitan Homes added two onerous stipulations to its Declaration of Covenants, Conditions & Restrictions governing the condo association. The first condition was that the condo association would be required to resolve all claims of construction defects through binding arbitration. The second limitation on condo association rights was to require the consent of Metropolitan to approve any proposed amendment to the Declarations (CC&Rs) that would remove the requirement for mandatory binding arbitration, even after control of the association has been legally transferred from the developer to a homeowner controlled board.
In 2013, two-thirds of members in Vallagio’s owner-controlled association voted to rescind the binding arbitration provision in their governing documents. But Metropolitan Homes sued the association for failing to get the home builder’s permission to remove the binding arbitration requirement.
According to reports in The Denver Post, a lower court sided with Vallagio condo association, but the appeals court agreed with Metropolitan Homes. The Supreme Court ruling upholds in favor of the home builder, and has far-reaching implications for how association-governed communities will pursue construction defect claims in the future.
Homeowner advocates point out that the decision is likely to prompt developers to include the same one-sided stipulations in all future Declarations applicable to new construction, or to amend current documents while still holding voting control of association-governed, common interest communities.
Colorado Supreme Court gives a boost to builders in construction defects battle
Ruling strengthens developers’ hand against condo owner-occupiers in debates involving arbitration vs. lawsuits
By JOHN AGUILAR | email@example.com | The Denver Post
PUBLISHED: June 5, 2017 at 10:50 am | UPDATED: June 5, 2017 at 5:36 pm
In a ruling that could stir near-dormant multifamily home construction in Colorado, the state Supreme Court on Monday ruled that a homeowners association was wrong to sue a builder after disregarding bylaws that require binding arbitration to settle claims of construction defects.
The association’s key misstep, the court said in a 5-2 ruling, involved its bid to change the rules to allow litigation without getting the consent of the development’s builder.
“Because the unit owners did not obtain the Declarant’s written consent to remove the declaration’s arbitration provision, the attempted amendment was ineffective,” the court majority ruled. “Consequently, the Association remains bound by the arbitration agreement …”
The ruling in the case Vallagio at Inverness Residential Condo Association vs. Metropolitan Homes Inc. has potentially far-reaching implications for both homeowners and builders. Advocates of homeowner’s associations have steadfastly argued for owners’ right to sue over slipshod workmanship on what is often their biggest life investment.
Conversely, the construction industry has long blamed litigation — and the heavy costs of defending a defects case in court — for slowing new condo projects in the metro area to a trickle. Data show that condos consisted of roughly 1 in 5 housing starts in the state a decade go but are around 3 percent of all starts today.
Most infuriating about the Colorado Supreme Court 5-2 ruling: the court merely considered whether or not the condo association violated the Covenants and Restrictions, without addressing the larger issue of whether or not a developer or home builder’s restrictions were, in and of themselves, blatantly unfair or unconstitutional.
But history repeats itself. The U.S. Supreme Court sidestepped the issue of racially restrictive covenants in Shelley vs. Kraemer, back in 1948. It took another 20 years to definitively outlaw restrictive covenants in the Fair Housing Act of 1968.
See the reference section below for further details. Notice the familiar language used by the courts, both then and now, stating that individual homeowners have the right to agree to private restrictive covenants or “contracts.” In the 1950s and early 1960s, it was socially acceptable to perpetuate harmful restrictive covenants for the purposes of protecting property values.
But today, most Americans find racial, ethnic, and religious deed restrictions unacceptable.
Today’s CC&Rs – usually enforceable by a homeowner, condominium, or cooperative association – commonly contain provisions that unduly limit private property rights, make a mockery of due process, covertly discriminate by using rule enforcement as a sword, and create an unfair economic advantage for developers and other well-funded real estate stakeholders.
The twisted logic in legal circles goes something like this:
You agreed to follow the terms of a legal contract that is one-sided, blatantly unfair, discriminatory against the individual and in favor of the developer and/or the association, vague and difficult to understand, potentially abusive, and one that you had no part in writing.
Now live with it.
Our greatest legal experts and judges in our courts have not yet displayed the courage to challenge the substance of restrictive covenants that form the basis for residential communities for more than 60 million Americans.
And our policymakers, including state and federal Legislators, have been painfully slow to recognize the inherent injustice, and to amend and enact laws that truly serve the public interest.
Why the failure to act?
In Colorado, and in other states plagued by construction defect litigation, the justification for continuing this charade is the need for “affordable” multifamily housing in the form of condominiums and possibly townhouses. Local governments and real estate professionals fret that there is not enough housing for first-time buyer millennials and down-sizing seniors.
Their “solution” is to convince developers to finance and build more condos at prices that are low enough for households with average or below average incomes.
But home builders are only interested in entertaining the notion of building new condos if they can sidestep the possibility that they may be sued in the future. Now that developers and home builders can create and amend restrictions with regard to construction defect claims, proponents claim that builders will start to build condos again.
You might recall that recently enacted legislation, HB 1279, now requires a majority of condo association members to vote to approve filing a lawsuit involving construction defect claims. In other words, a condo association board is no longer able to decide to pursue litigation without ample notice and obtaining the required vote of membership.
Between HB 1279 and the Supreme Court decision, condo owners face a considerable risk. If they purchase a condo and later discover construction defects, owners will have little chance of getting the builder to reimburse their association for mounting costs to correct problems that inevitably occur with poor design and shoddy workmanship.
How about some Real solutions?
1) Preventing poor construction is common sense. Begin by raising construction standards:
a) Implement more frequent and thorough inspections by the County or Municipality.
b) As a key component of economic development, invest in high quality training for the next generation of design and construction professionals. There are wonderful career opportunities for young people who do not want to attend – and pay for – a four year college.
c) Reward developers who invest in solid construction that is built to last. Quality construction does not require costly, labor-intensive maintenance, making homeownership more affordable in the long run. Local governments need to work with developers to build a legacy, rather than hastily building homes and communities destined for functional obsolescence in 30-40 years – or even less.
2) Although it may sound radical, why not do away with developer control of association governed communities? Developer control only shields home and community builders from liability, while shifting cost burdens to consumers and taxpayers. The housing market needs to return to the previous policy of allowing the free market to weed out developers who churn out shoddy construction and poor design.
3) Prohibit provisions in sales contracts or governing documents that limit due process and property rights of consumers.
Further reading on restrictive covenants and fair housing:
1948: Shelley v. Kraemer (The Fair Housing Center of Greater Boston)
1948–1968: Unenforceable Restrictive Covenants
Despite the Supreme Court decision declaring the enforcement of racially-based restrictive covenants (see Shelley v. Kraemer), the practice remained commonplace. The Court found that the covenants themselves were not invalid, thus allowing private parties to continue to voluntarily adhere to the restrictions.
1968: Federal Fair Housing Act