Colorado Court of Appeals Gives Homebuilders the Gift of Arbitration

May 11, 2015

Colorado SB 177 died in a House of Representatives committee on Monday, April 27. The bill, which had already been passed by the Colorado Senate, would have given Colorado homebuilders several protections against construction defect lawsuits, including:

• requiring an HOA to get the approval of a majority of its homeonwers before instituting a construction defect lawsuit;
• requiring certain pre-litigation disclosures to the homeowners in a common interest community; and
• making arbitration requirements (which take away HOA jury trial rights) permanently embedded in a homeowners association’s governing documents, and entirely un-amendable

A number of Colorado municipalities have been trying to pick up the pieces for the homebuilder lobby by passing their own similar local ordinances. Lakewood, Lone Tree, and Littleton have done so, and several other cities threaten to follow that path as well. The legality and enforceability of such local ordinances is questionable, however, given the breadth of state-level statutes on construction defect claims, common interest communities, and arbitration which arguably preempt and preclude location legislation on those topics.

Entirely separate from the state and local legislative activity, the Colorado Court of Appeals just issued a decision that gives the homebuilders an apparently-unavoidable right to arbitration. In the condominium construction defect case of Vellagio at Inverness v. Metropolitan Homes, Inc. the Court determined that a provision of the plaintiff-Vellagio HOA’s Declaration requiring arbitration of construction defect claims, and which purported to require the declarant’s (the developer, Metropolitan Homes) consent to amend that provision out of the Declaration, was in fact un-amendable by the HOA. The Court upheld the Declarant’s attempt to maintain control over the actions of the HOA years after it had built and sold its last condominium unit and was no longer a member of the HOA in any form. The decision will certainly be appealed to the Colorado Supreme Court, so the recent decision may or may not be the final judicial word.

Nonetheless, the Court of Appeals appears to have given Colorado homebuilders the mandatory arbitration that they have been seeking in the last several State legislative sessions. If the logic of the Court were extended to things other than arbitration, there seems to be no reason now that other un-amendable provisions couldn’t be drafted by builders to get everything else that has been on their list of “wants”, including but certainly not limited to pre-litigation disclosures and homeowner votes before litigation can be instituted.

The Vellagio decision seems to nullify any need for state or local statutory help for the homebuilding industry. It will be interesting to see what continued or additional legislative efforts the homebuilding lobby pursues at this point though. It will also be interesting to see how quickly building permits for condominiums, townhomes, and other forms of for-sale affordable housing start to fly off the shelves in Colorado, now that homebuilders have obtained the protections they’ve been asking for for years. The already-growing number of for-sale multifamily projects should now skyrocket if the homebuilders were right, and if the threat of construction defect lawsuits was the only reason that kind of product hasn’t generally been built for the past few years. Time will tell…