February 21, 2017

The Latest (and Greatest) Colorado Construction Defect Reform Bill—SB17-156

By: Rebecca Dow

The lack of more affordable housing in Colorado has been well documented over the last several years, and there have been a number of attempts to address reform of the current laws by legislative action.  More than 13 communities with 2.5 million residents have passed local ordinances to promote condo development to provide owner-occupied, multi-family housing by putting in place reforms to reduce the threat of expensive, time-consuming litigation over construction defects.  Since 2015, a broad, bipartisan coalition of mayors, economic development groups, affordable housing groups, and representatives of the construction and housing industry (the Homeownership Opportunity Alliance or HOA) have attempted to find a state-wide legislative solution to the housing crisis.  The HOA notes that condos are only 3.4% of new housing starts in the Denver metro area, compared to 20% in 2007.

The HOA’s most recent construction defect reform bill (SB156)  was introduced on February 1st in the Colorado legislature, offering a more robust reform proposal regarding construction defect disputes.  SB156 as introduced appears to be an improved version of SB177, which was introduced in 2015, and ended in a quick death in a “kill” committee in the Senate.  The 2017 bill includes the previous bill’s provision that prevents the removal of binding arbitration clauses in the declaration of a common interest community, and states that any amendment or removal of a mediation or arbitration provision in a common interest community declaration cannot apply to claims that were originally described in the declaration.  This means that an amendment or removal of a binding arbitration provision in the association declaration will not be applicable to a construction defect claim. This new and improved bill makes this protection also applicable to non-CCIOA party wall agreements, REAs and similar documents, which contain mediation or arbitration requirements–protecting those documents from amendments to strip out mediation or arbitration provisions for construction defect claims.

SB156 includes requirements related to arbitration or mediation, and that failure to follow the substantive law of Colorado is grounds for a district court to vacate or refuse to enforce the arbitrator’s award. The bill requires mediation before arbitration or litigation. The bill specifies that the mediation or arbitration must take place in the judicial district in which the community is located and that the arbitrator must:

  • Be a neutral third party;
  • Make certain disclosures before being selected; and
  • Be selected as specified in the common interest community’s governing documents or, if not so specified, in accordance with applicable state or federal laws governing mediation or arbitration.

The new bill requires that, before a construction defect claim is filed on behalf of the association:

  • The parties must submit the matter to mediation before a neutral third party; and
  • The association board must give advance notice to all unit owners, together with a disclosure of the projected costs, duration, and financial impact of the construction defect claim, and must obtain the written consent of the owners of units in the association.

The vote of the owners (excluding the declarant), and not just the association board, is required before a construction defect claim may be brought. SB156 provides that the vote of a majority of the owners is required unless the governing documents specify a greater margin, and if so, then that margin applies.  This is beneficial to a developer/declarant because most declarations require a 67% vote of the owners to amend, which voting percentage would be protected under SB156.  This is an improvement to the prior bill for developers.

The bill also adds to the disclosures required prior to the purchase and sale of property in a common interest community related to binding arbitration of certain disputes. The revised disclosure would be for all residential contracts executed on or after January 1, 2018.

The bill was introduced in Senate and assigned to the Business, Labor, & Technology Committee.  No action has been taken on the bill, and it has been reported that the Metro Mayors Caucus is planning to urge lawmakers to give SB156 a full hearing.  The HOA believes that passage of the bill would encourage construction of more affordable and multi-family housing, and protect homeowners by giving them the right to knowledge of, and consent to, litigation by their association that could affect their home value, while not limiting a single homeowner from pursuing legal action for construction defects against their builder.