Arbitration and Majority Rules: Resuscitating Stagnant Colorado Condominium Development?

Earlier this month, the Colorado Supreme Court ruled in a 5-2 decision that binding arbitration agreements are valid in condominium construction defects cases and binding on homeowners’ associations that do not receive written consent to remove the arbitration provisions.  The case, Vallegio at Inverness Residential Condo Association vs. Metropolitan Homes Inc., is the most recent in a series of pro-condo-developer developments in Colorado law.  House Bill 1279 also passed this session.  The Bill requires the majority of homeowners, instead of a homeowners’ association board, to decide whether the raise a claim against a condominium developer for construction defects.  Backers of the bill said that it is more fair to homeowners to give them a voice in a dispute that could affect their homes’ resale value.

 

Colorado law has one of the most permissive statutes of limitations on construction defect cases on the books—only two years within the time the claimant or claimant’s predecessor in interest discovers, or should have discovered, the physical manifestations of a defect in the construction improvement that causes an injury.  C.R.S. § 13-80-104. Taken together, it seems as though the current climate in Colorado is shining warmly on encouraging condominium development, which has dropped from 20% of new development in Colorado in 2007 to about 3% today. 

 

This attitude only makes sense because of the increasing number of transplants to Colorado in recent years—almost 101,000 new residents between 2014 and 2015 alone.  Current numbers show the population influx evening out somewhat but it takes one glance at the property market in Denver alone to see what a challenge these newcomers present to a market so hot, the inventory of existing homes for sale is at historic lows.  The demand for affordable housing in Denver continues to go up but supply is down, which drives prices up. 

 

Condominiums and multifamily developments are an obvious solution to the problem.  If we can build up instead of out, residents in Denver will be able to stay in desirable areas without breaking the bank and possibly realize the American Dream of property ownership.  But is the best way to encourage condo development to deregulate and make it more difficult for homeowners to sue their developers?

 

Those in favor of the decision in Vallegio and HB 1279 would argue that these decisions put more power in the hands of homeowners.  The Bill makes it impossible for an HOA board to decide to bring a case without the consent of homeowners.  While the obvious consequence of this rule makes it more difficult to sue developers (majority of 100 unit owners is much more difficult to receive and calculate than a majority of a 10-person HOA board), it also purports to be in the interest of condo owners.  After all, why should they have to worry about changes in their property value based on a lawsuit brought by a sue-friendly HOA?  Then again, a well-settled rule of property law is predicated on sellers disclosing material defects as an exception to the general rule of caveat emptor.  So, if a homeowner wishes to avoid litigation to keep property value up, he or she would still have to disclose known issues with the property at the time of sale.  It is anyone’s guess whether making it more difficult to sue developers for condominium construction defects will be better or worse for homeowners in the long run but hopefully it will serve its purpose of encouraging development of much-needed multifamily housing in highly-populated areas of Colorado.

 

Vallegio seems at first blush to be more protective of developers than warranted but really, the decision simply upholds another well-settled rule of Contracts—that parties can and often do contract around any number of rights in their agreements.  After all, the court did not say that binding arbitration clauses are the norm in construction defects litigation for condos—merely that, since the HOA in the case agreed to a binding arbitration clause, it cannot sidestep the agreement and sue anyway, regardless of the injuries suffered. 

 

As litigation costs rise and the process is a dice roll in terms of favorable decisions, there is a trend in real estate and business law matters toward requiring arbitration in lieu of trial.  Deciding whether to acquiesce to arbitration over court is a decision to make at the start of a deal, not in the middle.  This is the heart of the Colorado Supreme Court decision in Vallegio, and a good rule to remember when embarking on any kind of project.  Because courts in Colorado hold parties to their word and require all parties to have a seat at the table if renegotiation is on the menu.  Regardless of the policy considerations or arguments about protectivism toward questionable real estate construction, the purpose of a contract is to keep deals consistent regardless of the direction in which they go.  And that, at the end of the day, is a strong reassurance for anyone engaged in construction or contract in Colorado. 

 

Sources and Additional Resources: http://www.cpr.org/news/story/why-is-denvers-housing-market-still-on-fire-supply-and-demand; http://www.denverpost.com/2016/07/07/colorado-second-population-growth-2015/; C.R.S. 13-80-104; http://www.denverpost.com/2017/06/05/colorado-supreme-court-construction-defects-battle/.