Colorado Supreme Court Decision Issues Landmark Ruling on Construction Defects Issue
Today, in a landmark, precedent-setting decision for the construction and homebuilders industry as well as the state of Colorado, the Colorado Supreme Court provided long-awaited clarity on a key construction defects issue that has stalled construction of affordable condominiums in Colorado due to uncertainty on whether declarant consent-to-amend provisions in a condominium declaration are enforceable.
The June 5 decision in Vallagio at Inverness Residential Condominium Association v. Metropolitan Homes, Inc. (“Vallagio”), authored by Justice Richard Gabriel, affirmed the judgment of the Court of Appeals with two primary take-aways:
The Colorado’s Common Interest Ownership Act (CCIOA) does not prohibit a declaration from imposing the requirement of declarant consent for amendments.
The Colorado Consumer Protection Act (CCPA) does not preclude an agreement to arbitrate CCPA claims against a declarant.
The decision provides greater certainty to the development community, potentially making developers more willing to build condominiums and other attached housing, which would help address the state’s current shortage of entry-level housing.
The Court’s opinion is momentous because the holding sets judicial precedent on an important piece of CCIOA and will likely be looked to by courts from around the country, as CCIOA is modeled after a national uniform act. Further, the Vallagio decision addresses a key component of recent legislative efforts that have been previously unable to reach the Colorado Governor’s desk.
This construction defects case has garnered national attention since the Colorado Court of Appeals’ decided in May 2015 to enforce a requirement contained in condominium association’s governing documents that consent of the declarant is necessary for any amendment to those documents. Specifically, the intermediate appellate court held that a declaration’s consent-to-amend requirement that the declarant approve a homeowners’ association amendment of an arbitration clause to be valid and enforceable.
The case went up to the Colorado Supreme Court, which granted certiorari to answer whether the Court of Appeals erred by holding as a matter of first impression that the CCIOA permits a developer-declarant to reserve the “power to veto unit owner votes to amend common interest community declarations.” The Supreme Court also addressed the Court of Appeals’ holding that claims against a declarant for violating the CCPA can be submitted to arbitration.
The Colorado Supreme Court was presented with a case where “certain provisions of the original declaration (1) required that all construction defect claims be resolved through binding arbitration and (2) provided that the provisions governing such claims ‘shall never be amended’ without the Declarant’s written consent.” The Court concluded “that the consent-to-amend provision contained in the Project’s original declaration is consistent with CCIOA and is therefore valid and enforceable.”
The Court also agreed that the CCPA does not preclude an agreement to arbitrate CCPA claims against a declarant. This is a significant decision as it provides precedent on the arbitrability of CCPA claims in the construction defect context against declarants.
In Vallagio, a condominium homeowners association brought a lawsuit against the developer/declarant alleging construction defects. The declaration included a mandatory arbitration provision specifically for construction defect claims. That section stated that its provisions “shall not ever be amended without the written consent of Declarant and without regard to whether Declarant owns any portion of the Real Estate at the time of the amendment.”
After the declarant turned over control of the project to the association, the unit owners voted to amend the declaration to remove the entire mandatory arbitration provision, without ever obtaining the declarant’s consent. Soon after the declaration was amended, the association filed a lawsuit in district court. The district court denied the declarant’s motion to compel arbitration, ruling the declarant consent requirement violated CCIOA and was void and unenforceable. An appeal followed and the Court of Appeals reversed on the CCIOA issues. The Colorado Supreme Court granted certiorari and affirmed the judgment of the Court of Appeals.
Besides holding that the declarant’s permission was required, the Colorado Supreme Court further held, consistent with the Court of Appeals, that requiring declarant consent for amendments does not limit any power of a homeowners’ association and that CCIOA does not prohibit a declaration from imposing the requirement of declarant consent for amendments.