On June 5, 2017, the Colorado Supreme Court gave developers and contractors another reason to consider jumping back into the condominium construction market. By upholding the Colorado Court of Appeals decision in the Vallagio case,[1] the court ruled that developers and contractors can use “consent-to-amend” provisions to prevent homeowners from removing binding arbitration provisions from condominium declarations. The decision represents a significant step towards requiring construction defect claims to be arbitrated. The court also held that claims for deceptive trade practices under the Colorado Consumer Protection Act (“CCPA”) are also subject to arbitration.
The history of this decision goes back 10 years. In 2007, a condominium developer drafted the declaration for a development known as the Vallagio at Inverness. The declaration required: (1) binding arbitration of all construction defect claims; and (2) the developer’s written consent to remove the arbitration provision.
In 2013, without the developer’s consent, the HOA voted to remove the arbitration provision from the declaration and then filed a construction defects lawsuit against the developer, the contractor, and others. The defendants moved to compel arbitration, arguing that the HOA members failed to obtain their consent to remove the arbitration provision. The trial court denied the motion to compel arbitration, holding that the “consent-to-amend” provision in the declarations violated the Colorado Common Interest Ownership Act (“CCIOA”). The developer and others immediately appealed the decision, and in May 2015, a three-judge panel of the Colorado Court of Appeals overturned the trial court’s decision.
The Colorado Supreme Court took the case and came down in favor of arbitration. In arriving at its conclusions, the Supreme Court dismissed several key arguments from the HOA:
First, the court ruled that a developer can establish additional conditions that HOA members must satisfy before they are allowed to amend the declarations. With respect to super-majority voting, the only type of condition CCIOA does not permit is one requiring more than 67% of the homeowners’ votes for passage of an amendment. The court found that the “consent-to-amend” provision in the Vallagio declarations did not address voting percentages and was consistent with similar conditions allowed in other sections of CCIOA.
Second, the court disagreed with the HOA’s argument that the developer’s “consent-to-amend” provision was an “end-run” around CCIOA. CCIOA, the court found, expressly allows developers to specify circumstances in which disputes are resolved through arbitration. Therefore, the “consent-to-amend” provision was being used to encourage use of one of the law’s favored dispute resolution methods, not to get around it.
Third, the court dismissed the HOA’s argument that the “consent-to-amend” provision violates a portion of CCIOA that disallows provisions in declarations that make it more difficult for the HOA to deal with the developer than with other persons. The court determined that, in general, only the homeowners, not the HOA itself, have the power to remove an arbitration provision. Because the HOA has no power to amend the declarations, the “consent-to-amend” provision does not impact the relationship between the HOA and the developer.
The Vallagio opinion leaves a number of important issues unaddressed. For example, while the court held that claims under the CCPA are subject to mandatory arbitration provisions, it did not expressly hold that mandatory arbitration provisions are allowable under CCIOA. Additionally, the court did not address the HOA’s arguments that a permanent “consent-to-amend” provision exceeds the maximum time allowable for developer control of the HOA or is otherwise unconscionable. These unaddressed concerns may encourage HOAs to continue filing lawsuits (instead of arbitration demands) against condominium project developers and contractors until each issue is addressed by the courts or legislature.
Although the Vallagio court did not directly hold that mandatory arbitration provisions are allowed under CCIOA, this decision indicates it eventually will. Most importantly, the court’s ruling cleared the way for developers to place additional conditions on an HOA’s ability to sue the developer and contractor, as long as those conditions are generally consistent with (and do not attempt to create an end-run around) CCIOA.
The Vallagio decision is a very positive step towards improving Colorado’s legal environment for condominium developers. Developers can now move forward knowing they likely can enforce properly-drafted arbitration provisions in condominium declarations. Unfortunately, neither HB 1279, which was recently signed by Governor Hickenlooper (see our recent Construction Advisory on HB 1279), nor the Vallagio ruling comprehensively addresses all the issues that have driven developers and contractors out of the condominium construction market. Whether Vallagio and HB 1279 reduce the risks involved in condominium construction enough to convince developers, contractors and their insurers to embrace new condominium construction projects remains to be seen.
We recommend that parties considering new condominium development projects consult with experienced counsel to ensure declarations are carefully drafted with appropriate arbitration, consent-to-amend, notice, majority vote, mediation and other provisions to reduce the risk of construction defect claims and to reduce the cost of resolving any claims that may arise. Sherman & Howard’s Construction, Real Estate and Insurance Practice Group attorneys are experienced in drafting declarations, enforcing arbitration provisions, helping clients manage and resolve construction defect claims, and assisting clients with insurance coverage issues. Our attorneys can assist your team with a strategy designed to reduce the risks of condominium construction.
[1] Vallagio at Inverness Residential Condominium Ass’n v. Metropolitan Homes, Inc., 2017 CO 69.
