On May 23, 2017, Governor Hickenlooper signed House Bill 17-1279 (“HB 1279”) into law, which applies to all construction defect actions filed on or after that date. With the adjournment of the 2017 Colorado General Assembly legislative session, HB 1279 is the only construction defect bill that successfully passed the House and Senate and reached Governor Hickenlooper’s desk. This client advisory highlights HB 1279’s key aspects and shortcomings.
Key Aspects of HB 1279
The new law has three key provisions:
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Notice. A homeowners’ association (“HOA”) considering filing a construction defect action must provide specific notice to all unit owners and to the developer and builder against whom a construction defect action is being considered. The notice must include an explanation of the nature of the proposed construction defect action, including a description of the alleged defects, the relief sought, the impact on obtaining or refinancing a mortgage on a unit, and a good-faith estimate of the benefits and risks involved.
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Meeting. After providing notice, the HOA must call a meeting of unit owners at which the developer and/or builder have an opportunity to address the unit owners regarding the alleged construction defects. A quorum is not required. The developer or builder may (but is not required to) offer to repair or settle the alleged construction defects.
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Vote. The HOA cannot commence a construction defect action until it conducts a vote and a majority of unit owners who vote approve proceeding with the defect action. However, for purposes of calculating whether a majority of unit owners have approved the proposed defect action, unit owners who are nonresponsive will be excluded.
Benefits and Drawbacks of HB 1279
The new law has some positive aspects. Some construction professionals believed it was inappropriate for only an HOA’s board of directors, often just three or five individuals, to have the authority to bring a construction defect lawsuit without involving the other unit owners. HB 1279 addresses this by giving all unit owners the opportunity to participate in the HOA’s decision to bring a defect action. In addition, some developers and contractors wanted to sit down and talk with the HOA about potential defect claims before an action is filed but some HOAs have not been willing to have that discussion. The new law changes this by ensuring that developers and contractors have a right to meet with the HOA members to discuss the claims.
A significant concern with HB 1279 is that it does not really require a majority vote to pursue a construction defect action. For example, if there are 100 units and 40 unit owners are nonresponsive, then all it would take to approve a construction defect action is 31 votes (a majority of those voting but only 31% of all unit owners).
Another concern is that HB 1279’s notice and vote provisions may conflict with the notice and vote provisions in existing HOA declarations. Many HOA declarations currently require a majority (or a supermajority of up to 67% of unit owners) to vote to approve a construction defect action. Some existing HOA declarations may require different notices to unit owners than HB 1279. Thus, the notice and vote requirements in existing declarations may be called into question to the extent they differ from or are more stringent than HB 1279.
HB 1279 Does Not Address Other Issues
HB 1279 does not address other construction defect reforms including arbitration of construction defect claims. The Homeownership Opportunity Alliance, along with many construction industry organizations, for several years has sought legislation to promote arbitration of construction defect claims. Arbitration may lead to lower legal fees, costs, and damage awards than in litigation, saving costs and reducing the incentive to bring defect actions.
HB 1279 also does not address a construction professional’s right to repair. Many construction professionals believe such a right would help in resolving any construction defects without the need for litigation or arbitration. HOAs, the plaintiffs’ bar, and other groups have not supported legislation to provide construction professionals with a right to repair.
Conclusion
Some legislators hailed HB 1279 as “solving” the construction defect issue. As reported by The Denver Post, Governor Hickenlooper declared HB 1279 “will help make our housing more affordable.” We believe HB 1279’s impact will be more muted. Although HB 1279 has some positive aspects, we believe it does not go far enough to meaningfully reduce the risk and cost of construction defect actions and spur new condominium construction. In addition, in the 2018 legislative session, it will be interesting to see if the legislature is willing to consider additional construction defect legislation or if legislators will want to move on to other issues. We will monitor what happens next session and issue advisories on key developments.
