When it comes to the creation of common interest communities in Colorado, ambiguities in state law could mean serious liability risks for developers, builders and homeowners’ associations. The Colorado Common Interest Ownership Act (“CCIOA”) is a set of statutes that control homeowners’ associations and condominium associations from inception on. CCIOA governs everything from how communities are created to how the community is managed, including how meetings are held, how records are maintained, how owners cast votes and what procedures must be followed when assessing ownership dues. Among the rules central to CCIOA’s operation are the standards for creating a formal common interest community: who is empowered to sign and record the relevant documents and what procedures must be followed? Recent litigation in Colorado has revealed that CCIOA’s text may contain an important gap in this respect, one that the Colorado Supreme Court is expected to clarify later this year.
Who creates a common interest community?
The individuals or entities that form a common interest community are called the declarant. CCIOA defines a declarant as any “person or group of persons acting in concert who” engage in a “common promotional plan” to transfer their ownership to subsequent purchasers. Under CCIOA, the declarant of a community must meet certain prerequisites when forming the community, including recording a declaration that is “executed in the same manner as a deed.” This means that the declaration must be signed by the entity encumbering the property, which is often interpreted to mean the entity that owns the underlying land. See Abril Meadows Homeowner’s Ass’n v. Castro, 211 P.3d 64, 67 (Colo. App. 2009).
However, it is common in large-scale residential real estate development projects for developers to create various corporate entities to accomplish their objectives. That often means title to the real estate shifts between entities, and lines can blur among those entities while moving the project forward. What happens, then, if a declaration is recorded to create a common interest community but bears the wrong signatures?
What will the courts say?
In one case in particular, the Colorado Supreme Court has agreed to hear this issue. The case is Buffalo Run Fairways, LLC v. Fairways at Buffalo Run Homeowners Ass’n, Inc., 2019SC865 (Colo.). In Buffalo Run, the property developer formed a number of entities to undertake a 12.5-acre residential development project. One of these entities, Buffalo Fairways, LLC, actually owned the underlying 12.5-acre property. But when the declaration was ultimately filed, the signature came from a different entity altogether: Fairway Builders, Inc. The dispute came to a head in 2016 when developers were blocked from entering the property to continue construction on the land. The HOA claimed that the right to build additional homes had expired, while the developers argued that the land on which they sought to build had not been made part of the community. The court, in turn, had to determine whether the declaration was valid at the outset, as well as what portions of the 12.5-acre property were encumbered by the declaration.
After a five-day bench trial, the trial court ruled that the close affiliations among the developer and builder entities (i.e., “acting in concert” under CCIOA) meant that the distinction between which entity owned the property and which entity signed the declaration did not invalidate the declaration. Instead, the trial court ordered equitable reformation of the declaration to include the correct signatures on the original declaration. In other words, the trial court determined that all of the parties intended that the declaration be valid and binding on all 12.5 acres such that the reformation of signatures amounted to little more than a clerical correction to clarify the chain of title.
On appeal, the court of appeals agreed that the entire 12.5-acre property was encumbered by a valid declaration but deemed reformation of the original declaration unnecessary, holding that the technical distinction between the entity that owned the property and the entity that signed the declaration had no bearing on the validity of title.
A few months ago, the Colorado Supreme Court agreed to hear the case. The questions granted review by the court include whether a declaration can encumber property even though the owner of the property did not sign the declaration and whether a non-owner’s signature is sufficient to encumber property under CCIOA when the signatory and the owner were otherwise acting in concert.
Why does this matter?
On the one hand, the developers and builders are expected to argue that technical requirements for recorded real estate documents control the outcome here. That is, if the signature of the property owner is required to encumber a piece of real estate, then no other substitute will suffice. On the other hand, the HOA will argue that the distinction is without a difference: if the developers and builders—including the property owner and the signatory on the declaration—were each “acting in concert” when establishing the CCIOA community, then the declaration is valid regardless of which specific entity signed it.
After a number of delays, the parties to the appeal only began filing their briefs earlier this month, but this is a legal issue that Brownstein Hyatt Farber Schreck has also litigated. See generally City Center Lofts LLLP v. Norstar Residential LLLP et al., 2019CV31105. Large-scale real estate development projects are expensive undertakings, and a seemingly minor flaw such as which entity signs and records a community’s declaration can quickly become a serious liability. Developers, builders and HOAs are encouraged to seek counsel from the outset to avoid these sorts of issues down the road. In the earliest stages, our experienced real estate teams can help navigate the requirements necessary to create a valid common interest community; but if a dispute has already arisen, our tried-and-tested litigators are capable of creating and executing an effective litigation strategy.