Colorado Court of Appeals Places Significant Implied Warranty Liability on Residential Developers and Builders

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Snell & WilmerThe Denver housing market has been hot for years. An influx of residents, low housing inventory, and rising home prices make Denver a good choice for residential builders and developers. However, this past November, the Colorado Court of Appeals issued an opinion underscoring the liability that developers and builders face when building “common interest communities” as set forth in Colo. Rev. Stat. § 38-33.3-103(8).

The Players

Brooktree Village Homeowners Association, Inc. v. Brooktree Village LLC, 479 P.3d 86 (Colo. App. 2020) centers around a 52-unit townhome community in Colorado Springs. The original owner built and sold seven townhomes before running into financial problems. Eventually, Rivers Development, Inc. (“developer”) and Brooktree Village, LLC (“builder”) took over. The developer (which the builder had established to market and sell the townhomes) acquired the unfinished remainder of the development excluding common areas, which had already been conveyed to the homeowner’s association (“association”). The builder agreed to complete the remaining homes, roadways and common areas.

The Issues

Not long after construction was complete, homeowners started experiencing issues resulting from improper grading and drainage. The association then filed suit on behalf of itself and its member-homeowners against the developer and builder asserting claims for breach of implied warranty, negligence and negligence per se. The association sought damages to repair construction defects in the common areas and in one townhome where damage had been caused by construction defects in the common areas. A jury found in favor of the association on the implied warranty and negligence claims and awarded $1,850,000 in damages. The developer and builder appealed for a number of issues, the most significant of which are explained below.

The Takeaways

The developer and builder claimed the association lacked standing to assert its implied warranty claim. The court of appeals disagreed and ultimately held that a homeowner’s association can recover the entire cost of remediating construction defects in common areas if:

  1. the defects are attributable to the developer or builder;
  2. at least two of the association’s members purchased their homes directly from that developer or builder; and
  3. those members have the right to use common areas.

In making this determination, the court rejected the builder’s argument that because the developer had sold the remaining townhomes, the builder could not be sued for breach of implied warranty because Colorado’s implied warranty of workmanlike construction and habitability arises only from contractual agreements for the sale of new construction, and there was no contractual privity between the builder and homeowners. The court of appeals determined that the builder had provided implied warranties to purchasers because it was a signatory to the purchase agreement. The court further opined that it would be unfair to allow builders to establish intermediary sales companies to absolve themselves of responsibility under Colorado’s implied warranty law.

The court of appeals also struck down the argument that the association lacked standing to pursue its implied warranty claim because the builder and developer were not in privity with and did not otherwise provide implied warranties to the association. The court explained that, under Colorado law, a homeowner’s association may assert implied warranty claims on behalf of its members. Thus, the association could stand in the shoes of its members even though it had no contractual relationship of its own with the developer and builder.

The fact that the builder and developer had never owned the common areas at issue provided no defense to them. The court required only that defects in these areas be caused by the developer or builder.

Finally, the court held that the builder and developer were liable for the entire cost of remediating the construction defects in common areas—even though the developer had sold townhomes to (and thus owed an implied warranty) to less than half of the association’s current members. To find otherwise, the court opined, would deprive direct purchasers with a meaningful remedy.

A Final Note on Damages

As noted above, the jury awarded $1,850,000 in damages to the association without distinguishing which portion of the award related to the negligence versus implied warranties claim. The jury also determined that the association was 10% at fault, but the trial court did not reduce the damages award accordingly.

The court of appeals affirmed and found no error. Had the association prevailed only on its negligence claim, the trial court would have been required to reduce the award by 10%–the association’s percentage of fault. However, the court of appeals found the association was entitled to the full award because the association had prevailed on its implied warranty claim, and principles of comparative fault do not apply to that claim.

Conclusion

Brooktree Village Homeowners Association, Inc. shows that builders and developers may be liable to homeowner’s associations for all damages caused by construction defects in common areas of “common interest communities.” However, its impact extends far beyond perceived common areas in condo complexes. “Common areas” may include individual units and “common interest communities” can extend to subdivisions. Accordingly, Colorado builders and developers—even successor builders and developers—should understand the significant liability they face and consider seeking legal counsel before commencing any residential development project.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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