03 December 2013
14 November 2013
DRCOG had commissioned the study to investigate why new condominium construction in Denver has been slow to rebound following the Great Recession. The report, released on 29 October 2013, concluded that one factor is developers’ perceived risk of increased liability for construction defects on condominium projects. Many developers believe that apartment renters are less likely to sue for shoddy workmanship than condominium owners, and some have therefore chosen to build low-quality apartments rather than spend the extra money on well-built condominiums.
Local politicians such as Lakewood Mayor Bob Murphy were quick to seize upon this report and call for new laws to protect developers from construction defect claims. In an interview with the Denver Business Journal, Murphy called the report “devastating” and said that it was “conclusive that the litigation is by far the biggest factor stalling condo development.” Although the Colorado Senate rejected such a bill last session, a number of politicians and homebuilder advocates still contend that legislation is needed to encourage developers to build more cheap condominiums. Under current law, developers who violate the building code or fail to follow industry standards can be held liable for the cost of repairing property damage caused by their mistakes. Last session’s proposed bill would have made developers immune to some such claims and would have prohibited condominium owners from seeking relief in court for construction defects in communities located near bus stops or light-rail stations. A new bill for 2014 may take the same approach.
Despite the statements of Mayor Murphy and others, however, the actual DRCOG report contains little evidence to support such a bill. The report itself, which is available from DRCOG's website, identifies multiple factors that have slowed condominium construction in addition to the perceived legal risks associated with lower quality work. These include more stringent lending requirements from banks, surplus inventory from foreclosures, and overall economic and market conditions that presently favor apartments.
With regard to construction defect issues, the report does identify three areas where developers may be able to save money by erecting apartments instead of condominiums. One is quality control: for condominium projects, prudent developers often choose to retain a third-party inspector to visit the site and verify that subcontractors are performing their work correctly. This is a wise step to ensure that any defects are identified promptly and corrected on the spot, and one which we recommend to many of our clients. Making such repairs during construction, while subcontractors are still on site and before other trades have covered up the work area, is typically far less expensive than taking a building apart and fixing mistakes years later. On an apartment project, however, a developer may choose to omit this step and delay repairs until renters complain. By eliminating this quality control expense, the report found that a developer could save an estimated $1800 per unit during construction.
A second area of the potential savings comes from the use of less-experienced subcontractors. The report found that general contractors who build condominium projects may demand a “premium” of between 4% and 6% of job costs to pay for subcontractors who have the necessary credentials and insurance to do the most challenging phases of the work. This is deemed crucial for condominium projects, because the eventual owners may seek redress in court if their homes contain construction defects. By contrast, those who rent apartments are less likely to insist on quality workmanship, so general contractors may be able to get by with a cheaper workforce. The report found that using less-qualified subcontractors can save developers an estimated $9300 per unit.
The third area of savings on apartments comes from lower insurance costs. The report assumes that condominium communities will not have the same level of on-site maintenance as apartment complexes, and that condominium owner associations “introduce an element of risk for litigation that apartment properties do not have.” As such, developers of apartment projects often pay between $3674 and $3952 less per unit for liability insurance than developers of condominium projects.
Adding these three figures produces a total savings of $14,774 to $15,052 per unit for apartments. Developers interviewed for the DRCOG report stated that they the only way they could make sufficient profits on “entry-priced” condominiums (those with a sales price under $450,000) was to use the cheaper construction methods associated with apartments. These developers are apparently reluctant to cut the same corners on condominiums, however, because of the fear that buyers may sue for the cost of repairing defects. Some have suggested that the state legislature should enact laws restricting homeowners’ rights in disputes over defective work, which could allow developers to build cheap condominiums without fear of liability for defects and property damage.
Although this is one viewpoint, one should recognize that the authors of the DRCOG report relied primarily on interviews with homebuilders, contractors, and defense lawyers; they admit that that they spoke to “very few” plaintiff attorneys (they did not contact The Witt Law Firm), and they spoke to no homeowner association representatives. As such, the authors concede that the subjective portions of their report reflect the opinions of the development industry and "should be recognized as one side of the discussion."
Meanwhile, the report’s objective data largely refute the suggestion that litigious homeowners or associations are to blame for slow condominium development. The report describes a market that has been saturated with cheap, low-quality condominiums, many of which have been the subject of multi-million dollar defect lawsuits and foreclosures in recent years. Although several national builders have now pulled out of the Colorado attached-housing market, a lingering oversupply of condominiums has been holding sales prices down. The report expects this oversupply to diminish within a few years, but it may take some additional time before the market fully normalizes and returns to the point where local, honest contractors can compete with those who have been peddling cheap, substandard work. The report likewise notes that many prospective buyers cannot currently obtain the financing or afford the down payment needed to buy a new home. While these conditions are also improving, it may take more time for the economy to rebound to the point where these individuals will start looking for attached housing instead of rental apartments.
Although high insurance rates do remain a valid concern, the report suggests that this increase is the result of 2010 legislation that the homebuilders themselves sponsored. Senate Bill 10-1394, now codified at Colo. Rev. Stat. § 13-20-808, protects builders from unfavorable insurance policy interpretations by creating a rebuttable presumption of insurance coverage for property damage from construction defects. According to the DRCOG report, however, roughly a dozen insurance carriers have left the state in recent years, and “brokers attribute their departure to the passage of the 2010 legislation.” The report notes that new insurance providers have entered the market, but these carriers tend to specialize in the “high cost/high risk” arena and charge premiums that are 25% to 45% higher. If SB 10-1394 is in fact the cause of increased insurance premiums, the homebuilders can only blame themselves for this portion of the cost; they should not point the finger at condominium owners or cite these higher premiums as an excuse to seek immunity for their own negligence.
In short, the DRCOG report identifies a variety of factors that have slowed condominium development in Denver. Construction defects have certainly been part of the problem, but nothing in the report suggests that taking away homeowner rights will reduce the subpar work that has plagued the Colorado market in recent years. Although some homebuilders may have the perception that they will be sued on any condominium project, the reality is that they can avoid defects and litigation by implementing basic quality control measures and employing qualified subcontractors. It is true that such precautions made add approximately 4% to the costs of construction, but these steps will save millions in the long run by eliminating lawsuits over construction defects and damage. In our opinion, if legislators want more new condominiums, they should look at ways to help builders stay competitive and earn a living selling quality homes. The last thing they should do is give immunity to negligent developers and encourage even more cheap, low-quality work.
16 August 2013
The Journal interviewed Jesse Witt, principal of The Witt Law Firm, as part of its coverage, and noted his belief that "better construction curbs lawsuits." Witt explained that "Changing this law would be ignoring a fundamental problem: Why don't they just build to code? They only get sued if they didn't do the work properly." The Journal also quoted Witt as saying that "if developers paid more upfront costs to do careful construction, litigation costs could be avoided." Witt suggested that a better approach would be to focus on education and certification of contractors. Colorado does not currently license contractors at the state level.
The story appeared in the 16 August 2013 edition of the Journal. Subscribers can access the full text of the article here.
07 August 2013
Colorado has a long history of protecting homeowners from defective construction. Thirty years ago, in May 1983, the Colorado Supreme Court announced its seminal decision in Cosmopolitan Homes v. Weller, which recognized that builders have an independent duty to avoid negligence when building someone’s home. The court reasoned that that builders are in the best position to determine the structural condition of a home, that an ordinary homebuyer is seldom qualified to evaluate a house's construction, and that a house is typically a family’s largest investment. Although the court would later adopt the economic loss rule—which provides that a party suffering only economic loss from the breach of a contractual duty may not assert a tort claim—the court has consistently held that a builder’s duty to avoid negligence exists independent of any contract. Because of this, the economic loss rule does not shield builders from tort liability for negligent work and construction defects.
The August 2013 case of Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc., 2013 COA 119, however, presented an interesting question: Can the subsidiary of a construction lender sue in tort over construction defects in a house it acquired after the developer defaulted on a construction loan? On the one hand, the public policy concerns that underlie a builder’s independent duty to avoid defects seem less compelling when the homeowner is a sophisticated corporation. On the other hand, there is little reason to excuse a builder’s negligence merely because a business may have temporarily owned a house that was originally intended for sale to a family.
The court noted the tension between the economic loss rule and the independent duty recognized in Cosmopolitan Homes, but it ultimately sided with the owner and allowed the negligence claim to proceed. Among other reasons, the court based its decision on the fact that limiting negligence claims to natural persons would grant the defendants a windfall based solely on the fortuity of who happened to hold title to a house when a defect manifested; the court explained:
as years pass, some houses will be foreclosed on by mortgage lenders, who, in turn, will sell the houses to new owners. If only natural persons who both owned and occupied such a house could enforce the builder’s duty, the dispositive factor would be the fortuity of who owned the house when the defect ripened, rather than the builder’s negligence and its consequences to that owner. This approach, in turn, would lead to the anomaly of a negligence duty becoming unenforceable upon sale of a home to a commercial or non-occupant owner, only to have enforceability resurrected upon acquisition by a traditional home owner.
Judge Webb wrote the majority opinion, and Judge Russell concurred. Judge Jones wrote a special concurrence urging the supreme court to revisit the issue and clarify whether recognition of a homebuilder’s duty to act without negligence is truly consistent with the economic loss rule, or whether it should simply be treated as an exception to the rule.The full text of the court’s opinion is available on the court's website at
02 August 2013
The case arose our of a six-figure remodeling job on a single-family home. The dispute began with minor billing discrepancies but escalated when the homeowners learned that the general contractor had not been paying its subcontractors, and that the subcontractors were preparing to pursue mechanics lien claims.
Firm principal Jesse Witt represented the homeowners. He first negotiated a three-way deal to ensure that the subcontractors received payment and released their liens. He then defended the homeowners in an arbitration hearing over the general contractor's bill. Following this hearing, the arbitrator found that the general contractor's "credibility during cross-examination was severely lacking," and that the he had overcharged the homeowners for a number of items. The arbitrator ruled that the contractor was due some additional payment, but he deemed the homeowners to be the prevailing parties and awarded them reasonable attorney fees.
Cases such as this illustrate the importance of keeping accurate records on construction jobs, accounting for all subcontractor funds held in trust, and maintaining good communications between owners and general contractors.
28 May 2013
In a scathing dissent, Chief Justice Bender wrote that "a thorough and uniform system of education must include the availability of qualified teachers, up-to-date textbooks, access to modern technology, and safe and healthy facilities in which to learn. The record, however, reveals an education system that is fundamentally broken. It is plagued by underfunding and marked by gross funding disparities among districts." Justice Hobbs also dissented and criticized a regressive system that pays less for students in poorer counties. Colorado is one of the wealthiest states in the nation but ranks 49th in per-pupil spending.
Click here to read the full opinion from State v. Lobato, 2013 CO 30.
22 May 2013
Mr Witt and Ms Achenbach hope that their article will be prove to be a valuable resource for lawyers and other professionals who desire a better understanding of construction insurance. The article appeared in the Law Review's spring edition as part of its annual survey of significant decisions from the United States Court of Appeals for the Tenth Circuit.
Click here to read the full text.
18 April 2013
As originally drafted, the bill would have defined any homeowner association within a half mile of a bus or light rail stop as a "Transit-Oriented Development." Such associations would lose the right to recover any damages in court for building code violations or other negligent construction, and the developers of such communities would gain absolute immunity from claims for environmental hazards or pollution. A last-minute amendment from the bill's sponsor would have limited the bill's scope to communities near light rail and removed provisions requiring private arbitration of disputes, but the three Democrats on the committee remained concerned about the lack of data supporting the bill and the risk that it would harm consumers. The committee's two Republicans voted in favor of the bill.
Jesse Witt of The Witt Law Firm testified on behalf of the Community Associations Institute in opposition to the bill. Mr Witt asserted that, although the proponents of the bill had argued that an insurance crisis was hindering the construction of new homes near public transit, SB 13-052 would do nothing to improve the insurance climate. Instead, the bill would reward the incompetent builders who cut corners, refuse to take care of their customers, and expect their insurance companies to "clean up the mess." These builders cause insurance premiums to rise for everyone, including the many quality builders in Colorado who take the time to do things right. Making homeowner associations increase their dues to fix negligent builders' mistakes was not, according to Mr Witt, the right policy for Colorado.
The stakeholders agreed to meet over the summer to discuss other options to encourage new construction and ensure the availability of affordable insurance without unfairly penalizing homeowners. Please check this site or contact The Witt Law Firm for updates on this process.
01 April 2013
The Colorado Supreme Court ruled today that the statutes allowing homeowner associations (HOA’s) to charge their members monthly assessments and collect them by means of a “superlien” violate the state constitution. The ruling may have a dramatic effect on communities throughout the state.
The Colorado Common Interest Ownership Act (CCIOA) was enacted in 1990 after the state legislature determined that “the continuation of the economic prosperity of Colorado is dependent upon the strengthening of homeowner associations in common interest communities financially through . . . the creation of statutory assessment liens the granting of six months’ lien priority . . . and through enhancing the financial stability of associations by increasing the association’s powers to collect delinquent assessments.” Since then HOA’s have relied on CCIOA to collect monthly assessments from their members. If a member refused to pay the HOA could foreclose a lien on the property that took precedence over the homeowner’s mortgage. The court’s opinion in Fairview Orchards Owners League v. Pesci, 2013 CO 20A invalidates these laws as unconstitutional.
The case arose after the Fairview Orchards Owners League obtained a county court judgment against a homeowner who had stopped paying her monthly assessments. The district court affirmed but the homeowner appealed the ruling to the supreme court. She argued that HOA’s serve no rational purpose and that the laws supporting HOA’s should therefore be struck down. Surprisingly, the court agreed.
In its briefing, the HOA had argued that monthly assessments were necessary to fund community activities such as common area maintenance landscaping and snowplowing, but the justices disagreed. Writing for a unanimous court Justice Nancy Rice cited a 2010 Colorado State University study suggesting that the importance of these tasks had been overrated. “Most modern construction materials need little or no maintenance” she noted. “An HOA cannot therefore justify collection of dues based on the performance of unnecessary jobs such as painting or replacement of building components.”
Justice Rice likewise rejected the HOA’s argument that its assessments were necessary to pay for landscaping. “The CSU study shows that most species of turf grass will naturally reach a height of two inches and then spread laterally to choke out invasive weeds so long as meddlesome HOA’s and vendors do not interfere with the grasses’ natural growth patterns.” She noted that the study had also found that these grasses had evolved the ability to retain extra chlorophyll during drought conditions which causes them to appear lush and green even when left unwatered. The HOA’s claim that it needed to charge its members for snowplowing also failed to persuade the court. Justice Rice again quoted from the CSU study which concluded “that the electromagnetic properties of asphalt are such that it will repel the ions that exist in the tiny ice crystals that make up snow. So long as the resulting electromagnetic field is not discharged by contact with snowplows or other metal objects the snow will quickly move away from the surfaces of roads.” Because of this Justice Rice concluded that snowplowing costs were not a valid purpose for collecting HOA assessments. “Contrary to popular belief” she stated “it seems that streets really do plow themselves.”
The court announced its opinion on Monday, 1 April 2013. Court rules allow the parties fourteen days to petition for rehearing.
12 March 2013
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04 February 2013
The decision in Yale v. AC Excavating, Inc. reversed a 2010 opinion from the Colorado Court of Appeals, which had surprised many observers by concluding that the owner of a construction company could be liable for theft of money he had loaned to the company in an unsuccessful effort to keep the company from going out of business. The court of appeals had ruled that he was required to hold all funds in trust for an unpaid subcontractor, even though he had not contributed the funds for that purpose.
Although the supreme court's ruling in this case seems reasonable under the facts, contractors should remain cautious whenever they receive funds for use on a construction project from an owner or other party. Improper management of such funds can lead to personal liability, treble damages, and attorney fees. On public projects, penalty interest can also be imposed. To avoid such risks and ensure compliance with the such statutory requirements, contractors doing business in Colorado should consult promptly with a qualified construction law attorney.
29 January 2013
Sponsored by Senator Mark Scheffel (R-Douglas), Senator Bill Cadman (R-El Paso), and Representative Brian DelGrosso (R-Larimer), SB 13-052 would create a special procedure to be followed whenever a homeowner or HOA identifies potential construction defects in a “transit-oriented development” project. In any such community, the builder responsible for the defects would have a broad right to enter the property and make whatever repairs the builder felt were appropriate, without approval or consent from the homeowners. If the repairs were inadequate, the homeowners’ only option would be to participate in binding arbitration before a private dispute resolution service; the homeowners’ right to trial by impartial judge or jury would be forfeited. In addition, builders would enjoy complete immunity from any claims for environmental contamination, excess sound transmission, mold, odors, humidity, smoke, or fumes, and builders would have no obligation to repair such problems.
The real catch in this bill, however, is the definition of “transit-oriented development.” The bill does not limit its scope to communities near light rail; instead, the bill comprises all multi-family projects within “within one-half mile of any commuter rail stop, commuter light rail stop, or commuter bus stop.” By including bus stops in this definition, the bill could potentially ensnare hundreds of condominium and townhome communities within the RTD zone, including numerous projects that are nowhere near any light rail lines.
Whether the bill would apply to existing communities or merely affect future construction is unclear. The bill would also amend the statute of limitations and repose to make it easier for builders to sue subcontractors for indemnity.
At The Witt Law Firm, we represent a broad client base of contractors, homeowners, and associations. We support efforts to improve construction law, particularly where such efforts balance the rights of construction professionals and homeowners. Construction professionals should absolutely be able to build quality projects without the fear of litigation, just as homeowners should be able to expect homes that are built in compliance with local codes and industry standards. We do not believe that SB 13-052 would further either of these goals. By shielding builders from liability for their own negligence, this bill would reward those who use cheap materials and unqualified workers, and it would make it harder for honest, competent contractors to stay competitive.
If our legislators want to create incentives for building near light rail, we would encourage them to look at other options besides creating immunity for shoddy construction work. Expanding resources for building code education and stricter contractor licensing standards, for example, could help weed out negligent contractors and thereby reduce overall litigation. Offering special financing to those who build quality homes in designated areas could help draw developers to this market. There are many valid ways to approach this issue without penalizing innocent homeowners. Erecting leaky homes with environmental hazards near our train and bus stops, however, is not the answer.
Update: The Senate Judiciary Committee rejected SB 13-052 on 17 April 2013. Click here for more information.