31 December 2014

2014 Top Ten: Does Colorado Need Construction Defect Legislation to Spur Affordable Home Development?

One of top ten stories for the Construction Defect Journal in 2014 was the debate over whether Colorado needs new construction defect legislation to spur affordable home development.

Jesse Witt of The Witt Law Firm started the discussion with his article "Colorado Mayors Should Not Sacrifice Homeowners to Lure Condo Developers." Others followed with pieces advocating limits on homeowner association rights and discussing Lakewood's recent efforts to shield builders from liability for their errors.

Click here to read the full articles.

21 November 2014

Affordable housing should not be filled with defects

Prime Time for Condos: Today's Denver Business Journal presents a feature on Colorado's hot market for condominiums and other forms of affordable housing. In several stories, reporter Molly Armbrister discusses how high demand for apartments and low construction of new condominium projects have put a premium on existing property.

Addressing the argument that lawsuits have made builders reluctant to develop multifamily housing, she quotes The Witt Law Firm's Jesse Witt, who said that both homeowner and builder advocates would like to see changes to Colorado's existing statutes. Current laws do little to prevent defective work and often leave consumers no choice but to pursue claims in court or binding arbitration if they want a builder to correct code violations and other mistakes.

Witt explained that lawsuits are often lengthy and inconvenient for homeowners, and that the gap in affordable housing is not something that anyone wants. "We want more affordable housing, but we don't want affordable housing filled with defects," Witt said in the article.

The Journal also quoted Witt in a second article that summarized Colorado's existing statutes and anticipated legislation in 2015.

Subscribers can read the full articles by clicking here, and printed copies are available at local newsstands.

23 October 2014

Can Denver condominium developers learn from their counterparts in Seattle?

Concerns over construction defect liability has not hindered condominium development in Washington State. Instead of asking politicians to give them immunity from their own negligence, developers in Colorado might want to consider taking steps to avoid construction defects in the first place.

As a story in this week's Puget Sound Business Journal reports, some builders in Washington have been reluctant to bid on condominium projects because they fear lawsuits over construction defects. Many others have quickly moved in to meet the demand for new housing, however. One company, Lowe Enterprises, has taken a common sense approach to the risk:

"The development team is trying to head off construction defect claims by planning and documenting with photos their work. This way if a lawyer questions the wiring and plumbing behind the walls, Lowe will be able to say, 'Look, this is what we have done,' and here's evidence that everything was properly installed."

Coupled with adequate quality control, this simple method is an excellent way to avoid defects and litigation. Indeed, we at The Witt Law Firm have been recommending a similar process to our builder clients to reduce risk on construction projects in Colorado.

Now, if the Broncos can just figure out a way to beat the Seahawks, all will be well in the world.

Click here to read the full text of the article.

10 October 2014

Construction defects could become issue in governor's race

According to today's Denver Business Journal, construction defects have emerged as a potential issue in Colorado's gubernatorial race. During last night's debate, Republican challenger Bob Beauprez criticized incumbent Democrat John Hickenlooper for failing to help senators with a last-minute push to enact a bill stripping away homeowner protections in construction disputes. Republicans had argued that the bill was needed to appease apartment developers who claim that quality control and insurance costs are too high on condominium projects.

Beauprez's attempt to blame Hickenlooper for this issue is a stretch. Hickenlooper is a former real estate developer who frequently sides with the homebuilders on construction matters, and he said during the debate that he was open to some sort of compromise. When I last spoke with Hickenlooper, he was staying out of the debate over construction defect laws, and he was not involved in the senate leadership's decision not to hear S.B. 220 at the end of the 2014 session. It will be interesting to see if this subject draws further interest from the candidates as the election nears.

17 September 2014

Colorado mayors should not sacrifice homeowners to lure condo developers

This article first appeared in Issue 242749 of the Construction Defect Journal.

For the past two years, Colorado’s Metro Mayors Caucus has been aggressively lobbying the state legislature to strip away consumer protections in construction defect disputes, in the hope that more lax construction standards may attract condominium developers to their cities. Although the General Assembly voted down their proposals in the 2013 and 2014 sessions, Denver mayor Michael Hancock raised the issue again during his recent State of the City address, and it is likely that proponents will sponsor another bill during the upcoming 2015 session.

The mayors would do better to protect their constituents’ rights and work to correct the underlying problems that have hampered condominium construction in recent years. Eliminating consumer protections is not the right way to help their communities grow.

Should developers build apartments to rent or condominiums to sell?

At the core of this debate is the recent trend favoring apartments over condominiums. According to an October 2013 report from the Denver Region Council of Governments (DRCOG), the construction of new condominiums around Denver has not rebounded from the Great Recession as quickly as the construction of apartments or single-family homes. Many of the new attached-housing projects currently in development are expected to be offered as apartments for rent rather than condominiums for sale. This concerns some mayors, who feel that apartments promote a more transient population, with fewer permanent ties to the their communities. To encourage developers to build condominiums instead of apartments, the mayors have argued that Colorado should repeal or limit laws that currently protect condominium owners from shoddy workmanship and construction defects.

In April 2013, DRCOG had urged the Colorado General Assembly to pass Senate Bill 13-52, which would have given immunity for environmental hazards to builders of multi-family communities located near bus stops or light rail stations. The bill would also have given these builders an unfettered right to choose what repairs were appropriate if any homeowners complained of other defects, and it would have prohibited homeowners from seeking relief in court for unsatisfactory repairs; if builders did not offer reasonable repairs, homeowners’ only option would have been to pursue costly private arbitration. During judiciary committee hearings, a number of mayors and homebuilders testified in favor of the bill and expressed a belief that it was virtually impossible to build a condominium project without being sued over defective work, and that this was the reason why apartrments had become more popular. There were few data to support their anecdotes, however, and the DRCOG report had not yet been published. As a result, the committee rejected the bill.

Just what the “Doctor” ordered

Several months later, DRCOG made its report available. Not surprisingly, portions of this document supported the type of legislation that DRCOG had promoted earlier in the year. The report’s authors acknowledged, in fact, that the subjective sections of their report were limited to the opinions of the development industry and “should be recognized as one side of the discussion.” The authors also conceded that they had relied primarily on interviews with homebuilders, contractors, and defense lawyers in preparing their findings; they had spoken to “very few” plaintiff attorneys, and it does not appear that they spoke to any homeowner association representatives.

Nevertheless, local politicians immediately seized on the report as evidence that laws should be changed. “God bless DRCOG,” joked one member of the Denver Metro Chamber of Commerce in an interview with Westword. “I think it’s devastating,” Lakewood Mayor Bob Murphy said in a separate interview with the Denver Business Journal. “I see this as a verification of what I’ve been talking about… I’m not aware of a single member of the 41-member Metro Mayors Caucus who is opposed to some kind of reform.”

At the January 2014 meeting of the Metro Mayors Caucus, Mayors Murphy and Hancock cited the report when arguing for changes in the law. Other mayors echoed their concerns and voted to support legislation that would take away homeowners’ access to the courts, limit the power of homeowner associations to advocate for their members, and impose difficult administrative barriers to taking legal action against developers.

Senate Bill 220

The mayors eventually found a receptive ear in Commerce City Senator Jessie Ulibarri. In the final days of the 2014 session, Ulibarri broke ranks with fellow Democrats and introduced Senate Bill 14-220.

Ullibarri’s bill would have addressed the mayors’ concerns by making it illegal for homeowner association boards to speak with attorneys, consult experts, or request that builders repair construction defects, unless the board first obtained the votes of at least half of the community. The bill would have required that the board obtain votes from a majority of the entire membership—not just those who appeared at a meeting or participated in the election—and forbid the use of proxies to meet this total. In practice, this would have made it effectively impossible for large communities to hold a builder accountable for negligent construction, code violations, or breaches of warranty. In addition, even for communities that were able to overcome these voting hurdles, the bill would have forced many disputes into binding arbitration with whatever service the builder had selected to resolve disputes. In theory, these changes would have made it so difficult for communities to enforce their legal rights that developers would have enjoyed de facto immunity from claims for defective work. Senator Ulibarri and the mayors hoped that giving this immunity to developers would spur them to build more inexpensive condominiums, without fear of liability for ignoring the building code or delivering low quality work.

Ultimately, the late introduction of S.B. 220 proved fatal. Democratic leadership expressed frustratation that Ullibarri had put forth the bill without allowing sufficient time to discuss potential amendments to preserve consumer rights, and the 2014 session ended before the bill could pass through committee hearings. The mayors, however, seem intent on introducing similar legislation in 2015, repeating the mantra that it is impossible for developers to build quality condominiums at a reasonable price. Mayor Murphy, in particular, has been vociferous in his support for laws curtailing homeowner rights: He recently proposed a local ordinance that would deny Lakewood residents the consumer protections available to other Colorado homeowners in construction disputes.

Litigation is not the only factor favoring rentals

This approach is fundamentally misguided. Although many apartment builders have cited the fear of litigation as a factor affecting their decision to avoid the condomium and townhome market, there is little in the DRCOG report or elsewhere to support the theory that eliminating consumer protections will cause these developers to start erecting condominiums.

In reality, the DRCOG report itself (which was recently taken off of DRCOG’s website without explanation), identified multiple factors that have slowed condominium construction, not just the perceived legal risks of litigation over defective work. These factors included more stringent lending requirements from banks, surplus inventory from foreclosures, homebuyers’ inability to afford down payments, and overall economic and market conditions that have recently favored apartments. Giving builders immunity for defective work will not change any of these economic circumstances.

In addition, the DRCOG report noted that some Millennials may simply prefer to rent rather than buy; it acknowledged the existence of a vigorous ongoing debate in academic circles over whether the “Gen-Y” and “Millennial” populations have the same desire to own property as their parents in the “Boomer” generation, though the report’s authors ultimately concluded that generational preferences have only had a minor effect on condominium construction. The report further noted that demand for condominiums may increase on its own over time, as older Boomers seek to downsize and move to smaller houses. These issues are also independent of any concern over construction defects.

Moreover, one should not overlook a factor that received little attention from the DRCOG report: Colorado’s strong rental market. Recent reports show that rents are at all-time highs across the state, and many individuals are willing to pay a premium for desirable rental property in this tight market. It should therefore come as little surprise that homebuilders have started constructing more apartments to meet this demand.

Mayors should concentrate on why apartments cost less to build

On the subject of construction and construction defects, the DRCOG report did identify three reasons why it may be less expensive to build apartments than condominiums in today’s market.

One was 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; making such repairs during construction, while the responsible subcontractors are still on site and before other trades have covered up their work, is typically far less expensive than taking a house apart and fixing mistakes years later. On an apartment project, however, a developer may choose to omit this step and wait to see if renters complain about defects or demand repairs. By eliminating this quality control expense, the DRCOG report found that a developer could save an estimated $1800 per unit during construction.

A second reason was the use of less-expensive subcontractors. The report found that general contractors who build condominium projects may demand a “premium” of between four and six percent of overall 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 homeowners may seek redress in court if their homes contain construction defects. By contrast, those who lease apartments are thought less likely to insist on quality workmanship, and builders may therefore be able to get by with a cheaper workforce when constructing rental properties. The report found that using less-qualified subcontractors could save developers an estimated $9300 per unit.

The third reason was lower insurance costs. The report assumed that condominium communities would not have the same level of on-site maintenance as apartment complexes, and that condominium owner associations would “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 were reluctant to cut such corners on condominiums, however, because of the fear that buyers might sue for the cost of repairing defects and code violations.

Lowering quality standards will not help the industry

Although the DRCOG report helped explain why the perceived fear of litigation may have made some developers hesitant to build condominiums, this perception does not justify laws that would strip away consumer protections or lower quality standards in the industry.

Overall, the DRCOG report described a market saturated with poorly-built condominiums, many of which have been the subject of multi-million dollar construction defect lawsuits and foreclosures in recent years. Although several national builders have now pulled out of the Colorado attached-housing market, the report noted that a lingering oversupply of condominiums has held sales prices down. The report stated that this oversupply would likely diminish within a few years, but it may take 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 products. The last thing that Colorado lawmakers should do now is encourage more low-quality workmanship by limiting homeowner rights.

Likewise, while high insurance rates remain a valid concern, the DRCOG report suggested that this increase is actually 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 policy interpretations by creating a rebuttable presumption of insurance coverage for property damage from construction defects. This is good for developers but has made some insurance carriers nervous. According to the DRCOG report, roughly a dozen carriers have left the state in recent years, and insurance brokers “attribute their departure to the passage of the 2010 legislation.” The report also noted that new insurance providers have since entered the market, but these carriers tend to specialize in the “high cost/high risk” arena and charge premiums that are twenty-five to forty-five percent higher. Developers likely did not intend this result when they sought insurance reform in 2010, but that does not mean that homeowners should be penalized in 2015.

In sum, these data do not support curtailing consumer rights. If Senator Ulibarri and the mayors truly want condominium construction to become more economical for developers, they should direct their attention to the real issue: How did it become impossible for quality builders to earn a profit on condominiums? The DRCOG report suggests that construction defects are part of the problem, but politicians should be thinking about ways to prevent the defects, not penalize the consumers who end up stuck living in defective houses. If poor workmanship and code violations have become so commonplace that a developer can only make money by eliminating quality control and hiring unqualified workers, then steps should be taken to stamp out negligence and level the playing field for quality builders. Politicians should not create even more incentives for builders to cut corners.

Moreoever, one should note that Colorado, unlike many states, does not license its general contractors at the state level; some cities require contractors to pass a local examination, but a statewide licensure program could help weed out builders with a history of defective work.

Temporarily providing grants to offset quality control and insurance costs could also help condominium developers stay competitive until the economic conditions improve. In fact, Senator Ullibarri proposed a separate bill in 2014, S.B. 216, that would have done just that, but Republicans killed the measure shortly before S.B. 220 was heard in committee.

Arbitration and HOA restrictions are not the answer

Unfortunately, however, many of Colorado mayors and legislators insist that eliminating consumer protections in the only way to create an incentive for builders to construct more condominiums. Thus, their ideas have largely ignored the underlying problems of cheap, substandard work; they have insetad focused on concepts such as requiring private arbitration of disputes and limiting the power of homeowner associations to represent their members in lawsuits. Although these concepts may seem neutral at first glance, they could actually tilt the balance heavily in favor of the homebuilding industry.

With regard to arbitration, one should recognize that the process is unlike mediation or other forms of alternative dispute resolution, in which the parties meet and try to reach a mutually acceptable compromise. Arbitration is more akin to a private lawsuit, wherein the parties give up their right to an impartial jury and instead pay a panel of lawyers or retired judges to hear their evidence and award monetary damages. This tends to make arbitration much more expensive, and to create a financial incentive for arbitrators to favor the large companies that are likely to give them future business, not the occasional consumer who is unlikely to need a professional dispute resolution service again.

With regard to homeowner associations, individual homeowners often lack the resources to litigate claims against well-funded developers and insurance companies, and the only way they can protect their property values is to join together in an association with their neighbors. A united association of homeowners can often persuade a builder to make reasonable repairs; a divided group of individuals can rarely achieve such a result. Limiting this right of association would merely encourage developers to build more substandard units.

Likewise, while homeowner voting requirements may seem innocuous, they often penalize communities with large numbers of military, absentee, or out-of-town owners, all of whom may be difficult to reach in the event that the community needs a quick vote on legal action. If nothing else, the hypocrisy of these arguments should anger the mayors’ constituents. Homeowner associations and cities both rely on the same model of representative government. But when a municipality hires a contractor to build a new city hall or erect a new bus stop, it does not let the contractor unilaterally dictate the terms of dispute resolution, nor does it promise to abandon all legal rights unless a majority of its entire population votes to act. Imagine if Mayor Hancock had to obtain affirmative votes from half of Denver’s 483,000 registered voters before he could ask the City Attorney to enforce a construction contract; DIA would be a defect-riddled nightmare for taxpayers.

Despite such facts, however, many of the mayors at the January 2014 meeting seemed confused or na├»ve about what really happens when a homeowner gives up his or her legal rights. Some, for instance, did not seem to understand the different forms of alternative dispute resolution available, or to appreciate the difference between voluntary mediation (in which both sides meet and agree on appropriate repairs or solutions) and binding arbitration (in which the builder selects a private service to decide if the homeowners are entitled to money damages). Cherry Hills Village Mayor Doug Tisdale, meanwhile encouraged the other mayors to use talking points such as arbitration being “faster, cheaper, more effective, and more efficient” than proceeding in court, precisely because neither side can appeal if the arbitrator misinterprets the law. He failed to offer any real facts or statistics to support this opinion, however, or to explain why homeowners should feel good about forfeiting their right to appeal an erroneous decision.

Mayor Tisdale went on to suggest that mayors tell their constituents that homeowners of limited means could always find an attorney willing to represent them individually on a contingent fee, even if legislators took away the ability of homeowner associations to advocate on behalf of their members. No such statement should ever be part of a mayor’s talking points; anyone who actually practices in this field knows that construction attorneys will rarely agree to represent a single condominium owner on a contingent fee basis, because of both the high investigation costs and the reality that the owners’ association almost always has exclusive responsibility for maintaining and repairing the community’s structures and other common elements.

An honest debate

This is not to say that the homebuilders’ concerns about the increased costs of condominium construction are entirely without merit.

The DRCOG report suggested that the prevalence of cheap, low quality work across Colorado forced many developers to cut back on quality control and hire inexperienced subcontractors in order to remain competitive and earn a profit in recent years. The resulting poor workmanship led to construction defects and litigation, and the insurance carriers responded by raising rates on builders across the board. The passage of SB 10-1394 appears to have exacerbated the problem and pushed insurance rates even higher. The combination of low sales prices and high insurance rates, coupled with a dip in demand for owner-occupied attached housing, has made it very difficult for local developers to make money on condominiums.

As the DRCOG report confirmed, a key underlying cause of this problem has been defective work. Stripping away consumer protections will not encourage condominium developers to invest in more quality control or premium subcontractors, however; stripping away consumer protections will merely encourage more of the same mistakes that contributed to the condominium shortage in the first place. If the mayors truly want to address the lack of new condominiums, they should look at why substandard construction has become acceptable and ways to improve code compliance and overall quality. Mayors are in a unique position to direct their cities’ building departments, and they should take advantage; instead of lobbying for weakened consumer protections, mayors should invest their tax dollars in hiring and training more building inspectors, and they should establish a clear policy prohibiting approval of substandard construction. Once communities stop tolerating shoddy workmanship, good developers will again be able to build quality condominiums without fear of incompetent competitors undercutting their prices.

Legislators may also want to revisit the option of providing temporary tax credits or other financial assistance to developers who hire their own quality control inspectors and take other steps to avoid building homes with construction defects. The DRCOG report concluded that the developers could shave about $15,000 off the construction cost of an entry-level condominium unit by eliminating quality control, using less-qualified subcontractors, and saving on insurance premiums, and the government could act to eliminate this incentive. Licensing contractors at the state level could help in the long term, but politicians may also wish to consider supporting tax credits or other incentives of up to $15,000 per unit to developers who agree to build quality condominiums instead of cheap apartments. This would allow the developers to offset the higher costs of building for-sale properties, avoid litigation over substandard work, maintain adequate insurance, and still earn an attractive profit.

Obviously, some taxpayer advocates might object to the subsidization of real estate developers’ profit margins in this manner. Others might conclude that encouraging owner-occupied housing is a worthwhile investment of a community’s tax revenue. Regardless, this would at least be an honest debate about the real question: Who should bear the cost of building condominiums without defects? The mayors’ current plan to make homeowners pay for repairing a builder’s poor workmanship is the wrong answer.

Jesse Howard Witt is an attorney with The Witt Law Firm in Denver. He focuses on construction law and represents homeowners, associations, developers, and contractors. Please contact The Witt Law Firm for further information about this subject or any construction law questions.

19 August 2014

Local mayors are once again stumping to eliminate homeowner protections in construction defect disputes

It appears that we can expect another anti-homeowner bill from Senator Ulibarri and the Metro Mayors Caucus in 2015. Although they are paying lip service to the idea of consumer protection, they made similar remarks before introducing bills in 2013 and 2014 that would have eviscerated homeowner rights in construction defect disputes.

The Denver Business Journal reports:

Three mayors, a state legislator and the leader of a nonprofit all came together Friday at the Denver Metro Chamber of Commerce's annual State of the City event to discuss a law that has been on the lips and minds of many in the real estate community: the construction defects law. "This situation has to change," said Colorado Sen. Jessie Ulibarri, D-Commerce City, who sponsored legislation in the 2014 session to help protect against lawsuits arising from the defects law....

Click here to read the full story.

12 August 2014

Drafting complaints to trigger insurance coverage

Here is an interesting article on construction defects at the UConn law library and drafting complaints to trigger insurance coverage. As the author notes, it may be best to avoid pleading too many specific facts when filing suit, since some details (especially dates) can cause unexpected problems when one tries to find insurance for the losses. The case was decided under Connecticut law but is consistent with most jurisdictions with which I am familiar. I would add that specificity is rarely required for construction claims, and that the plaintiff is seldom in possession of the defendant's insurance policies before a lawsuit is filed; these factors further militate against the need for putting too much detail into an initial pleading. Obviously, specificity is required for fraud claims, but fraud will not trigger insurance anyway, so a claimant who is chasing fraud damages has likely already decided not to depend on the other side's insurance to satisfy a judgment.

In short, "less is more," at least in this context. The article does not indicate whether the law library has been repaired yet, but I would hope that the law students learn this lesson quickly.

"Choose Your Words Wisely: The Allegations in a Construction Defect Complaint" by Matthew Vocci. The Supreme Court of Connecticut provided a reminder of the importance of the wording of allegations relating to construction defects, resulting damage and when the parties were on notice of the issues. For property owners, contractors/builders/developers and their insurers, the allegations in the complaint guide what can be a difficult and contentious determination regarding whether the insured is provided with a defense from its CGL carrier...

26 June 2014

Sviluppi recenti nella sicurezza dell’edilizia negli USA

Quest’anno, l’Associazione Internazionale Giuristi di Lingua Italiana ha pubblicato nel giornale Il Bollettino un articolo da Avv.ti Jesse Howard Witt e Flavia Mascolo che discute sviluppi recenti nella sicurezza dell’edilizia negli Stati Uniti. Cliccate qui per leggere il testo intero.

This year, the International Association of Italian Language Lawyers published an article by attorneys Jesse Howard Witt and Flavia Mascolo in its journal, Il Bollettino, which discusses recent developments in construction insurance in the United States. Click above to read the Italian text.

06 May 2014

Colorado Senate rejects bill to limit homeowner rights in construction defect disputes

Yesterday, the Colorado State Senate's Judiciary Committee declined to hear a bill that would have gutted homeowner rights in construction defect disputes. Earlier in the day, a divided committee on State, Veterans, and Military Affairs had approved SB 220 following two hours of heated testimony from both sides.

This decision effectively ended the proponents' last-minute efforts to pass a bill before the session ends tomorrow. The bill had been the subject of rumor since a similar measure failed in 2013, and potential drafts had begun appearing on the Internet in March of this year. Nevertheless, the sponsors did not introduce their legislation until 30 April 2014, just days before the end of the session. Although the proponents obtained an initial extension of time in hopes of getting the bill to the floor in the final seventy-two hours, Senate leaders did not feel that sufficient time remained to consider the bill and potential amendments.

“The speaker and I gave more notice of what we wanted than they’ve had on any other negotiation. And I can’t think of an instance where anybody was more ignored,” Senate President Morgan Carroll told the Denver Business Journal. “So, when you drop a bill in the last few days of session that’s squarely hostile to the rights of consumers and incorporates none of the suggestions that leaders in both houses give you, it’s an exercise in frustration.”

Jesse Witt of The Witt Law Firm was among those who were present to testify against the bill. He has previously noted that, although quality control and insurance costs have recently increased for condominium construction, taking away consumer rights is not the proper way to address these issues or encourage more affordable housing. At yesterday's hearing, University of Colorado economist Jane Lillydahl offered testimony echoing this view and refuting the notion that limiting builder liability would benefit the industry.

While the issue is dead for this year, supporters vowed to bring the bill back in the 2015 session. Please contact The Witt Law Firm for more information on this subject or other construction law issues.

01 May 2014

Bill introduced to strip homeowners of ability to recover for construction defects

Today, the Rocky Mountain Chapter of the Community Associations Institute (CAI) released the following press release:
With one week remaining in the 2014 legislative session, Senate Bill 14 – 220 (“SB 220”) was introduced yesterday evening in the Colorado Senate. While it may seem to some that this bill was introduced too late in the session to have any chance of passage, with relaxed rules in place for the end of the session, a bill can technically make it through the entire legislative process in three days. This bill has been assigned to the Senate State, Veterans & Military Affairs Committee and the Senate Judiciary Committee.

Sponsored by Senator Jesse Ulibarri (D-Commerce City) and Senator Mark Scheffel (R-Parker), the bill seeks to spur the construction of condominiums in Colorado. Unfortunately, the bill is so extreme that it would guarantee that owners of homes in HOAs would have no recourse against builders for defective construction. As introduced, here’s what the bill provides:

HOAs are not permitted to remove or amend mandatory arbitration provisions placed in declarations by developers.
The language of the bill says that a requirement within the declaration to mediate or arbitrate “represents a commitment on the part of the unit owners and the association on which a developer, contractor, architect, or other person involved with construction is entitled to rely.” This choice of language is interesting; these mandatory arbitration provisions are placed in declarations unilaterally by developers and the homeowners have no ability to negotiate whether arbitration is an appropriate alternative to a jury trial.

Unless the association can prove that the arbitration provider is unqualified, construction defect claims must be resolved by the arbitration service provider named in the declaration by the developer.
It is not unusual for developers to require the use of arbitration service providers who are known for providing low awards for construction defects. This results in a very one-sided arbitration process and provides HOAs with no ability to participate in choosing the individuals who will sit on the arbitration panel. Further, in addition to the strong likelihood that the arbitration award for the defects will be much lower than a verdict from a jury, the association’s responsibility for the costs of the arbitration panel are taken off the top of the award for the defects. Taken together, this means an association victimized by defects will not be awarded enough money to make the required repairs.

Regardless of what is required in the declaration, the arbitrator must be a neutral third-party as described by Colorado law.
Colorado law provides that an arbitrator “who has a known, direct, and material interest in the outcome of the arbitration proceeding or a known, existing, and substantial relationship with a party may not serve as an arbitrator if the agreement requires the arbitrator to be neutral.” This added requirement in the bill provides slim consolation because there is no “agreement” between the HOA and developer that the arbitrator must be neutral. In addition, it is highly unlikely that arbitration panels would be found not to be neutral, even when they are known for providing low awards to HOAs for construction defect claims.

If an HOA intends to institute any legal action (which would include proceeding to arbitration) for construction defects, the association would be required to prepare and provide the following disclosures to owners without the assistance of construction defect counsel:
The expenses and fees that the board anticipates will be incurred, directly or indirectly, in prosecuting the action, including:
  • Attorney fees, consultant fees, expert witness fees, and court costs, whether incurred by the association directly or for which it may be liable if it is not the prevailing party or that the association will be required, pursuant to an agreement with its attorney or otherwise, to pay if it elects not to proceed with the claim;

  • The impact on the value of the units that are the subject of the action, both during the pendency of the litigation and after its resolution;

  • The impact on the marketability of units that are not the subject of the action, including the impact on the ability of owners to refinance and buyers to get financing, both during the pendency of the litigation and after its resolution;

  • The manner in which the association proposed to fund the cost of the litigation, including any proposed special assessments or use of reserves; and

  • The anticipated duration of the litigation and the likelihood of success.
Without the assistance of construction defect counsel, how could an association possibly answer these questions and provide owners with meaningful disclosures? In addition, without first going through the initial phases of testing and working through the Notice of Claims process with the developer, it would be impossible for the association to provide meaningful notice on many of these issues. Frankly, these disclosure requirements set boards up for breach of fiduciary duty lawsuits.

The mandatory disclosures outlined above must be provided to owners at least 60 days before the HOA is permitted to provide notice of potential claims to developers as required by the Construction Defect Action Reform Act (“CDARA”).
If the defects were discovered late, the timing of these disclosures could result in an association not complying with applicable statutes of limitations and repose. This means that the association would be barred from pursuing construction defect claims against the developer.

The disclosures outlined above must also be provided to owners before an HOA hires any experts or consultants or incurs or agrees to pay expert fees or consultant fees in connection with the construction defects.
It is impossible to comply with some of the required disclosures without first obtaining the input from experts and consultants. Without their help, how could an association possibly provide a disclosure regarding the costs of consultation fees, expert witness fees, and the likelihood of success against the developer?

Associations are not permitted to pursue developers for construction defects unless the association obtains written consents from owners holding at least a majority of the total voting rights in the association. This consent must be obtained directly from the owners and proxies are not permitted to be utilized.
Obviously, it’s extremely challenging to obtain written consents in associations. This is magnified when attempting to obtain written consents from 51% of owners in large scale communities, mountain communities where owners literally can live all over the nation and the world, and communities that are largely made up of individuals in the military who may be deployed. This provision alone will make it impossible for many HOAs to ever pursue construction defect claims against developers.

Every purchase and sales contract for a home in an HOA must include the following disclosure in bold-faced type:
The property is located within a common interest community and is subject to the declaration for such community. The owner of the property will be required to be a member of the owner’s association for the community and will be subject to the bylaws and rules and regulations of the association. The declaration, bylaws, and rules and regulations will impose financial obligations upon the owner of the property, including an obligation to pay assessments of the association. If the owner does not pay these assessments, the association could place a lien on the property and possibly sell it to pay the debt. The declaration, bylaws and rules and regulations of the community may prohibit the owner from making changes to the property without an architectural review by the association (or a committee of the association) and the approval of the association. The declaration for the community or the bylaws or rules and regulations of the association may require that certain disputes be resolved by mandatory, binding arbitration. Purchasers of property within the common interest community should investigate the financial obligations of members of the association. Purchasers should carefully read the declaration for the community and the bylaws and rules and regulations of the association.

While this disclosure is not objectionable, we all know that purchasers of new homes rarely read these types of disclosures.

When taking all of these provisions together, it becomes abundantly clear that this bill would successfully strip away all rights of homeowners living in HOAs from being able to hold developers responsible for their construction defects. This means that homeowners will be left paying the tab to repair such defects through special assessments or significant assessment increases. Without taking these difficult financial steps, the defects will go unrepaired and owners will be required to disclose the defects as part of any sales transaction.

Keep your eye out for an important Call to Action from CAI on this extremely damaging piece of legislation that CLAC is calling the “Horrors of Homeownership Act.”
Molly Foley-Healy is Chair of CAI’s Colorado Legislative Action Committee.

Please contact The Witt Law Firm for further details on this proposed legislation.

23 April 2014

Denver Post: Colorado HOA's vow strong defense of defects law

A lead story in today's Denver Post highlights the consumer side of the recent debate over construction defect legislation:

Another story
notes that home values and rents are at record highs across the Metro Area, which undercuts the arguments of local mayors who keep saying that existing consumer protections are crushing the homebuilding industry.

Click here for The Witt Law Firm's earlier analysis of this issue.

18 March 2014

Witt named to 2014 Super Lawyers

The Witt Law Firm is proud to announce that its principal, Jesse Howard Witt, has been recognized for the third straight year as a Rising Star in construction law by Colorado Super Lawyers.

Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high-degree of peer recognition and professional achievement. The selection process is multi-phased and includes independent research, peer nominations, and peer evaluations. The objective is to create a credible, comprehensive and diverse listing of outstanding attorneys that can be used as a resource for attorneys and consumers searching for legal counsel. Since Super Lawyers is intended to be used as an aid in selecting a lawyer, it is limited to those who can be hired and retained by the public.

To be eligible for inclusion in Rising Stars, a candidate must be either 40 years old or younger or in practice for ten years or less. While up to five percent of the lawyers in the state are named to Super Lawyers, no more than two and a half percent are named to the Rising Stars list.

13 March 2014

Colorado Pool settlement leaves insurance question unanswered

In January, the Colorado Supreme Court quietly approved a settlement of the Colorado Pool Systems, Inc. v. Scottsdale Ins. Co. case, ending a long legal battle over the scope of the term “occurrence” in construction insurance policies. Although this likely came as a relief to the parties, it leaves a number of questions unanswered for future litigants.

The dispute arose from a contractor’s insurance claim relating to the construction of a swimming pool. The contractor's subcontractors had placed rebar in the pool’s shell too close to the concrete surface, and the owner had demanded that the contractor redo the work. The contractor’s insurance carrier initially stated that it would cover the loss but later reneged, and the contractor brought suit. After a district court granted summary judgment for the carrier, the court of appeals reversed in part. Relying on the Tenth Circuit’s decision in Greystone Construction Inc. v. National Fire & Marine Ins. Co., 661 F.3d 1272, 1280 (10th Cir. 2011), the state appellate court ruled that, although the policy's definition of occurrence did not extend to the cost of replacing defective work, the policy could cover “rip and tear” damages associated with the removal of nondefective property as needed to access and repair the defects.

Both sides sought certiorari review. The supreme court denied the carrier’s petition, but it granted the contractor’s petition and agreed to consider whether damage to an insured’s defective work product could be deemed an occurrence under Colorado statutory or common law. This is a question that has generated considerable debate, and observers were hopeful that the justices would finally decide the issue. Perhaps to avoid establishing such precedent, however, the carrier agreed to settle the contractor's claim shortly after opening briefs were filed. The settlement means that the question will remain unresolved for the foreseeable future.

The Witt Law Firm’s Jesse Witt and Marci Achenbach filed an amicus brief in support of the insured contractor on behalf of the Colorado Trial Lawyers Association.

28 February 2014

Colorado legislature votes down retainage bill

Yesterday, the Colorado House of Representatives committee on Business, Labor, Economic, & Workforce Development rejected a bill that would have capped retainage in private construction contracts at five percent.

Many construction contracts permit an owner or developer to withhold ten percent or more of a contractor's earnings to ensure that the work is completed properly. The practice of withholding retainage is not new, and likely originated with the need to rely on inexperienced contractors to build railways in the Nineteenth Century. In theory, this allows an owner to retain the contractor's profit prior to substantial completion, while paying enough during construction to ensure that the contractor is not forced to finance the job.

HB 14-1165, which was modeled after existing requirements for public works projects in Colorado, would have required owners and general contractors on private projects to "pay at least ninety-five percent of the calculated value of completed work" to subcontractors on an ongoing basis, and it would have imposed penalty interest and attorney fee sanctions on anyone who violated this provision. The bill contained exemptions for single-family homes, multi-family properties with less than five units, and projects costing less than $150,000.

Attorney Jesse Witt of The Witt Law Firm testified on behalf of the Community Associations Institute against the bill. He noted that the bill would impose complicated accounting requirements on volunteer leaders of community associations and subject them to draconian penalties if they made an error. Although public works contractors are accustomed to such requirements, residential community associations would likely need to hire outside professionals to ensure compliance with these regulations, and this could significantly increase the cost of many projects. In addition, the amount of retainage is typically negotiated between the parties, and there was no apparent need for the legislature to regulate these transactions.

After hearing testimony on both sides of the issue, the committee voted to postpone the bill indefinitely, effectively ending its run through the 2014 legislative session.