Examining Denver’s new construction defect reform ordinance

Construction defect reform is a hot-button issue in Colorado.  This is especially true along the booming Front Range, where rapidly increasing population has driven the prices of renting and buying property a mile high.  Developers maintain that building condominiums is just too risky given their exposure to lawsuits from dissatisfied owners under current state law, while homeowners’ rights groups insist that the current system is necessary to protect homeowners from shoddy construction in what amounts to the biggest investment of many peoples’ lives.

In the face of such a polarizing issue, the Colorado legislature has tried but failed to pass any meaningful reform. In light of this, local municipalities have started taking it upon themselves to create more construction-friendly legal environments through city ordinances.  Denver passed an ordinance late last year, effective January 1, 2016, which aims to create a more developer-friendly legal environment with regard to “common interest communities” (condominiums).

The new ordinance has three significant impacts, each with its own section:

City building codes and construction defect claims (Sec. 10-202)

This section seeks to curb the use of building code violations to support construction defect claims, while simultaneously allowing builders to use compliance with the code as an affirmative defense.

Under the section, failure to substantially comply with city building codes does not create a private cause of action, and cannot be used to support or prove any construction defect claim unless the violation results in (1) actual damage to real or personal property; (2) actual loss of the use of real or personal property; (3) bodily injury or wrongful death; or (4) a risk of bodily injury to death to the occupants, or a threat to the life, health, or safety of the occupants.

The section then explicitly singles out strict liability and negligence per se claims as unsupportable based on a violation of a building code.

Interestingly, this section also creates an affirmative defense of compliance with building codes, stating that if any particular element that is specifically regulated by code complies with that code, then it cannot be considered defective for the purposes of a construction defect claim.

Unit owners’ informed consent and construction defect claims (Sec. 10-203)

This section is squarely aimed at curbing construction defect lawsuits brought by condominium boards.  This section’s most substantial and controversial provision requires the board to receive signed, written consent from a majority of unit owners before the board can sue a developer.  This essentially eliminates the possibility of a suit where only a small percentage of units are affected, which protects developers from small claims brought by big entities, but it may also leave individual unit owners holding the bag even if they face significant defects.

This section also expands the required notice that the board must provide to the unit owners before it can instigate a suit, much of which is very specific.  These include the expected recovery range, the contingency percentage the attorney will take in the event of a successful suit, and warnings that a suit could impair unit owners’ ability to refinance, lower property values, and expose the board to fees and costs in the event of a loss.

Alternate dispute resolution and construction defect claims (Sec. 10-204)

This last section basically requires that arbitration clauses with specific language cannot be changed without the consent of the developer/owner (“declarant” specifically).  This provision is interesting in that the contractual language must already be in place, and it seems to be aimed mainly at countering arguments that the contractual language is somehow unenforceable.  The section only applies if the arbitration clause benefits development parties beyond the developer/owner, the arbitrator is neutral, the arbitration is in Denver at a mutually agreeable place, and the arbitration can be overturned if it does not substantially comply with Colorado law.

This section, in sum, does not seem to affect much, but it could cut down on litigating the enforceability of a specific type of construction defect arbitration clause.

 

Three months in, it is too early to tell what effect this will have on condominium construction in Denver.  Moreover, to the extent that it conflicts with Colorado’s Common Interest Ownership Act or Construction Defect Action Reform Act, it may not survive if and when it is challenged in court.  Nevertheless, for the time being, Denver’s attempt to stem the tide of construction defect litigation and boost badly-needed condominium construction is in effect, and both developers and homeowners should take note.