Under Colorado House Bill 17-1279, HOA Boards Now Must Get Members’ Informed Consent Before Bringing A Construction Defect Action

Last year, I wrote a post calling attention to stalled efforts in the Colorado legislature to pass  meaningful construction defect reform.  Shortly thereafter, the legislature got it done in the form of House Bill 17-1279.  This bill creates an important pre-litigation notice-and-approval process whenever an HOA initiates a construction defect action in its own name or on behalf of two or more of its members.

Before May 2017, the pre-litigation requirements that an HOA had to fulfill before bringing a construction defect claim under the Colorado Construction Defect Action Reform Act (“CDARA”) were generally minor. For example, while many declarations required majority approval from the community prior to initiation of claims, in practice, what the industry was seeing is that some HOAs were making it so that only a majority of the HOA Board had to approve bringing the claim, rather than the majority of interested unit owners.  It was also common that, even where the majority of owners were involved, they were often voting in favor of filing a lawsuit or arbitration without fully understanding the risks and costs.  This practice presented a risk to developers—it is easier to get approval from a small group than from a larger group, and it is easier to get approval when the voting owners do not fully appreciate the risks and costs inherent in filing a claim.

Colorado House Bill 17-1279, which was signed into law by Governor Hickenlooper in May 2017 and is codified at C.R.S. § 38-33.3-303.5, lessens these risks by amending the Colorado Common Interest Ownership Act (“CCIOA”) to add certain pre-litigation requirements.  Section 38-33.3-303.5 applies any time an HOA institutes a construction defect action  its own name on behalf of itself or two or more unit owners on matters affecting the common interest community.  C.R.S. §§ 38-33.3-302(1)(d), -303.5(1)(a).

These amendments directly address the “majority vote” issue. As amended, section 38-33.3-303.5 states that the HOA’s “executive board may initiate the construction defect action only if authorized within the voting period by owners of units to which a majority of votes in the association are allocated,” unless the action pertains to (1) nonresidential facilities with defects of less than $50,000 or (2) “the association is the contracting party for the performance of labor or purchase of services or materials.”  C.R.S. § 38-33.3-303.5(1)(d)(I)(A).  The section excludes several types of votes from this “majority,” including votes allocated to units owned by a development party and by banking institutions “unless a vote from such an institution is actually received,” votes “allocated to units of a product type in which no defects are alleged, in a common interest community whose declaration provides that common expense liabilities are not shared between the product types,” and votes allocated to “nonresponsive” unit owners.  C.R.S. § 38-33.3-303.5(1)(d)(III).  Nevertheless, this majority vote requirement applies “notwithstanding any provision of law or any requirement in the governing documents” of the community, so for most construction defect actions, it effectively curtails the practice of initiating construction defect actions based only on a majority vote of the HOA board.  C.R.S. § 38-33.3-303.5(1)(d)(I)(A).

The revised statute also requires significant disclosures. Before bringing a lawsuit or arbitration for construction defect claims, the HOA board must mail or deliver written notice of the anticipated construction defect action (the “Proposed Action”) to each owner and to the construction professional against whom the Proposed Action would be asserted (the “Disclosure Notice”).  The Disclosure Notice must: (1) set the date for the newly required meeting with owners (the “Meeting”) within ten to fifteen days after the Disclosure Notice, to consider the Proposed Action; and (2) make the following disclosures:[1]

• As to the meeting itself, the Disclosure Notice must explain that:
  • The voting period begins after the Meeting, at which time the HOA will accept votes for or against proceeding with the Proposed Action;
  • The voting period ends at the earlier of 90 days after the meeting or when the HOA has received enough votes to either approve or disapprove of the Proposed Action; and
  • All impacted construction professionals are invited to the Meeting and will have the opportunity to address the owners and, if the professional so chooses (not required), they may offer a remedy in accordance with CDARA’s notice of claim process
• As to the substance of the claims and proposed action, the Disclosure Notice must provide a description of the alleged defects with reasonable specificity, the relief sought, and a good faith estimate of the benefits and risks involved. It must disclose that:
  • The alleged defects may result in increased maintenance and repair costs or special assessments;
  • The applicable deadlines and statutes of limitations for bringing the Proposed Action;
  • That the defects may have to be disclosed to potential buyers;
  • The compensation arrangement between the attorneys and the HOA;
  • The HOA may incur legal costs up to a specified amount, in addition to attorneys’ fees and that, if the HOA does not prevail on its claims, it may have to pay these amounts;
  • A court or arbitrator could award costs and fees to the opposing party, if the HOA does not prevail, and the HOA would be responsible for those amounts;
  • There is no guarantee that any damages awarded will cover the cost of repairs;
  • Market value of the units may be adversely affected by the defects; and
  • Owners and prospective buyers could have difficulty obtaining financing because of the defects and the suit.

The purpose of the disclosures is to ensure that owners are informed and knowledgeable about the risks and basis for the Proposed Action prior to voting. Further, at least five business days before sending the Disclosure Notice, the HOA Board must send a separate notice to the construction professional, advising it of the upcoming Meeting.  The construction professional may then elect to offer a presentation at the meeting, which may include “an offer to remedy any defect in accordance with” CDARA.   C.R.S. § 38-33.3-303.5(1)(c)(II).  This provision is intended to give the construction professional enough time to prepare for the Meeting and to offer voluntary remediation.

In sum, HB 17-1279 should have two primary effects: making sure HOA members understand the potential risks and benefits of construction defect litigation, and making sure that most of the affected parties give informed consent to proceed.

[1] The specific language of the required disclosures is codified at C.R.S. § 38-33.3-303.5(1)(c)(II)-(III).