Colorado Senate Bill 15-177: This Year’s Attempt at Reasonable Construction Defect Reform

On February 10, 2015, Senators Scheffel and Ulibarri introduced Senate Bill 15-177, which is sponsored in the House by Representatives DelGrosso and Singer. SB 15-177 amends the prerequisites, found in the Colorado Common Interest Ownership Act (“CCIOA”), for an association to file a construction defect action.  The bill has been assigned to the Senate Committee on Business, Labor, and Technology but not yet scheduled for hearing.

The major points of the bill include: 1) enforcement of a mediation or arbitration provision contained in the original governing documents of a common interest community, even if subsequently amended or removed; 2) the addition of a requirement that mediation take place before a construction defect action can be filed; 3) heightened requirements that an association board provide advanced notice to all unit owners, together with a disclosure of projected costs, duration, and financial impact of the construction defect claim; 4) the addition of a requirement that the board obtain the written consent of a majority of the owners of units, and; 5) a requirement that prior to the purchase and sale of a property in a common interest community, the purchaser receive notice that binding arbitration may be required for certain disputes.

One of the most significant aspects of Senate Bill 15-177 is the addition of section (1)(a)(III) to Colorado Revised Statute § 38-33.3-124. The proposed language for section (1)(a)(III), states:

The General Assembly further finds and declares that when the governing documents of a common interest community contain a requirement that construction defect claims be submitted to mediation or arbitration, that requirement represents a commitment on the part of the unit owners and the association on which development parties are entitled to rely. Therefore, a later amendment to the governing documents that removes or amends the mediation or arbitration requirement should not apply to claims that are described in the mediation or arbitration requirements of the governing documents.

The addition of this language would have a effect on the forum in which construction defect actions are litigated. Currently, associations are free to amend any provision contained in their governing documents, including any mediation or arbitration provision inserted by the developer. Associations routinely amend their governing documents just prior to filing a construction defect action in district court in order to avoid submitting their case to binding arbitration. If Senate Bill 15-177 is passed in its current form, the majority of construction defect actions would likely be subject to binding arbitration. I anticipate this provision of the bill will receive strong opposition from association representatives and construction defect plaintiffs’ attorneys who wish to litigate their cases in district court.

The second major addition contained in SB 15-177 is the addition of section (1.5) to Colorado Revised Statute § 38-33.3-303.5. The proposed language requires that a construction defect claim be submitted to mediation prior to the filing of an action. The proposed language in its entirety states:

(1.5) As a condition precedent to any construction defect claim, the parties must submit the matter to mediation before a neutral third party mutually selected by the parties to the construction defect claim. If the parties are not able to agree upon a mediator, they may use an alternative selection method specified in the governing documents or, if no alternative selection method is specified, may petition the district court in the jurisdiction in which the common interest community is located to appoint a mediator for the construction defect claim.

Senate Bill 15-177 also expands upon the required disclosures contained in the C.R.S. § 38.33.3-303.5. Colorado Revised Statute § 38.33.3-303.5 in its current form only requires the disclosure of: (I) The nature of the action and relief sought; and (II) The expenses and fees that the executive board anticipates will be incurred in prosecuting the action. Senate Bill 15-177 seeks to add more specific disclosure requirements to C.R.S. § 38.33.3-303(II) including the disclosure of:  (A) Attorneys’ fees, consultant fees, expert witness fees, and court costs; (B) The impact on the value of units subject to the construction defect claim; (C) The impact on the marketability of units subject to the construction defect action; (D) The impact on the marketability of units not containing any design or construction defects; (E) The manner in which the association is planning on funding the construction defect action; and (F) The anticipated duration and likelihood of success of the construction defect action.

Additionally, the bill requires the association board to obtain the informed consent of a majority of unit owners prior to pursuing a construction defect action and seeks to add the following language to Colorado Revised Statute § 38-33.3-303.5:

 (II) The construction defect claim is not authorized unless the executive board obtains the written consent of the owners, other than the declarant, of units to which at least a majority of the total votes, excluding votes allocated to units owned by declarant, in the association are allocated, after giving notice in accordance with this subsection (2). The consent must be obtained directly and not as a result of proxy voting.

Finally, Senate Bill 15-177 seeks to add to the disclosures required prior to the purchase and sale of property in a common interest community to provide notice that construction defect actions may be subject to binding arbitration. The proposed language to be added to C.R.S. § 38-35.7-102 is as follows:

THE BYLAWS OR RULES AND REGULATIONS OF THE ASSOCIATION MAY REQUIRE THAT CERTAIN DISPUTES BE RESOLVED BY MANDATORY, BINDING ARBITRATION.

Senate Bill 15-177, once passed, will represent a significant change to the current state of construction defect litigation in Colorado. While the proposals in Senate Bill 15-177 would have a beneficial impact on Colorado construction professionals, the bill will likely be met with strong opposition. We will continue to watch the legislature for bills impacting construction law in Colorado and will monitor the progress of such bills, including Senate Bill 15-177.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.