On
May 7th, the Colorado Court of Appeals issued its much anticipated
ruling in Vallagio at Inverness Residential Condominium Association, Inc. v.
Metropolitan Homes, Inc., et al.,
2015COA65 (Colo. App. May 7, 2015). By
way of background, the Vallagio at Inverness Residential Condominiums were
developed by Metro Inverness, LLC, which also served as the declarant for its
homeowners association. Metropolitan Homes was Metro Inverness’ manager and the
general contractor on the project. Greg Krause and Peter Kudla served as
declarant-appointed members of the Association’s board during the period of
declarant control.
When
it set up the Association, Metro Inverness included within the Association’s
declaration a mandatory arbitration provision specifically for construction
defect claims. This provision stated that it “shall not ever be amended without
the written consent of Declarant and without regard to whether Declarant owns
any portion of the Real Estate at the time of the amendment.”
In
2010, Metro Inverness turned control of the Association’s board of directors
over to the project’s unit owners and it sold the last unit to a non-declarant
owner in 2012. The next year, the project’s unit owners voted to amend the
declaration to remove, among other provisions, the mandatory binding
arbitration provision for construction defect claims. In doing so, the unit
owners did not obtain Metro Inverness’ consent to amend that section. Soon
after the unit owners amended the declaration, the Association filed a
construction defect lawsuit in district court, naming as defendants, Metro
Inverness, Metropolitan Homes, Greg Krause, and Peter Kudla.
The
defendants moved to compel arbitration, relying on the arbitration provision
for construction defect claims and arguing that the purported amendment to
remove it was invalid because the unit owners did not obtain Metro Inverness’
consent for the amendment. The Association, in response, argued that the unit
owners validly amended the declaration to remove the arbitration provision and
that the declarant consent requirement violated the Colorado Common Interest
Act (“CCIOA”).
The
district court denied the defendants’ motion to compel arbitration, concluding
that Metro Inverness’ consent was not required to remove the arbitration
provision because, inter alia, the
declarant consent requirement violated CCIOA and was, therefore, void and
unenforceable. Specifically, the district court held that the declarant consent
provision violated C.R.S. § 38-33.3-302(2), which provides: “The declaration
may not impose limitations on the power of the association to deal with the
declarant that are more restrictive than the limitations imposed on the power
of the association to deal with other persons.” The court also found that the
declarant consent provision violated C.R.S. § 38-33.3-217(1)(a)(I), which
states:
[T]he
declaration . . . may be amended only by affirmative vote or agreement of unit
owners to which more than fifty percent of the votes in the association are
allocated or any larger percentage, not to exceed sixty-seven percent, that the
declaration specifies. Any provision in the declaration that purports to specify
a percentage larger than sixty-seven percent is hereby declared void as
contrary to public policy, and until amended, such provision shall be deemed to
specify a percentage of sixty-seven percent.
The
defendants then filed the interlocutory appeal of the district court’s order,
which resulted in this decision. In
finding that the district court erred in this analysis, the Colorado Court of
Appeals concluded that the provision requiring the declarant’s consent to amend
the arbitration provision for construction defect claims did not violate CCIOA
and was, therefore, enforceable.
With
respect to C.R.S. § 38-33.3-302(2), the Court of Appeals held that the
declarant consent provision does not violate that section because the
Association has no power to amend the declaration itself. Under the terms of
the declaration, the power to amend the declaration resides with the unit
owners, not the Association, and, therefore, the declarant consent requirement
does not impose any limitation on “the power of the association” under section
38-33.3-302(2).
With
respect to C.R.S. § 38-33.3-217, the Court of Appeals held that the statute
does not prohibit a declaration from requiring declarant consent for an
amendment. In so holding, the Court of Appeals pointed out that CCIOA does not
explicitly preclude a declaration from imposing additional requirements for
amendments and that, to the contrary, other provisions of section 217
contemplate requirements of consent or approval by parties other than unit
owners. See C.R.S. §
38-33.3-217(1)(b)(I) (setting forth notification procedures applicable “[i]f
the declaration requires first mortgagees to approve or consent to
amendments”). On this topic, the Court concluded “that section
38-33.3-217(1)(a)(I) merely governs requirements for unit owners’ voting
percentages and does not prohibit a declaration from imposing an additional
requirement of declarant consent for amendments.”
Dispensing
with the argument that the declarant consent requirement contravenes CCIOA’s
purpose, the Court of Appeals pointed out that:
CCIOA endorses
the use of alternative dispute resolution and specifically allows declarations
to mandate binding arbitration. See § 38-33.3-124(3), C.R.S. 2014 (“The
declaration . . . may specify situations in which disputes shall be resolved by
binding arbitration.”); § 38-33.3-124(1)(a)(II) (“The general assembly hereby
specifically endorses and encourages associations, unit owners, managers,
declarants, and all other parties to disputes arising under this article to
agree to make use of all available public or private resources for alternative
dispute resolution.”). Given this statutory language and the public policy in
Colorado favoring arbitration, see City & Cnty. of Denver, 939 P.2d at
1353, 1362, we cannot say that the declarant consent requirement in this case
“evade[s] the limitations or prohibitions” of CCIOA, § 38-33.3-104.
For
these reasons and others, the Court of Appeals concluded that the declarant
consent provision was enforceable and consistent with CCIOA. “Because the unit
owners did not obtain Metro Inverness’ written consent, their attempt to remove
the declaration’s arbitration provision was ineffective. Accordingly, we
conclude that the declaration still contains a valid and enforceable arbitration
agreement as set forth in [the declaration].”
As
a builder, the moral of the story here is that you need not rely on the
Colorado Legislature to protect your ability to arbitrate construction defect
claims asserted against you by homeowners associations. All you need to do is
to include within your declaration a valid and enforceable declarant consent
provision requiring your consent to amend out of the declaration the
arbitration requirement for construction defect claims.
Congratulations
to Marisa Ala, Mary Ritchie, and the rest of our friends at Palumbo Bergstrom
and to Amy Hansen, Richard Murray, and Ryan Warren at Polsinelli on this
outstanding result. The Colorado construction community owes you a big debt of
gratitude for helping to preserve a builder’s ability to enforce arbitration
provisions in construction defect cases.
For
additional information regarding the Vallagio decision, its impact, or
how to comply with its guidance, you can contact David M. McLain by e-mail at mclain@hhmrlaw.com or by telephone at (303)
987-9813.
