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CO Supreme Court Upholds Developer’s Right to Demand Arbitration of Construction Defect Claims

Last Monday, the Colorado Supreme Court, affirming the lower court’s ruling, issued a decision essentially upholding condominium developers’ right to require arbitration of construction-defect disputes. See Vallagio at Inverness Residential Condo. Ass’n v. Metro. Homes, Inc., et al., Case No. 15SC508 (CO Sup. Ct.) (June 5, 2017). The Court’s 5-2 decision last week, combined with recent state legislation (House Bill 1279) requiring approval by a majority of condominium owners to pursue legal action against condominium developers, may reinvigorate what has been a dormant market for the better part of a decade.

The dispute presented to the Colorado Supreme Court concerned a so-called “right to consent” in which the condominium developer attempted to contractually retain a perpetual right to consent to any subsequent homeowners association’s proposed amendments to the community’s declarations regarding arbitration for construction-defects claims. In short, the condominium developer included contract language preventing homeowners associations from subsequently removing arbitration requirements without its consent (i.e., the original declaration required binding arbitration of construction-defect claims and prohibited any amendment to the binding arbitration provision without the developer’s consent).

The underlying litigation was the product of construction defect claims asserted by unit owners. Unable to resolve their claims informally, the unit owners voted to amend the property declaration to remove the arbitration provision and the homeowners association then filed a lawsuit against the developer. In response, the developer moved to compel arbitration, arguing that the arbitration provision deprived the district court of jurisdiction and that the unit owners’ attempt to amend the provision was invalid because they failed to secure its consent. The homeowners association asserted that the right to consent was invalid under the Colorado Consumer Protection Act (CCPA) and the Colorado Common Interest Ownership Act (CCIOA), the latter of which governs rules between developers and property owners in communities with shared walls.

The Colorado Supreme Court, however, concluded that developers can, in fact, retain a perpetual right to consent. In arriving at its decision, the Court reviewed the language of the CCPA and the CCIOA, as well as the legislative intent underlying each statute. The majority determined that although the CCIOA bars developers from requiring thresholds higher than 67 percent of residents to make changes to contracted declarations, nothing in either law prohibits a developer from including a provision perpetually requiring its consent for particular amendments. Indeed, according to the majority opinion, such an outcome is consistent with the CCIO language and Colorado public policy favoring alternative dispute resolution, including arbitration.

Consequently, according to the Court, the developer is entitled to binding arbitration of construction-defect claims arising from the development and the homeowners cannot modify or amend the associated provisions without the developer’s consent.