Colorado Lawmakers Gear up for Construction-Defects Reform in 2015
John Aguilar | The Denver Post
January 4, 2015
Supporters of a change to a Colorado law blamed for slowing condominium construction to a trickle are hopeful 2015 will be the year they succeed.
Lawmakers have tried for the past two years to reform Colorado's construction-defects law, which developers complain makes building condos too fraught with legal liability.
Both times, the legislature came up empty.
But that could change in the new legislative session, which begins Wednesday. Supporters of reforming Colorado's law say a new Lakewood ordinance, designed to spur condo building in that city, is apt to serve as the impetus for passing a bill, as other cities eye similar ordinances.
"A patchwork around the state on this issue is not the way to go," said Rep. Brian DelGrosso, R-Loveland, who was part of the reform effort in the last session. "Hopefully, the Lakewood measure will spur the conversation this year."
According to the market research firm Metrostudy, condos accounted for more than 20 percent of all housing starts — or more than 4,000 units — in late 2005 but only 3 percent through the first three quarters of 2014.
Just last month, Denver Mayor Michael Hancock said reforming the law was his top legislative priority.
"Right to repair" A key concern for builders is that Colorado law lets the majority of a homeowners association board, rather than a majority of the homeowners, decide whether to sue over construction defects. The law also allows home owners to reject a fix offered by a builder even before the builder does the work.
Builders say the law is particularly troublesome for condos because so many home owners live under one roof, complicating legal action.
In October, Lakewood took matters into its own hands by passing an ordinance making it tougher for homeowners living in multi-family developments to sue over defects, like leaky windows, cracked concrete and bad drainage.
The city's measure gives builders a "right to repair" faulty work before facing legal action and requires that a majority of home owners approve legal action before it is taken.
Nancy Stockton, president of the homeowners association at the Vallagio at Inverness in Arapahoe County, said following Lakewood's example statewide would only make it that much harder to hold builders accountable for the quality of their work.
"I think it would be a license for builders to cut corners and be even more lax in their construction," said Stockton, whose community is in litigation over alleged defects. "The dispute process is already onerous."
John Stovall, a resident at Denver's Penterra Plaza, said it took a lawsuit seeking $20 million to get a $10.5 million settlement from the developer to fix the 24-story building's problems.
He said initial efforts to get the problems fixed were inadequate, leading to the litigation and then months where homeowners were besieged by workers fixing windows and pushing wheelbarrows of bricks through their high-end units to address subpar mortar work.
"They had to go through each unit multiple times," Stovall said. "It went on for essentially two years. These are people's homes."
But builders, and increasingly municipal leaders, say in many cases homeowners associations and trial lawyers are just looking for any opportunity to exploit honest and fixable mistakes.
The accompanying spike in the cost of insurance policies for condo projects has deterred many builders from taking on the work in Colorado, they say.
Justin McClure, a principal with Louisville-based DELO, said getting a loan for condo construction is tough because lenders are worried about the project getting tangled up in legal action.
DELO is sitting on a 46-acre parcel in Erie and a 20-acre parcel in Longmont, both of which McClure said would be perfect for condos.
"A lot of my building partners have ended up in litigation," he said. "It's just not worth taking on that type of liability."
"Fishing expeditions" Lawyers in the industry say there's no good way of tracking how many of Colorado's condo projects end up in dispute, but attorney David McLain said the problem is directly tied to state law.
McLain, who represents general contractors and developers, said lawyers for the plaintiffs often go on "fishing expeditions" after a notice of claim is filed, listing not just legitimate problems but technical code violations. What could be addressed under the standard warranty process becomes something much bigger, he said.
"I think the problem is when attorneys insert themselves into that warranty process between the homeowner and the builder," he said. "There's got to be a better way to separate the wheat from the chaff, get real problems fixed early and not hold up money to pay attorney's fees."
The Colorado HOA Forum, which pegs itself as an organization representing individuals who live in homeowner association-controlled properties, likes Lakewood's requirement that a majority of homeowners approve legal action.
Stanley Hrincevich, the group's president, said homeowners association boards are often too quick to turn to litigation on their own.
"This protects the homeowner from costs associated with frivolous lawsuits and the raiding of HOA funds by the HOA legal industry," he said.
Heidi Storz, a construction-defects attorney who represents homeowners and home owner associations, said the notion that builders are getting a bad deal here is fanciful. At six years, Colorado ranks near the bottom of states nationwide in the time it gives homeowners to discover and report defects, Storz said.
Moreover, a 2008 Colorado Supreme Court decision, she said, prevented homeowners from collecting pre-judgment interest in disputes, creating an incentive for builders to hedge and delay.
She also noted that many condo units early on are owned by the developer and suggested any decision on whether to sue should be made by residents who actually occupy units.
And Lakewood's ordinance that allows developers to try to repair a problem before they can be sued runs roughshod over home owners' property rights, she said. Why, she asks, should the builder get to dictate what repair should be made?
"The homeowner should have the right to give permission for a repair instead of being forced to accept a repair that is insufficient and may cause more damage to the property or more inconvenience to the homeowner," Storz said.
Stovall, who has lived at Penterra for nearly 10 years, said Colorado's construction-defects law is not why developers aren't building condos.
As a real estate broker for 40 years, Stovall said developers invest where payoff is greatest. Right now, he said, that is in the metro area's red-hot apartment market, where the median rent reached $1,772.
"Construction defects is a convenient talking point for them," he said. "When the market changes so that selling makes them more money than renting, they will go back to building condos."
In the meantime, Rep. Jonathan Singer, D-Longmont, said something needs to be done.
Singer, who helped sponsor a reform bill during the last legislative session, said he's mostly concerned about the lack of affordable multifamily for-sale homes being built.
"The less you see of multifamily and starter housing, the more it's driving up the rental prices for those who can least afford it," he said.
But Singer cautioned that in the legislature's zeal to address the issue, it needs to be careful not to dismiss the concerns of homeowners who find themselves living in a perpetual fix-it zone.
"We do have to be careful we don't flip the scales to the other side," he said.
John Aguilar: 303-954-1695, email@example.com or twitter.com/abuvthefold
Condo starts in metro denver (1-year rolling average based on third quarter data)
Year / condo starts / % of overall housing starts
2005 / 3,589 / 18.5
2006 / 3,863 / 21.9
2007 / 2,342 / 22.9
2008 / 1,047 / 18.8
2009 / 281 / 10.1
2010 / 216 / 5.8
2011 / 97 / 2.7
2012 / 86 / 1.8
2013 / 244 / 3.7
2014 / 238 / 3.1
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