At Long Last, the Colorado Legislature Gets Serious About Construction Defect Reform – In a Constructive Way

On February 5^th, Senators Zenzinger and Coleman, along with Representative Bird, introduced Senate Bill 24-106 into the Colorado Legislature.  The bill has been assigned to the Senate Committee on Local Government and Housing.  What follows are the various portions of the bill I believe to be the most impactful, as described in the bill summary, along with my commentary thereon:

Sections 3 and 6 – A True Right to Repair

Sections 3 and 6 create a right for a construction professional to remedy a claim made against the construction professional by doing remedial work or hiring another construction professional to perform the work.  The following applies to the remedy:

• The construction professional must notify the claimant and diligently make sure the remedial work is performed; and
• Upon completion, the claimant is deemed to have settled and released the claim, and the claimant is limited to claims regarding improper performance of the remedial work.

Currently, a claim may be held in abeyance if the parties have agreed to mediation. Section 3 also adds other forms of alternative dispute resolution for which the claim would be held in abeyance.  Alternative dispute resolution is binding.  If a settlement offer of a payment is made and accepted in a claim, the payment constitutes a settlement of the claim and the cause of action is deemed to have been released, and an offer of settlement is not admissible in any subsequent action or legal proceeding unless the proceeding is to enforce the settlement.

While Colorado has had a notice of claim requirement and an opportunity for construction professionals to make an offer of repair since the enactment of the Construction Defect Action Reform Act II in 2003, Colorado’s construction professionals have never had a true right to repair.  Should SB 24-106 become law, they will.  In my view, this is a move in the right direction.  No longer will owners be able to refuse reasonable offers, hoping to do better in the litigation lottery.  In short, once the builder performs, or has performed, repairs, the owners claims are deemed released and the matter is over.

Furthermore, this section clears up the current ambiguity in the notice of claim process regarding what happens when an owner accepts an offer of a sum certain in response to a notice of claim.  The current statute does not provide for a release of the issues raised in the notice of claim, and defense counsel have to ask for one, but cannot force an owner to sign it.  Under the new law, the release of those issues raised would become automatic when an owner accepts a sum certain in response to a notice of claim.  Both of these are positive steps forward.

Section 4 – Homeowner Consent Before an HOA Can Bring a Claim

To bring a claim or related action, Section 4 requires a unit owners’ association (association) to obtain the written consent of at least two-thirds of the actual owners of the units in the common interest community. The consent must contain the currently required notices, must be signed by each consenting owner, and must have certain attestations.

In 2017, the Colorado Legislature passed House Bill 17-1279, which I called a misguided attempt at construction defect reform.  At the time, I wrote:

Pursuant to this bill, an executive board may only institute a construction defect action only if authorized by a simple majority of the unit owners, not including: 1) any unit owned by any construction professional, or affiliate of a construction professional, involved in the design, construction, or repair of any portion of the project; 2) any unit owned by a banking institution; 3) any unit owned in which no defects are alleged to exist, and/or 4) any unit owned by an individual deemed “nonresponsive.” . . .  While [the bill] may seem helpful in curbing construction defect litigation, it is actually a step in the wrong direction.  Currently, under Colorado’s Common Interest Ownership Act, a developer may include a language in an HOA’s declaration requiring that the association provide owners with certain information about a proposed construction defect action, and requiring the approval of 67% of the unit owners, with no restrictions on which unit owners’ votes actually count towards the total.

In short, Section 4 of SB 24-106 rewinds the clock, putting the construction industry on the same footing on which it found itself before the misstep of the 2017 legislative session.  This is a long-overdue step in the right direction.

Section 5 – Actual Damage Requirement for Implied Warranty and Negligence Per Se Claims Based on Violations of the Applicable Building Code

Under the act, a claimant is barred from seeking damages for failing to comply with building codes or industry standards unless the failure results in:

• Actual damage to real or personal property;
• Actual loss of the use of real or personal property;
• Bodily injury or wrongful death; or
• A risk of bodily injury or death to, or a threat to the life, health, or safety of, the occupants.

Section 5 requires the actual property damage to be the result of a building code violation and requires the risk of injury or death or the threat to life, health, or safety to be imminent and unreasonable.

This is a very positive change.  Ever since the Colorado Legislature passed the Homeowner Protection Act in 2007, Colorado home builders have been living in a strict liability world.  If passed, Section 5 would make code violations actionable only if they caused actual damage, loss of use, bodily injury, or an imminent and unreasonable risk of injury or threat to the life, health, or safety of the occupants.  This would certainly take a lot of the sting out of the Homeowner Protection Act by creating sensical and reasonable restrictions on claims based on code violations.

Section 7 – Clarifying Associational Standing Under Colorado’s Common Interest Ownership Act

Under current law, an association may institute, defend, or intervene in litigation or administrative proceedings in its own name on behalf of itself or 2 or more unit owners on matters affecting a common interest community. For a construction defect matter to affect a common interest community, section 7 requires that the matter concern real estate that is owned by the association or by all members of the association. Section 7 also establishes that, when an association makes a claim or takes legal action on behalf of unit owners when the matter does not concern real estate owned by the association:

• The association and each claim are subject to each defense, limitation, claim procedure, and alternative dispute resolution procedure that each unit owner would be subject to if the unit owner had brought the claim; and

• The association has a fiduciary duty to act in the best interest of each unit owner.

Under Colorado’s Common Interest Ownership Act, a homeowners’ association may: “Institute, defend, or intervene in litigation or administrative proceedings in 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).  This is the statute that allows HOAs to assert construction defect actions on behalf of individual owners.  If enacted, SB 24-107 would make clear that if the association is suing individual owners in a representative capacity, regarding property not owned by the association, its claims would be subject to the same defenses, limitations, claim procedures, and ADR provisions to which the individual owners’ claims would be subject.  Furthermore, it makes clear that in such cases the association would have a fiduciary duty to act in the best interest of each unit owner.

We will certainly be watching this bill closely, as it is the first sign that the Colorado Legislature may be serious about construction defect reform.  If passed, this bill would go along way in creating an environment where builders may reassess the risk of building condominiums and townhomes in Colorado.  This would do a lot to address affordable housing in the state.  Of course, I am an eternal optimist.  Stay tuned.