Sunrise

Take a moment. Close your eyes.  Feel the sun on your face… shutterstock_228722404

Actually, this is not a Friday morning mediation.  But a title and tagline discussing “contracts law” would hardly promote readership.

The Colorado Supreme Court recently passed on the opportunity to consider whether sophisticated business entities could contractually modify the statute of limitations and agree upon an accrual period when constructing a project for residential use.  R.G. Brinkmann Company v. Broomfield Senior Living Owner, LLC and Sunrise Development. 2017SC351 September 5, 2017.

I had been watching this case with interest, not only because I was representing a subcontractor involved, but also because it could have far-reaching implications for all construction professions.  Frankly, the idea that sophisticated construction professionals could contractually modify the statute of limitation and agree to an accrual period for claims would have gone further in remedying the problems of the Colorado Construction Defect Action Reform Act and rising insurance cost than any action by the General Assembly last session.  The problem lay in the uncertain and amorphous concept of “substantial completion” and when/how defects are “discovered”.  Construction professionals face exposure for six or more years under the statute.  An attempt to contractually limit and define the period of exposure would be an obvious fix.  Although Justice Eid would have granted certiorari to review the questions presented by R.G. Brinkmann we have no other insight into the decision to leave the issues for another day.

Thus, we are left with the Colorado Court of Appeals decision and these takeaways: a commercially run senior assisted living facility is a “residential” project; even though none of the “residents” are homeowners, the project falls under the Homeowner Protection Act; and no matter how sophisticated the commercial entities are, they cannot modify the statute of limitations or agree to an accrual period for construction defect claims.

 

Construction Defect Disclosure Law Effective August 8, 2017

The Colorado Common Interest Ownership Act’s newest addition became effective August 8, 2017.  Colorado Revised Statute 38-33.3-303.5 (formerly HB 17-1279) was signed into law on May 23, 2017 and became effective this week.

The law requires homeowner association executive boards to satisfy new disclosure, meeting, and voting requirements before commencing an action against construction professionals under Colorado’s Construction Defect Action Reform Act (C.R.S. 13-20-803, et seq.).

Before beginning a construction defect action (defined broadly as any civil action or arbitration proceeding for damages….against a construction professional..for damages or loss to…real or personal property or personal injury caused by a defect in the design or construction of an improvement to real property…”), the executive board of a common interest ownership community must “mail or deliver written notice” to each owner AND to each construction professional against whom the action is proposed.  The construction professional must also be provided separate notice advising of the owner’s meeting.

The notice must contain a description of the  nature of the construction defect action, which identifies the alleged defects with reasonable specificity, the relief sought, a good-faith estimate of the benefits and risks involved, and any other pertinent information, including

Presumably, the notice of owner’s meeting would give the construction professional time to prepare a presentation, propose repair, or offer a monetary settlement to be made at the meeting.

Vague laundry lists of defects have been the norm in construction defect notices of claim and lists of defect.  While the new law could result in early notice and more full disclosure, there is no mechanism allowing the construction professional an inspection or to obtain greater detail and the new law lacks a strong enforcement mechanism.

The advisory notices need not be sent to any construction professionals identified after the first advisory notice is mailed, so construction professionals with discreet scopes of work may be left out in early stages.

As a practical matter, the new laws timing requirements may not provide construction professionals sufficient time to truly prepare a response to the allegations, much less rally the support of its insurance carrier and legal counsel before the owner’s meeting.  While there are benefits to open dialogue, construction professionals should participate in any owner meetings with caution: the association will clearly have retained counsel and has litigation on its mind; statements and presentations could be used as later evidence in a lawsuit; and early participation without the approval or involvement of your insurance carrier may also have coverage implications.

 

Out for Summer

capitol_vd_bobashThe First Regular Session of the Seventy-first General Assembly is Out for Summer having adjourned May 10, 2017, so it seemed an appropriate time to recap Construction Defect Reform across the State.

This session again saw an ambitious batch of Construction Defect reform bills – six in in fact. Both the Speaker of the House and President of the Senate highlighted reform in their opening speeches.  The bills ranged from defining “construction defect” to early allocation of costs among defendant litigants.

However, the only bill to garner enough support to make it to the Governor’s desk was HB 17-1279.  The bill requires that, before the executive board of a unit owners’ association (HOA) in a common interest community brings suit against a developer or builder on behalf of unit owners, the board must: Notify all unit owners and the developer or builder against whom the lawsuit is being considered; Call a meeting at which the executive board and the developer or builder will have an opportunity to present relevant facts and arguments; and Obtain the approval of a majority of the unit owners after giving them detailed disclosures about the lawsuit and its potential costs and benefits.

The hope is that it will reduce the risk of construction defect litigation just enough for insurance companies to lower their rates, allowing builders to re-enter the owner-occupied multi-family housing market in Colorado.

It will likely take a few years for insurance carriers to respond to HB 17-1279 with rate reductions, and another few years for builders and developers to feel confident that HB 17-1279 offers any true protection from overzealous litigants, but apparently, hope springs eternal among the General Assembly.

The Colorado Supreme Court’s recent ruling in Vallagio at Inverness Residential Condo Association vs. Metropolitan Homes Inc. will probably have more impact; reinforcing the power of a Declarant to bind future HOA members to arbitration of construction defect disputes.

In early June, the Court ruled that a homeowners association was wrong to sue a builder after disregarding bylaws that require binding arbitration to settle claims of construction defects.  The association’s key misstep, the court said in a 5-2 ruling, involved its bid to change the rules to allow litigation without getting the consent of the development’s builder.

“Because the unit owners did not obtain the Declarant’s written consent to remove the declaration’s arbitration provision, the attempted amendment was ineffective. Consequently, the Association remains bound by the arbitration agreement …”

Cities also continue to effectuate change on the local level.  Those that currently have Construction Defect ordinances include:

Arvada, Aurora, Castle Rock, Centennial, Colorado Springs, Commerce City, Denver, Durango, Fort Colins, Lakewood, Littleton, Lone Tree, Loveland, Parker, Westminster, and Wheat Ridge.

These ordinances include a combination of Notice-Repair language (pre-suit notice to construction professionals with a right to repair); Disclosure-Voting requirements (pre-suit disclosure to HOA members and lawsuit approval); Substantive Law changes (limitation of type or scope of a construction defect claim); or Plat Note language (allowing developers to record plat notes mandating arbitration).

As we enter the 2017 summer construction season, once again very little has changed from years past despite reform efforts at the General Assembly.  The General Assembly will convene once again in January 2018, and we will continue watching the circus for any true reform.

Special Thanks to @AxiomPolitics for working tirelessly and keeping the Colorado Defense Lawyer Association up to date on all legislative matters.

 

Forest City Revisted

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More than a year ago, the Colorado Court of Appeals issued an opinion in Rogers v. Forest City Stapleton, Inc. (2015COA167).  My post then noted the decision could significantly impact developers and construction professionals in Colorado.

The lawsuit involved a dispute between a homeowner in the Stapleton neighborhood and the master developer of the community (Forest City).  Before any new structures were built, Forest City subdivided the former Stapleton International Airport land into individual lots to create a new residential development.  Undeveloped lots were sold to a professional homebuilder (Infinity Home Collection at Stapleton, LLC).  Infinity improved and finished the lot, constructed a house on it, and sold the lot to Rogers.

Rogers claims that an undisclosed high water table beneath his house, coupled with calcite leaching from nearby roads, infiltrated his basement.  Rogers’ claim against Forest City included breach of implied warranty.  His theory was that by allowing Infinity to construct a home with a basement on the lot, Forest City had implied that the lot was suitable for that purpose.

Forest City argued that it did not have any role in the builder’s or homeowner’s decision to build a basement on the lot because it had provide the builder with all of the information available respecting the lot’s subsurface and groundwater condition.

Before the Court of Appeals decision, no Colorado appellate court had recognized an implied warranty running from a lot developer to a subsequent home buyer where the developer is not involved in construction of the house.

Although the opinion attempted to carve a narrow exception for implied warranty claims against a developer, developers, builders, contractors, and designers may now be exposed to more frequent and successful claims for breach of implied warranty.

The Colorado Supreme Court considered the case and has issued it’s ruling. The Supreme Court concluded that because breach of the implied warranty of suitability is a contract claim, privity of contract is required in such a case.

The home buyer was not in privity of contract with the developer and thus cannot pursue a claim against the developer for breach of the implied warranty of suitability.

Thankfully, the Colorado Supreme Court decision assuaged concerns raised a year ago by the court of appeals’ decision.

AIA Contract Provision Void

In early March, 2017 the Colorado Court of Appeals determined a key AIA Contract Provision was void and unenforceable in a residential project.

In Broomfield Senior Living v. R.G. Brinkmann , the Court of Appeals considered whether Section 13.7.1 of the AIA Form A101-1997 Contract was enforceable against the ownership of a senior living project.

Section 13.7.1 of the AIA contract generally states that any defect claims against the general contractor must be filed within a specified date from substantial completion of the project.

The A101 contract is a popular agreement used by owners and general contractors in construction. In this instance, it was entered into between a national general contracting firm and a national company that builds and operates senior living centers.

Brinkmann argued that the AIA’s statute-of-limitations provision (using “substantial completion” as the starting point) reflected the parties’ intent to deviate from Colorado’s 2 year statute of limitation.  The appellate court concluded that such deviation was in violation of the express purpose of the Homeowners Protection Act (“HPA”).  The decision pivoted on the determination that the senior living community was “residential” in nature.   By declaring the project to be “residential,” the Colorado Court of Appeals nullified the concept that commercially-sophisticated parties can consent to modify the statute-of-limitations by adopting long-standing AIA contract language.

Commercial contractor should be aware that Section 13.7.1, which is found in several AIA contract forms, won’t be enforced in any Colorado project involving the construction of “residential” living units.