Construction-defects legislation introduced
The Colorado Statesman
With only a week left in the legislative session, lawmakers last Wednesday night formally introduced one of the most controversial pieces of legislation, a measure that aims to curb construction-defects lawsuits in an effort to spur the development of affordable housing.
The measure has been a long time coming, with negotiations on Senate Bill 220 dating back to late last summer; the issue itself has been brewing for years at the Capitol, with previous legislative attempts failing.
It’s appropriate that the measure was formally introduced on the night before Law Day, which occurs every year on May 1. The bill is perhaps the most important law bill to be introduced this session.
The sponsor, Sen. Jessie Ulibarri, D-Commerce City, was actually the swing vote in killing a reform bill last year. But he believes he has developed a moderate proposal that will allow the measure to move forward this year, despite a monumental challenge crossing hurdles in the waning days of the legislative session.
Sen. Jessie Ulibarri,
“Like all of my bills, I fight very hard, and I want to see this one advance as well,” said Ulibarri. “We’ll see where it goes.”
Where the bill is headed for now is to two separate committees, Senate State, Veterans and Military Affairs, as well as Judiciary, after Senate President Morgan Carroll of Aurora dual assigned the measure. She has acknowledged that she is not the biggest fan of the proposal.
With all deadlines waived, it only takes three days to pass a bill in the last days of the session. But the clock is ticking and House Speaker Mark Ferrandino, D-Denver, has also expressed his concerns with the measure, perhaps foreshadowing a difficult journey if it gets to the House.
A positive for the legislation is that it has bipartisan sponsorship, with Assistant Minority Leader Mark Scheffel of Parker in the Senate and House Minority Leader Brian DelGrosso of Loveland and Rep. Jonathan Singer, D-Longmont.
SB 220 would:
• Require a majority of condo unit owners in a homeowners association to back filing suit against a homebuilder, instead of two unit owners, as is required under the current law;
• Mandate mediation or arbitration first before a lawsuit is filed; and
• Require notification to condo owners within an association about potential impacts as a result of filing a lawsuit.
Ulibarri explained the need for the measure as being about affordable housing. He pointed out that only 2 percent of housing in Colorado is multi-family occupied, while nationwide the statistic is closer to 20 percent.
“Looking at our housing market, we need a diverse housing mix,” he said. “Rental housing prices are through the sky. In my community, the only affordable owner-occupied product is a trailer or a manufactured home.”
Ulibarri, who grew up in a trailer park just north of Water World, said his interest is to attempt to ensure that there is a diverse housing mix for working families to buy a product that builds wealth.
“You either pay rent to someone else… or you buy a trailer, and they’re treated as personal property, not real property, and they depreciate over time…” he said. “We can have another product in our housing mix.”
The Denver Regional Council of Governments, or DRCOG, studied the issue last summer and reported that the construction-defects issue is weighing heavily upon developers, despite the need for more multi-family housing.
The development community appears to believe that the probability of being sued is nearly 100 percent for attached residential for-sale projects involving an HOA. The study also found that the costs of litigation are a deterrent to future development. As a result, the homebuilders surveyed said they have no plans for building attached for-sale housing in the state, suggesting that the risk of being sued is “just not worth it.”
Ulibarri said the evidence presented in the study is a major problem, especially for younger consumers who are just beginning to build wealth.
“I’ve heard people say that people don’t really want to buy their own home, they just want to stay in rentals forever and never have an asset as a Millennial,” explained Ulibarri, who just turned 31 recently. “I think that’s pretty offensive, actually.
“Our generation has gone through the Great Recession, we’re harder hit than most, our job prospects have been more bleak,” he continued. “That doesn’t mean we never want to own our own home, it means that we have more financial barriers than nearly any generation that came before us.”
Ulibarri said HOA boards have unilateral ability to change contracts, which often results in litigation. For example, one side of the equation could unilaterally remove an alternate dispute resolution or arbitration declaration, he said.
“That doesn’t usually happen in contracts where one party can change it and you’re going to live by my terms,” said Ulibarri.
He pointed to consequences, such as negative impacts to some unit owners who may not be facing a construction-defects issue. Even though their windows may not be leaking, they could be pulled into a lawsuit if the association decides to move forward because others are experiencing defects.
During the course of that lawsuit, which could last several years, those owners might be unable to refinance or sell their units. Also, if the settlement doesn’t cover the entire cost of what it would be to replace every defect, then the association would potentially have to assess fees to cover the difference, which would apply to all unit owners, including those who never had defects in the first place.
“Homeowners should know what they’re getting into,” declared Ulibarri.
He has the support of 27 mayors and the Colorado Metro Mayors Caucus. Lakewood Mayor Bob Murphy called it a “titanic battle.”
“Each of our communities in the region share some common challenges, as we look forward, those challenges include providing a complete array of housing choices for our residents,” explained Murphy.
He pointed to empty nesters who want to get out of a big house, or young consumers who want to live near transit facilities.
“If we miss this window of opportunity, we are not going to maximize the region’s multi-billion-dollar investment in transit,” said Murphy.
“We think this bill is very modest,” he added. “Number one, we want some meaningful disclosures to homeowners… and number two is really democracy. We think there should be a vote of homeowners who are about to be encumbered.”
The Colorado Association of Homebuilders has been very active in crafting the measure, working closely with Ulibarri on the language. Amie Mayhew, chief executive of the Association of Homebuilders, said developers cite threat of lawsuit as the single greatest deterrent.
“We know now coming out of the recession that the decrease in condominiums is not because of the recession, it’s not because of financing — it truly is an issue of risk, and our builders’ inability to build because of that risk,” said Mayhew.
She rejects the notion that the reason there have been so many lawsuits is because developers are building defective projects. Instead, Mayhew said the lawsuits have proliferated because trial attorneys are hunting for litigation.
“We believe that the issue is that this is frankly like shooting fish in a barrel for the trial attorneys… there’s definitely an incentive for the trial attorneys to go out and cultivate these types of lawsuits,” opined Mayhew.
HOAs, homeowners and trial attorneys fight back
But Jeff Kerrane, a construction-defects attorney with Benson, Kerrane, Storz & Nelson, a firm specializing in construction-defects law in Colorado, shrugged off the notion that trial attorneys oppose the measure simply for the sake of business.
“There’s this myth out there that the builders are trying to perpetuate, that the attorneys are filing these frivolous construction-defect lawsuits, and I have never heard of any construction-defect case in Colorado every being thrown out for being frivolous,” said Kerrane.
“If the concern is that these frivolous lawsuits are being filed, then I think that what the builders should be pushing for would be a law that would award attorney fees to the prevailing party,” he continued. “That way if a frivolous lawsuit is brought, then the builders would be able to recoup all of their costs and attorney fees.”
Kerrane doesn’t buy the argument that attached residential for-sale building has remained stagnant as a result of lawsuits. He said Colorado already has the weakest consumer protection laws in the country in terms of construction-defects law, including some of the shortest timelines in the nation.
“This bill is just taking that a step further,” opined Kerrane.
His biggest concern with the bill is over the arbitration requirement. Kerrane said arbitration is a long and expensive process, often costing $400 per hour. He said arbitration could run in the tens of thousands of dollars.
Kerrane also alleged an inherent bias in the arbitration process, suggesting that arbitrators with regular clients, such as homebuilders, might favor the developers over the homeowners.
“This bill allows the builders to actually select the arbitration service… and it’s the burden of the homeowner to show that the arbitration service is not fair,” explained Kerrane. “There’s arbitration services out there… that are actually kind of set up where the builders would use these arbitration services over and over and over again, and there’s this repeat player syndrome, where the person that’s paying the most money for the arbitration service, I would think, would tend to get more favored service from the arbitration.”
The Colorado Trial Lawyers Association is set to actively oppose the legislation, pointing to many of the concerns raised by Kerrane.
“These builders should strive for quality construction instead of proposing to take away Colorado consumers’ right to a jury trial,” decried Michael Ogborn, president of the Trial Lawyers Association. “Unfortunately, they want a free pass to escape accountability.
“Anyone looking to buy a condo should be cautious,” he continued. “This bill sets up incredibly difficult obstacles to obtain justice should these condos be built in a dangerous manner. A vote for [SB 220] puts all of us at risk.”
Also leading the charge in opposition is the Community Associations Institute of Colorado, which represents community associations, such as condo boards, cooperatives and homeowners associations. Molly Foley-Healy, chairwoman of CAI’s legislative action committee, called the bill the “Horrors of Homeownership Act.”
“Sen. Ulibarri’s stated goal is to create more affordable housing, but this bill has nothing to do with affordable housing,” said Foley-Healy. “Instead, it hurts the very people he said he wanted to help. It effectively blocks homeowners from holding builders responsible for their shoddy construction and leaves homeowners living in HOAs to pick up the tab for repairing the defects.
“If the folks living in HOAs can’t afford to pay for repairs, they will be stuck living with the defects while the investment they made in their homes is destroyed,” she added.
CAI believes it would be difficult for volunteer boards to write proper disclosures that conform to the law, and there are concerns around obtaining a majority in order to move forward with a lawsuit.
“In large-scale communities like the Highlands Ranch, Ken Caryl range, it’s going to be absolutely impossible to get 51 percent of owners to give consent,” said Foley-Healy.
She also pointed out that in mountain communities where people often own a second home, or military areas where homeowners could be deployed overseas, it might be insurmountable to collect the necessary support to move forward with a suit.
“If you take all of these whoppers together… there is no question that if this bill passes and is signed into law, it would strip away the ability for homeowners… to hold developers responsible,” opined Foley-Healy.
“If this bill were signed into law… nobody should ever purchase a unit in a condo association after that time because they have taken away every incentive for builders to build quality construction,” she added.
J.L. “Cap” Witzler understands too well the nightmare that can come from a defective development. As the past vice president of the Beauvallon HOA, he saw firsthand how important construction-defects laws are.
The luxurious Beauvallon Condominiums in the Golden Triangle neighborhood of Denver were plagued by defects almost from the beginning. The building’s barrier system had not been properly interfaced with claddings, and it was unable to control water.
Following a settlement in 2009, residents were forced to live through more than $21 million in repairs, which included wrapping the building in a sheath that blocked sunlight.
Witzler said that had the association not been able to change its bylaws, there would have been no way to file a lawsuit to find a remedy. He worries that SB 220 would erode the ability to seek such financial justice.
“If the builders and the developers are doing their job in the first place, why are we even having this discussion?” asked Witzler. “I just see this [bill] as self-serving to a very small group of people in the industry, and I don’t see that they’re looking out for the best interests of the people who are going to buy the product.”
Uphill battle in the legislature
Opponents such as Witzler, however, are hopeful that with less than a week left in the legislative session, the bill won’t make it out of the Capitol.
It helps opponents that both Carroll and Ferrandino are not shy about their opposition to the legislation. They don’t believe that there is evidence to prove a correlation between threat of lawsuit and stagnant condo development numbers.
Carroll acknowledged that the bill faces a tough climb in the Senate where she has assigned it to two committees.
“I’ve never thought that by weakening consumer protections or promoting defective construction, that that’s the key to getting construction built,” surmised Carroll.
“The first stab at this was to really even more aggressively gut consumer protections, and promoting defective construction as an economic development tool I don’t think is good public policy,” she added.
Ferrandino shared similar concerns, adding, “Fundamentally, I have huge concerns on the underlying premise of the conversation… I don’t think there is any conclusive evidence…
“If we are just going to take away homeowners’ protections with no actual measurable impact on policy, that just seems wrong,” Ferrandino added. “You just ask the people at the Beauvallon what they think of construction defects and what the impact to their building was and if they didn’t have the right to go to suit and remedy that.”
But if the bill does make its way to Gov. John Hickenlooper for his signature, it is likely to be met favorably. The governor on Wednesday would not indicate whether he supports the bill, as it had not been formally introduced yet. But he did point to his own experiences as a businessman.
In the 1990s, Hickenlooper developed some of the first lofts in LoDo. He said he is worried that the passion for building such developments has slowed.
“The truth is now it has blossomed, it has expanded more than we could have ever imagined,” said Hickenlooper. “I never would have dreamed… that we would see the density of housing… and yet you go down and look over the last five years, almost every one of those units is rented and that’s not healthy.
“When I ask developers why people aren’t doing condominium projects down there, again and again they say the law is so tilted… towards a condominium association almost having to take a developer to court… it’s just not worth… the risk to go ahead and build it,” the governor continued.
“Obviously you want to protect people’s rights… but at the same time you don’t want to have a system where builders won’t build condominiums,” he added. “It’s not good for the long-term resiliency of the community.”
Ulibarri understands that this may not be the year to pass construction-defects litigation reform. But he said he is simply advancing the conversation.
He was hopeful that another condo-related bill, Senate Bill 219, would have made it through the process. The measure would have directed the Division of Housing, the Division of Insurance and the Department of Law to investigate issues that may contribute to the affordable housing shortage.
The bill had made it through State Affairs on Wednesday, but Senate Appropriations killed it on Thursday.
Another bill sponsored by Ulibarri, Senate Bill 216, would create state-level insurance premium rebates to address the high cost of liability insurance for developers who build multi-family, owner-occupied affordable housing.
The legislation died on a Second-reading vote on Friday.
“By taking a thorough look at the complex underlying factors of our affordable housing shortage, the state can take a more strategic approach to fixing the problem,” explained Ulibarri. “The intense pressure on the affordable segment of the new, resale and rental markets is having a real effect on Colorado families’ ability to keep a roof over their heads.”