Senator Ulibarri’s Homeownership Opportunity Act (SB 14-220) was finally introduced Wednesday evening.   This much anticipated bill represents a moderate compromise with bipartisan support to address construction defect litigation in condominium projects.  As has been widely reported in the media, there are very few condominiums being constructed in Colorado, an issue that has the metro area mayors and other leaders concerned.   According to many experts, the primary contributing factor is the pervasive nature of construction defect litigation aimed at Colorado’s condominium projects.   The bill covers two topics related to construction defect litigation – alternative dispute resolution and meaningful disclosure followed by owner consent.

Alternative Dispute Resolution

The Colorado Common Interest Ownership Act (CCIOA) governs the creation and operation of condominium communities in Colorado.  CCIOA encourages the use of alternative dispute resolution such as mediation and arbitration in a variety of places, and CCIOA Section 124  specifically provides that the governing documents for a project may specify situations that must be submitted to binding arbitration.   Consistent with CCIOA’s current provisions, Senator Ulibarri’s bill provides that if the governing documents require that construction defect actions be submitted to mediation or binding arbitration, the developer is entitled to rely on those provisions.  And, therefore, per SB 14-220, if there are allegations of construction defects, those allegations would be resolved through the process set forth in the governing documents (i.e., mediation or binding arbitration), unless those responsible for construction consented to a different process.

The bill also requires

– potential arbitrators make disclosures about potential conflicts of interest and be neutral parties

-all buyers of units in these projects be notified in their sales contracts that the governing documents may require certain disputes be resolved by binding arbitration.

– the arbitration be held in the same judicial district where the project is located, unless the parties agree otherwise.

This bill represents a more thorough implementation of CCIOA’s existing provision allowing the use of binding arbitration, while putting in safeguards for the owners to help ensure that they are aware of any requirement for binding arbitration and the arbitration is not stacked against them by the use of an inconvenient location or arbitrators who have inherent conflicts of interest.

Senator Ulibarri’s bill does not represent a novel approach on this issue.  In a recent decision, the California Supreme Court held that if the governing documents for a condominium project require construction defect claims be resolved in binding arbitration, that requirement will still apply even if an owners association amends the governing documents to remove the binding arbitration requirement.

Meaningful Disclosure & Owner Consent

The second point in SB 14-220 is also CCIOA-based.  CCIOA currently allows an owners association, acting through its board of directors, to initiate construction defect litigation.   In many instances, there are only three members on an HOA’s board of directors.  This means that two owners can commence construction defect litigation for an entire condominium project.   And, as this recent Colorado Court of Appeals case illustrates, owners are often unable to sell their units or refinance, while having no say in whether or not the owners association goes down this path.  While CCIOA puts most decisions for a condominium project in the hands of the HOA board, there are a few things that are viewed as so significant that all owners should have an opportunity to weigh in on them.   Amending the governing documents, adoption of budgets and levy of assessments are examples of the big decisions that require an owner vote.

This bill requires that a thorough written disclosure be made to all owners detailing the nature of the potential claims, the expected duration of the litigation, the estimated costs associated with the litigation, the impact on the ability of owners to refinance and/or sell their units both during and after the litigation, the manner in which the owners association anticipates funding the cost of litigation (including any special assessments or use of reserves), and the likelihood of success.   After making such a written disclosure, an owners association is required to obtain the written consent of owners holding at least a majority of the votes.

This bill promotes transparency to all owners within a condominium project on issues surrounding construction defect litigation and ensures that the very kind of dispute resolution procedures that the legislature has endorsed in CCIOA already aren’t taken off the table.