By Joe Smith, Burg Simpson Eldredge Hersh Jardine, P.C. 

Among the most feared phrases to be uttered in a common interest community is “construction defect.” A construction defect is generally defined as a condition resulting from a flaw in design, workmanship, or materials that reduces the value of a structure or threatens the safety of its occupants. Once identified, construction defects have to be taken seriously and without delay. Although “construction professionals” (as defined Colorado’s Construction Defect Action Reform Act) are afforded at least two opportunities to resolve potential CD claims before an Association can file a CD lawsuit, every Association that finds itself with defects should assume that litigation is likely to occur.

Potential Benefits of CD Litigation

The greatest potential benefit to an Association and unit owners in successfully pursuing CD Litigation is the recovery of funds by negotiation, settlement, trial, or arbitration that allow the Association to permanently repair the defects at issue at the expense of those who are responsible for them, rather than depleting reserves or specially assessing the unit owners. By being able to make these repairs, the Association avoids the downsides identified below.

Additionally, if the Association prevails in the CD Litigation a court or arbitrator may order the construction professionals to reimburse the Association for its litigation expenses (e.g., the cost of expert witness investigation, reporting, and testimony; filing fees; and deposition costs that have to be paid as they become due). The court or arbitrator may also order the construction professionals to pay the Association’ attorney fees. Awarded litigation costs and attorney fees are in addition to repair costs and any other legal damages the Association recovers.

Potential Downsides to CD Litigation

There are several potential downsides to an Association not pursuing CD Litigation when preliminary investigation identifies construction defects that will require significant repairs. Among the most significant downsides are:

• The defects could result in increased maintenance or repair costs for the Association.

• The defects could cause an increase in assessments or special assessments to cover the cost of repairs.

• If the Association does not initiate its CD claim before applicable legal deadlines, the claim will expire.

• If the Association does not prevail on its CD claim, a court or arbitrator may awards costs and attorney fees to the construction professionals the Association could be responsible for paying.

• There is no guarantee that the Association will recover enough funds to repair all of the defects.

• Until the defects are repaired, additional damage to property and a reduction in the useful life of the common elements might occur. 

• Until the defects are repaired, or until the CD claim is concluded, the market value of the units in the Association might be adversely affected.

• Until the defects are repaired, sellers of units may owe unit buyers a duty to disclose known defects.

• Until the defects are repaired, or until the CD claim is concluded, unit owners might have difficulty refinancing and prospective buyers might have difficulty obtaining financing.

• Certain federal underwriting standards prevent refinancing or obtaining a new loan in projects where a construction defect is claimed, and certain lenders simply will not refinance or provide a new loan in projects where a defect is claimed.

How Does an Association Determine if CD Litigation is Warranted?

Whether or not construction defects exist in a community is usually beyond the knowledge of a community manager, Board members, and unit owners. Fortunately, a number of Colorado forensic engineers and architects, repair contractors, and CD attorneys specialize in working with Associations to help identify defects in common elements and determine if CD litigation may be necessary. 

Initially, the CD attorney usually retains a forensic engineer or architect and/or specialty repair contractor to perform visual observations of the exterior of the community and possibly a small number of unit interiors. These experts look for and document visible defects, damage, or distress. With that information in hand, as well as the Association’s Declaration and any amendments, the CD attorney can advise the community manager and Board about the types and scope of defects, the impact of applicable time limits on the CD claims, statutory processes that must be complied with before initiating CD Litigation, and any additional pre-litigation processes the Declaration may require the Association to follow. As part of this discussion, the CD attorney should tell the community manager and Board whether retaining the attorney to handle all applicable pre-litigation requirements and, if necessary, file a CD lawsuit is warranted. Ultimately, the decision rests with the Board, which should ask the CD attorney any and all questions that come to mind about the pros and cons of pursuing a CD lawsuit.

Building a common interest community is a complex undertaking that requires meticulous planning followed by strict observance of construction best practices. Serious construction defects can – and often do – occur. An Association that discovers construction defects should consult with CD Litigation experts as early as possible to assist an Association in weighing the potential benefits and downsides of CD Litigation and, ultimately, to hold the declarant, builder, and/or other parties liable for repair cost and other damages. 

About the Author: Joe Smith is a senior attorney in the Construction Defect Group at Burg Simpson Eldredge Hersh and Jardine. Joe is also a licensed architect and has represented Colorado homeowner associations and homeowners since 1999.