By Keith Hoagland, McKenzie Rhody, LLP
When creating a common interest community, the developer typically forms the owner’s association and controls it for a period of time through a developer-appointed board of directors. The Colorado Common Interest Ownership Act (“CCIOA”) requires that this period of control terminate after sufficient units have been sold, after sufficient time has passed since the last sale of a unit, or after sufficient time has passed since the last exercise of any right to add new units.
However, a developer may include provisions in a community’s governing documents that allow it to continue to exert control over a community after its control of the owner’s association has terminated. For example, the declaration may contain a requirement that certain amendments to the declaration require the developer’s consent. As a result, the community may find it impossible to amend the declaration in some ways, regardless of how many unit owners approve. Such a requirement severely impairs the right of an association to self-govern and, in some circumstances, it may also limit the legal recourse it has against the developer. In fact, in Vallagio at Inverness Residential Condominium Ass’n v. Metropolitan Homes, the Colorado Supreme Court recently upheld such a requirement as valid.
The declaration at issue in the Vallagio case required the owner’s association to arbitrate construction defect claims against the developer. Although declarations commonly contain such a requirement, this one further stated that the arbitration requirement could not be amended without the developer’s consent. The Colorado Court of Appeals has previously held that an owner’s association can remove an arbitration requirement in a declaration by amendment. However, requiring the developer’s consent to do so effectively makes the requirement permanent, controlling the manner in which the association may pursue construction defect claims long after the developer has sold the last unit and relinquished any control over the association.
CCIOA prevails over any inconsistent provision in a community’s governing documents, and the association in Vallagio made several strong arguments as to why the consent requirement in the declaration violated CCIOA. First, as noted above, CCIOA sets strict limits on the period of time during which the developer can maintain control over an owners association, and prohibiting amendment of the declaration without the developer’s consent would amount to impermissibly exerting control over the association beyond the time limit set forth by CCIOA. However, the court of appeals found that this provision deals specifically with the developer’s right to appoint and remove members of the association’s board of directors. Since the unit owners and not the association itself make amendments to the declaration, the court reasoned that the declaration did not require the developer’s consent for any actions of the association. Curiously, the Colorado Supreme Court did not address this argument separately on appeal, and it remains unclear whether it would have adopted the rationale of the court of appeals.
Second, outside of certain narrow exceptions, CCIOA explicitly provides that a declaration may be amended only by the affirmative vote or agreement of unit owners holding more than 50% (and up to 67%) of votes in the association. Requiring the developer’s consent to amend the declaration, especially if the developer no longer owns title to any units, would effectively call for something above the required unit owner vote. However, the court found that this provision merely prohibits requiring a percentage of unit owners larger than 67% and does not prohibit imposing additional requirements.
Third, CCIOA prohibits a developer from evading CCIOA’s limitations or prohibitions, an example of which would be controlling the votes of unit owners. By requiring its consent to amend the declaration, regardless of the number of unit owners in favor, the developer effectively controls the votes of those unit owners. However, the court rejected this argument, finding that it did not impermissibly create class voting or run afoul of CCIOA’s policies or purposes, which endorse and encourage arbitration.
Finally, CCIOA prohibits imposing any limitations on the power of an owner’s association to deal with the developer that are more restrictive than the limitations on the association’s power to deal with other persons. Requiring the developer’s consent to amend the declaration effectively restricts the association’s ability to deal with the developer more so than its ability to deal with other persons. This would seem especially true where the provision being amended, as in Vallagio, is one that specifically benefits and protects the developer. However, the court found that because, as noted above, it is the unit owners and not the association itself that amends the declaration, the consent requirement did nothing to restrict any power of the association.
Significantly, the court stated in a footnote that its holding is confined to “a narrowly drafted consent-to-amend provision that pertains solely to the resolution of construction defect disputes,” and that it “express[es] no opinion as to the propriety of any other consent-to-amend provisions.” However, as noted by two dissenting justices, the rationale for the opinion was not limited in this way. Consequently, the dissent fears that it will allow developers to control the affairs of owner’s associations “into perpetuity” simply by requiring its consent to amend any provision in a declaration. The fallout from this decision is likely to spawn future litigation testing the boundaries of consent-to-amend as a control mechanism that extends well beyond arbitration requirements in construction defect disputes.
Keith Hoagland is an attorney with McKenzie Rhody, LLP. McKenzie Rhody specializes in representing homeowners and homeowner associations in construction defect matters in Colorado, Texas, and California. www.mrcdlaw.com