By Kerry Wallace, Goodman and Wallace, P.C.
Your Common Interest Community (“CIC”) just discovered a construction defect (“Defect”) resulting from initial construction or an improvement project. What do you do? Welcome to the complex world of construction defects in Colorado. Time is not on a CIC’s side and it is important that a CIC insure a timely and professional investigation of the Defect, compliance with applicable Colorado statutes and preservation of claims. This article provides a generalized overview of a complex process that involves interrelated statutes. Seeking professional guidance is a good idea.
There are four main statutes applicable to Defects: (1) The Colorado Construction Defect Action Reform Act (“CDARA”) codified at C.R.S. § 13-20-801, et seq. which provides for statutory processes, guidelines, and limitations for Construction Defect Actions (“Defect Actions”); (2) The Homeowner Protection Act of 2007 at C.R.S. 13-20-806 which voids as against public policy waivers or limitations on certain homeowner rights related to Defect Actions; (3) C.R.S. 13-80-104 which addresses limitation of actions against construction professionals; and (4)The Colorado Common Interest Ownership Act (“CCIOA”) at C.R.S. 38-33.3-303.5 which addresses Defect Actions, the current version of which became effective May 2017.
CDARA and CCIOA both have pre-lawsuit filing processes that a CIC needs to follow before filing a Defect Action. CDARA’s Notice of Claim Process (“CDARA Process”) requires advance notice to the construction professionals of the Defect and provides for a period of time for informal negotiation. CDARA applies to “new improvements” to real property that are “essential and integral to the function of the project.” Arguably, certain remedial work, renovation, and remodel projects constitute new improvements.
CCIOA requires a complicated notice, hearing, record keeping, and vote process before a CIC can pursue a Defect Action (“CCIOA Process”). Failure to strictly follow the CCIOA Process could impact the ability to pursue a Defect Action and a CIC needs to be diligent about adherence to the CCIOA Process. The CCIOA Process includes majority owner approval before pursuing a Defect Action. For purposes of calculating the vote approval percentage, the following votes are excluded: (1) Votes of a “development party”; (2) Votes allocated to banking institution-owned units; (3) Votes allocated to units of a product type that does not contain alleged defects, in a community whose declaration does not impose shared common expense liabilities between the product types; and (4) Votes allocated to units owned by owners who are deemed nonresponsive. The statute does not define the term “nonresponsive.”
CCIOA also provides for two exceptions to the requirement of an owner vote: (1) if the Defect relates to a facility intended and used for nonresidential purposes, if the cost to repair does not exceed $50,000; and (2) if the Association was the contracting party for the performance of labor or purchase of services or materials. “Nonresidential purposes” is not defined in the statute but likely applies to common amenities, such as clubhouses, swimming pools, or facilities dedicated strictly to commercial use, such as the commercial portions of a mixed-use CIC. The second exception appears to be directed at Defects involving post-initial construction projects contracted for by the CIC, such as a roof replacement.
Often it makes sense to pursue the CDARA Process first to allow the CIC and construction professionals to work on informally resolving the issues. This can avoid the time and expense of the CCIOA Process. If the CDARA Process is not successful the CCIOA Process can be pursued.
Statute of Limitations
Defect Actions have limited time periods when a claim can be brought and after that time period passes all legal rights are time barred. This is called the Statute of Limitations (“SOL”). C.R.S. 13-80-104 concerns limitation of actions against design and construction professionals. There is a two year SOL and a six year statute of repose (“Repose”). The two year SOL requires a Defect Action to be filed within two years of the manifestation of the defect (“Manifestation”). Manifestation is when there is evidence of an issue even if the reason for the issue is not yet known. For example, cracking cement could indicate a soils issue. The Repose provides for a time related overall deadline for expiration of Defect Claims which is six years after substantial completion of the improvements. The exception is a Manifestation that occurs during the fifth or sixth year after substantial completion, then a Defect Action may be brought two years after the Manifestation but no later than eight years from substantial completion. It is imperative for a CIC to document when a Defect first Manifests as that date triggers the start of the two year SOL.
Upon Manifestation of a Defect, a CIC should determine SOL deadlines and proceed accordingly to preserve claims. The statutory pre-filing requirements of CDARA and CCIOA can assist in claim preservation. CDARA tolls or “stops” the running of the SOL during the CDARA Process for the time periods spelled out in CDARA. The SOL is tolled for all Defects listed in the CCIOA Process notice from the mailing date of the notice until the 90 days after the owner voting period ends or until the requisite vote is achieved, whichever occurs first. This tolling can only occur once and cannot be extended. The CDARA and CCIOA processes should be used diligently to avoid any gap in the tolling of the SOL in order to preserve claims.
What to Do
Do not delay. If a Defect Manifests it needs to be immediately investigated and the SOL determined in order to make sure that any potential claims are preserved. The CDARA and CCIOA processes need to be adhered to in order to create authority to file a Defect Action. Dates need to be calculated to insure preservation of claims and maximization of SOL tolling opportunities. The best investigation and determination of liability is worthless if the claims become time barred. Time waits for no CIC and diligence in the observation, identification, and preservation of a Defect Action is critical to a CIC’s potential to achieve remuneration for a Defect.
Kerry Wallace is a shareholder at Goodman and Wallace, P.C., a law firm located in the Vail Valley providing legal guidance for mountain resort communities for 30 years. For more information go to www.goodmanwallace.com.