Update on Colorado’s Construction Defects Law Reform

In May 2017, lawmakers reformed Colorado’s construction defects law reform. Under the old law, homeowners association boards could bring multimillion-dollar construction defects lawsuits against developers. HOA boards represent all of a condo development’s residents but are made up of as few as three people. The reforms require more than half of the development’s residents to agree to file suit.

The tide of litigation and the high cost of insurance that came with it was scaring developers away from building new condos in Denver—a big problem given that Denver has a new housing shortage and an affordable housing crisis. Buyers and renters alike face high prices and limited options.

The old laws were hurting not only developers but anyone looking for a place to live—even renters. If apartment dwellers who would like to buy can’t find or afford a condo or home, units don’t open up for renters. In addition, people who might want to downsize from a house to a condo find themselves without any good options, contributing to a tight market for single-family properties.

HOA boards often earn a bad rap for being overzealous. In the case of construction defects in condominium buildings they govern, they might feel compelled to sue in an attempt to stave off personal liability for not suing. And when the six-year statute of limitations nears its expiration date, the pressure can mount.

The ability to sue developers for serious defects is important for everyone in the building, whether they’re affected by a particular defect or not. When problems affect multiple units, HOAs must levy special assessments on all homeowners to cover the costs. Getting a developer to cover costs they should legitimately be held responsible for keeps more money in homeowners’ pockets, although individual unit owners may find themselves paying out of pocket to remedy some of the damage, especially cosmetic damage to their personal space. A settlement or judgment may not actually cover 100 percent of the problems.

Colorado’s Reformed Construction Defects Law

Consumers remain protected under the new laws. They still have recourse against serious problems such as water infiltration from improperly constructed facades, warping or gapping in wood floors, and ventilation and exhaust problems that cause residents to suffer the smells of each other’s cooking and smoking. But frivolous lawsuits are much harder to file. Frivolous defects lawsuits can actually hurt existing residents. They may not be able to sell their unit because buyers won’t want to get into a legal mess. Lenders might not approve loans for units in the development, turning away not just prospective buyers but existing owners wishing to refinance.

With more developer-friendly laws now in place, Denver’s already attractive housing market, with its booming economy and growing population, has become a more desirable place to build new condos. Industry experts say more developers are looking for land and have begun announcing projects. Affordable units and smaller buildings may become more available since developers have less need to offset the high cost of insurance with high priced large developments.

But additional changes are needed before Denver’s condo market is truly welcoming to developers. Insurance premiums for developers need to come down, which could take several years. Labor shortages need to be addressed. Local building and development fees may need to reduced, too. The per-unit fee in Colorado can be $30,000 to $40,000, while in many other states it’s just a few thousand, or even $0.

New Law Not a Silver Bullet

Curbing frivolous construction defect lawsuits won’t be a silver bullet for Denver’s housing challenges. But it will remove one layer of complexity from the situation and make the city more inviting for developers that previously stayed away to avoid the high risk of litigation. Hanley Wood’s latest report on the Denver housing market underscores this point. “Condo activity remains sporadic, concentrated in a few geographies, and generally falls within high price ranges,” it states.

Condominium starts were actually down almost 25 percent in the fourth quarter of 2018 compared to the same period in 2017. Townhome starts were up by a similar percentage. Only 6 percent of new home starts in 2018 were for condos. In 2005, that figure was 20 percent (of course, that was also during the peak of an overheated housing market). Economic factors, too, affect development decisions and buyer behavior. A volatile 2018 stock market could be playing a role in both.

Will condo development tick up in 2019? We’re still waiting to see how much change Denverites will experience from the higher thresholds for filing a construction defects lawsuit against condo developers.