CREJ - Multifamily Properties Quarterly - May 2016
Construction defect reform has been a hot issue at the state capitol building over the past several years as residential properties for sale in the Denver metropolitan area remain at historically low levels. Condominium construction in the area has come to a near standstill in the wake of mounting legal liability exposure for construction defects – the catalyst for bipartisan efforts to reform critical construction defect issues. Last May, Senate Bill 177 presented hope for the advancement of much needed reform. The bipartisan bill sought, in part, to address the common occurrence of an homeowners association voting to remove arbitration provisions from common interest community governing documents, which had been placed by the developers when the condo community was created. But after passing through the Senate, the bill died in a House of Representatives committee by one vote. Some local governments have picked up the baton on the effort but a statewide law is considered vital. The next day, the Colorado Court of Appeals published its decision in the highly publicized construction defects case of Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., et al. The appellate court held that declarations requiring declarant consent prior to the removal of an arbitration provision by homeowners are valid and enforceable under the Colorado Common Interest Ownership Act, the statute governing condo communities and HOAs. There is a pending petition with the Colorado Supreme Court for further review but it is unknown whether the state’s highest court will take the case. The Vallagio decision was a step in the right direction for repairing Colorado’s construction defects law. However, this past fall, the court of appeals took a step backward in this arena. In November 2015, in the case of Rogers v. Forest City Stapleton, Inc., et al., the appellate court decided, for the first time, that an implied warranty of “suitability” exists between a developer of a vacant lot and an owner of a home on that lot who is not the first purchaser. Forest City Stapleton is the master developer of Stapleton, a redevelopment of the old Stapleton Airport into a mixed-use community with about 12,000 residences. Forest City subdivided some 4,700 acres of land into lots, formed Park Creek Metropolitan District for the purpose of installation of infrastructure to serve those lots, and sold residential lots to homebuilders. The homebuilders built homes on those lots and sold the houses to homeowners. As part of its work at Stapleton, Forest City performed no actual construction. However, it selected builders, exercised control over the architecture and design of homes, and acted as the construction manager for Park Creek Metropolitan District’s infrastructure projects. One of the homebuilders at Stapleton sold a lot to and a completed a home for the plaintiff, Tad Rogers. Rogers paid a premium for a deeper basement that could be later finished with higher ceilings. Once the home was complete, and Rogers had closed on his purchase and moved into the home, he learned that the ground-water level on his lot was too high for the intended basement build-out. Rogers sued Forest City under a theory of implied warranty of suitability – even though Forest City did not build the house or even sell the lot to Rogers. Rogers claimed Forest City implicitly warranted the lot would be suitable for construction of a house with a basement suitable for finishing. Rogers also made a claim against Forest City for nuisance, based on the use of recycled concrete aggregate base course to build roads in the neighborhood. The use of RCABC allegedly caused clogging of perimeter drains on Rogers’s lot, which exacerbated the water issue. The roads were constructed by Park Creek Metropolitan District, but Rogers argued Forest City effectively controlled Park Creek Metropolitan District and acted as construction manager. Therefore, Forest City was liable for the nuisance caused by the use of RCABC. The case went to trial, with extensive expert testimony, and the jury sided with Rogers on both claims. Relying on prior-related Colorado case law, as well as case law from other jurisdictions, a divided court of appeals held that an implied warranty of suitability exists between a developer of a vacant lot and the owner of a home constructed on that lot (even if that owner is not the first purchaser) if the developer improves the lot for a particular purpose; and all subsequent purchasers rely on the developer’s skill or expertise in improving the lot for that purpose. With respect to the nuisance claim, the Court of Appeals found in favor of Forest City, recognizing that Forest City was separate from Park Creek Metropolitan District and therefore not liable for any nuisance caused by Park Creek Metropolitan District’s use of RCABC for road construction. The Rogers opinion is significant because it is the first time the Colorado Appellate Court has recognized that a master developer may be liable to a subsequent home purchaser under an implied warranty of suitability. Land developers in Colorado should take note of this case because it creates new liability for claims for implied warranties from parties with whom the land developers have no contractual relationship. Both sides of the case have filed petitions for review with the Colorado Supreme Court on different issues. The court presently has petitions for review pending in both the Vallagio and Rogers cases.