SENATE 3rd Reading Unamended April 14, 2015 SENATE Amended 2nd Reading April 10, 2015First Regular Session Seventieth General Assembly STATE OF COLORADO REENGROSSED This Version Includes All Amendments Adopted in the House of Introduction LLS NO. 15-0079.02 Duane Gall x4335 SENATE BILL 15-177 SENATE SPONSORSHIP Scheffel and Ulibarri, HOUSE SPONSORSHIP DelGrosso and Singer, Senate Committees House Committees Business, Labor, & Technology A BILL FOR AN ACT Concerning prerequisites to the authority of a unit owners' association to pursue resolution of disputes involving construction defects. Bill Summary (Note: This summary applies to this bill as introduced and does not reflect any amendments that may be subsequently adopted. If this bill passes third reading in the house of introduction, a bill summary that applies to the reengrossed version of this bill will be available at http://www.leg.state.co.us/billsummaries.) The bill states that when the governing documents of a common interest community require mediation or arbitration of a construction defect claim and the requirement is later amended or removed, mediation or arbitration is still required for a construction defect claim. These provisions are in section 2 of the bill. Section 2 also specifies that the mediation or arbitration must take place in the judicial district in which the community is located and that the arbitrator must: Be a neutral third party; Make certain disclosures before being selected; and Be selected as specified in the common interest community's governing documents or, if not so specified, in accordance with the uniform arbitration act. Section 1 adds definitions of key terms. Section 3 requires that before a construction defect claim is filed on behalf of the association: The parties must submit the matter to mediation before a neutral third party; and The board must give advance notice to all unit owners, together with a disclosure of the projected costs, duration, and financial impact of the construction defect claim, and must obtain the written consent of the owners of units to which at least a majority of the votes in the association are allocated. Section 4 adds to the disclosures required prior to the purchase and sale of property in a common interest community a notice that the community's governing documents may require binding arbitration of certain disputes. Be it enacted by the General Assembly of the State of Colorado: SECTION 1. In Colorado Revised Statutes, 13-22-223, amend (1.5) as follows: 13-22-223. Vacating award. (1.5) Notwithstanding the provisions of subsection (1) of this section, the fact that the relief was such that it could not or would not be granted by a court of law or equity is not grounds for vacating or refusing to confirm the award; except that, in the arbitration of an action as defined in section 13-20-802.5 (9.5), C.R.S., the arbitrator shall follow the substantive law of Colorado with regard to any remedy granted, and if the remedy is substantially affected by the arbitrator's failure to follow the substantive law of Colorado, the court may vacate or refuse to confirm the award on that basis. SECTION 2. In Colorado Revised Statutes, 38-33.3-103, add (9.5), (13.5), and (16.3) as follows: 38-33.3-103. Definitions. As used in the declaration and bylaws of an association, unless specifically provided otherwise or unless the context otherwise requires, and in this article: (9.5) "Construction defect claim" means a civil action or an arbitration proceeding for damages, indemnity, or contribution brought against a development party to assert a claim, counterclaim, cross-claim, or third-party claim for damages or loss to, or the loss of use of, real or personal property or personal injury caused by a defect in the design or construction of an improvement to real property that is part of the common interest community. (13.5) "Development party" means an architect, contractor, subcontractor, developer, declarant or affiliates of declarant, builder, builder vendor, engineer, or inspector performing or furnishing the design, supervision, inspection, construction, or observation of the construction of any improvement to real property that is part of the common interest community or any other party responsible for any part of the design or construction of any portion of the common interest community, or any of such parties' affiliates, or the officers, directors, shareholders, members, managers, employers or servants of any of them. (16.3) "Governing documents" means the declaration, articles of incorporation, bylaws, rules, regulations, policies, and procedures of a common interest community. SECTION 3. In Colorado Revised Statutes, 38-33.3-124, amend (3); and add (1) (a) (III) as follows: 38-33.3-124. Legislative declaration - alternative dispute resolution encouraged - policy statement required. (1) (a) (III) The general assembly further finds and declares that when the governing documents of a common interest community contain a requirement that construction defect claims be submitted to mediation or arbitration, that requirement represents a commitment on the part of the unit owners and the association on which development parties are entitled to rely. Therefore, a later amendment to the governing documents that removes or amends the mediation or arbitration requirement should not apply to claims that are described in the mediation or arbitration requirements of the governing documents. (3) (a) The declaration, bylaws, or rules governing documents of the association common interest community may specify situations in which disputes shall be resolved by binding arbitration under must be submitted to a mutually agreed-upon mediator or, in the case of an arbitration service provider, an arbitration service provider qualified pursuant to the uniform arbitration act, part 2 of article 22 of title 13, C.R.S., or by another means of alternative dispute resolution under the federal arbitration act, 9 U.S.C. secs. 1 to 307, or by another means of alternative dispute resolution under the "Dispute Resolution Act", part 3 of article 22 of title 13, C.R.S. If those situations include a construction defect claim against a development party, a subsequent amendment to the governing documents that removes or amends the mediation requirement is not effective with regard to a construction defect claim. (b) (I) A construction defect claim against a development party must be resolved by a qualified mediator or, in the case of an arbitration service provider, an arbitration service provider qualified pursuant to the uniform arbitration act, part 2 of article 22 of title 13, C.R.S. The parties shall cooperate to select a mutually agreed-upon mediator or, in the case of an arbitration service provider, an arbitration service provider qualified pursuant to the uniform arbitration act, part 2 of article 22 of title 13, C.R.S., with a preference given to the mediator or arbitration service provider specified in the declaration if that provider is qualified pursuant to the uniform arbitration act, part 2 of article 22 of title 13, C.R.S. If no arbitration service provider is specified in the governing documents or if the parties are unable to agree upon a mediation or arbitration service provider, then, with respect to mediation, the parties may petition the district court for the judicial district in which the common interest community is located to appoint a mediator and, with respect to arbitration, the arbitration service provider will be selected in accordance with the uniform arbitration act, part 2 of article 22 of title 13, C.R.S. (II) Notwithstanding any provision of the governing documents to the contrary, a mediator or arbitrator selected to preside over the construction defect claim must be a neutral third party as provided in section 13-22-211 (2), C.R.S. Before being selected to preside over the construction defect claim, a proposed mediator or arbitrator shall make the disclosures required by section 13-22-212, C.R.S. (III) Notwithstanding any provision of the governing documents to the contrary, unless the parties otherwise agree, the mediation or arbitration must be held at a mutually agreeable location within the judicial district in which the common interest community is located. SECTION 4. In Colorado Revised Statutes, 38-33.3-303.5, amend (1) and (2); and add (1.5) as follows: 38-33.3-303.5. Commencement of litigation by executive board - notice to unit owners - disclosure of projected costs - consent. (1) (a) In the event Before the executive board, pursuant to section 38-33.3-302 (1) (d), institutes an action asserting defects in the construction of five or more units, the provisions of this section shall apply. For purposes of this section, "action" shall have the same meaning as set forth in section 13-20-803 (1), C.R.S. any legal action, including a construction defect claim, (b) the executive board shall substantially comply with the provisions of this section. (1.5) As a condition precedent to any construction defect claim, the parties must submit the matter to mediation before a neutral third party mutually selected by the parties to the construction defect claim. If the parties are not able to agree upon a mediator, they may use an alternative selection method specified in the governing documents or, if no alternative selection method is specified, may petition the district court in the jurisdiction in which the common interest community is located to appoint a mediator for the construction defect claim. (2) (a) Prior to the service of the summons and complaint on any defendant with respect to an action governed by this section Within the time period specified in paragraph (c) or (d) of this subsection (2), the executive board shall mail or deliver written notice of the commencement or anticipated commencement of such the action to each unit owner at the owner's last-known address described in the association's records. (b) With respect to a construction defect claim, the notice required by paragraph (a) of this subsection (2) shall state a general description of the following must contain: (I) A general description of the nature of the action construction defect claim and the relief sought; and (II) A good-faith estimate of the benefits and risks involved, including the expenses and fees that the executive board anticipates will be incurred by the association in prosecuting the action construction defect claim, in substantially the following form: 1. If the association does not file a claim by _______ [date], the claim cannot be filed at all under the applicable statute of limitation, statute of repose, or both. 2. If the association prevails, the executive board expects that the association may recover from the defendant(s) an amount between $______ and $_______. 3. The executive board intends to enter into a contingency fee arrangement with the attorneys representing the association, under which, of the amount the association recovers from the defendant(s), the attorneys will be paid a contingency fee equal to ______ percent of the (net) (gross) recovery. The executive board estimates that, in addition to attorney fees, the association will incur costs totaling approximately $_______ for consultants, expert witnesses, depositions, filing fees, and other expenses of litigation. 4. If the association makes a claim and does not win, the executive board expects that the association will have to pay for its own attorney fees, consultant fees, expert witness fees, and other costs (the amount listed in paragraph 3 above) plus the defendant's consultant fees, expert witness fees, and court costs. 5. If the association does not recover from the defendant(s), it may have to pay to repair or replace the claimed defective construction work. In addition, the association may have to pay the defendants' attorney fees. 6. Until the claimed defective construction work is repaired or replaced, or until the construction defect claim is concluded, the market value of the affected units will be adversely affected. 7. Until the claimed defective construction work is repaired or replaced, or until the claim is concluded, owners of the affected units will have difficulty refinancing and prospective buyers of the affected units will have difficulty obtaining financing. In addition, certain federal underwriting standards or regulations prevent refinancing or obtaining a new loan in projects where a construction defect is claimed. In addition, certain lenders as a matter of policy will not refinance or provide a new loan in projects where a construction defect is claimed. (c) With respect to a construction defect claim: (I) The notice required under paragraph (a) of this subsection (2) must be sent at least sixty days before service of the notice of claim under section 13-20-803.5, C.R.S.; and (II) The construction defect claim is not authorized unless the executive board obtains the signed, written consent from owners, other than the declarant, of units to which at least a majority of the total votes, excluding votes allocated to units owned by the declarant, in the association are allocated, which written consent acknowledges that the owner has received the notice required under this subsection (2) and approves of the executive board's proposed action. (d) With respect to any legal action other than a construction defect claim described in paragraph (c) of this subsection (2), the notice required under paragraph (a) of this subsection (2) must be sent at least thirty days before service of the summons and complaint. SECTION 5. In Colorado Revised Statutes, 38-35.7-102, amend (1) as follows: 38-35.7-102. Disclosure - common interest community - obligation to pay assessments - requirement for architectural approval. (1) On and after January 1, 2007 2016, every contract for the purchase and sale of residential real property in a common interest community shall contain a disclosure statement in bold-faced type that is clearly legible and in substantially the following form: THE PROPERTY IS LOCATED WITHIN A COMMON INTEREST COMMUNITY AND IS SUBJECT TO THE DECLARATION FOR SUCH THE COMMUNITY. THE OWNER OF THE PROPERTY WILL BE REQUIRED TO BE A MEMBER OF THE OWNER'S ASSOCIATION FOR THE COMMUNITY AND WILL BE SUBJECT TO THE BYLAWS AND RULES AND REGULATIONS OF THE ASSOCIATION. THE DECLARATION, BYLAWS, AND RULES AND REGULATIONS WILL IMPOSE FINANCIAL OBLIGATIONS UPON THE OWNER OF THE PROPERTY, INCLUDING AN OBLIGATION TO PAY ASSESSMENTS OF THE ASSOCIATION. IF THE OWNER DOES NOT PAY THESE ASSESSMENTS, THE ASSOCIATION COULD PLACE A LIEN ON THE PROPERTY AND POSSIBLY SELL IT TO PAY THE DEBT. THE DECLARATION, BYLAWS, AND RULES AND REGULATIONS OF THE COMMUNITY MAY PROHIBIT THE OWNER FROM MAKING CHANGES TO THE PROPERTY WITHOUT AN ARCHITECTURAL REVIEW BY THE ASSOCIATION (OR A COMMITTEE OF THE ASSOCIATION) AND THE APPROVAL OF THE ASSOCIATION. PURCHASERS ASSOCIATION. THE DECLARATION FOR THE COMMUNITY OR THE BYLAWS OR RULES AND REGULATIONS OF THE ASSOCIATION MAY REQUIRE THAT CERTAIN DISPUTES BE RESOLVED BY MANDATORY, BINDING ARBITRATION. PURCHASERS OF PROPERTY WITHIN THE COMMON INTEREST COMMUNITY SHOULD INVESTIGATE THE FINANCIAL OBLIGATIONS OF MEMBERS OF THE ASSOCIATION. PURCHASERS SHOULD CAREFULLY READ THE DECLARATION FOR THE COMMUNITY AND THE BYLAWS AND RULES AND REGULATIONS OF THE ASSOCIATION. SECTION 6. Effective date - applicability. (1) Except as otherwise provided in subsection (2) of this section, this act takes effect upon passage. (2) Section 4 of this act takes effect January 1, 2016, and applies to contracts executed on or after that date. SECTION 7. Safety clause. The general assembly hereby finds, determines, and declares that this act is necessary for the immediate preservation of the public peace, health, and safety.