Colorado Court Rules HOA Must Arbitrate Construction Defect Claims Against Original Developer

Colorado Appellate Court decision (May 7, 2015).

This case was an action seeking damages for construction defects that was filed by a condominium homeowners association (“Association”) against the project’s original developer / declarant who established Association. As originally drafted, the Association’s declaration contained a provision that allowed unit owners to amend the declaration by a 67% vote provided however, that the declarant had to consent to an amendment until the last unit was sold by the declarant. The declaration also included a mandatory arbitration provision relating to construction defect claims which included language that prohibited its amendment without the declarant’s written consent, regardless of whether the declarant had already sold all of the units.

The developer sold the last unit to a non-declarant owner in 2012. Thereafter, in 2013, the requisite percentage of owners voted, without seeking the consent of the original declarant, to amend the declaration to remove the mandatory arbitration provision pertaining to construction defects. After amending the declaration, the Association filed the within construction defects action against the developer in the district court. The developer contended that the Association’s purported amendment of the declaration without declarant’s consent was invalid and sought an order compelling the Association to submit the construction defect claims to arbitration in accordance with the originally drafted declaration. The district court denied the developers motion to compel arbitration after determining that its consent was not required for the disputed amendment because the provisions in the declaration that required arbitration were ambiguous and in violation of the Colorado Common Interest Ownership Act (“Act”). The developer appealed the district court’s ruling.

The appellate court agreed with the developer and found that the declaration did require arbitration of the construction defect claims against the developer. The court stated that “Arbitration is favored in Colorado as a convenient and efficient alternative to resolving disputes by litigation.” The court further found that, under the original declaration, the developer’s consent was required to amend the arbitration provision in the declaration, and that provision was not void under the Act. The court concluded that, although the Act specified required voting percentages for amendments, it did not prohibit a declaration from imposing the additional requirement of obtaining the declarant’s consent to amendments of the declaration. Accordingly, the appellate court ruled that the Association’s attempt to amend the declaration was ineffective and the declaration still contained a valid and enforceable arbitration agreement.

See case decision: Colorado_appeals-court-rulin