Construction defects: who decides whether to sue?

Posted: November 30, 2017

An interesting experiment is under way in Colorado.

Policy makers have changed the rules of construction defect litigation in hopes of reengineering the housing mix. Condo development has essentially stalled despite the state’s status as a millennial magnet.

Developers, stung by defect lawsuits and associated rising insurance rates, are opting to build more rental properties than condominiums. Condos represent only two to three percent of the housing market vs. 20 percent a dozen years ago, according to Construction Dive. And though total new residential units in Denver are in line with past years, rentals make up 75 percent of those figures rather than the traditional 25 percent, architect Nathan Sciarra, associate principal at KTGY Architecture + Planning, told the publication.

The steady rise of construction defect litigation, reportedly spurred by a 2005 construction defect law, has driven up insurance prices, adding an estimated $15,000 to the cost of every condo unit, according to Denver officials. Roughly 200 construction defect lawsuits have been brought annually against builders in Colorado, according to the state courts.

“Since the late 1970s, the construction defect law has grown into its own industry, generally focused on condominium projects at a large expense to contractors and [the] insurance carriers that underwrite commercial general liability policies,” Lane Schwarzberg, national client manager at Partner Engineering and Science in Denver, told Construction Dive.

Letting homeowners decide

To reset the market, the governor recently signed a law that requires a majority of homeowners in a condo development to approve litigation before suing a developer for any construction defects. Prior to the law, only a majority of the condo association board – as few as three of five members – has been sufficient for the litigation green light. “This bill will help us make housing more affordable in a lot of different ways,” Colorado Gov. John Hickenlooper said.

It remains to be seen how much of an effect the law will have on litigation activity or the housing market, or how soon. Observers point to other factors that may have contributed to the condo slowdown, including labor shortages, building impact fees, millennial debt or lucrative rents.

Developers, however, cite some immediate benefits of the new law. Letting homeowners partake in litigation decisions eliminates the ability for condo associations to “wall off” homeowners from developers. Also, they hope unit owners will consider the penalty they might pay for litigation – difficulty in selling or refinancing. The new law is not perfect, Kyle Zeppelin told the Denver Post, “but it really starts to address what is a major problem.”

The new law is similar to ordinances passed in Lakewood, Colo., and 20 other communities. “The bill is not the magic bullet,” said Lakewood Mayor Adam Paul told the Post. “But it is a step in the right direction.”

Some critics, however, oppose the law’s potential use as a shield against shoddy construction. As attorney Suzanne Leff told the Post, “We don’t want the legislature to take away the rights of homeowners to a jury trial.” Or as one condo owner said, “Lawsuits don’t create construction defects — they are the result of bad construction.”

Prominent construction law attorney David M. McLain has another take. “When you read the fine print, you learn that not a whole lot has changed,” he told Esquire Viewpoint. “When a homeowners’ association calls for a vote on whether to litigate a construction defect, the law excludes ‘nonresponsive’ owners from the tally.”

Based on past homeowner association voting, one could expect a turnout of 20 percent or less. That suggests that in a 100-unit complex, 20 owners would come forward to vote, and 11 votes would swing the decision. Noted McLain, “That’s still a mere handful of influential owners.”