To: Honorable Mayor and Members of Town Council
From: Bill Detweiler, Director of Development Services
Heidi Hugdahl, Assistant Town Attorney
Title
Ordinance: Amending Chapter 17.24 of the Castle Rock Municipal Code by the Addition of a New Section 17.24.050 Concerning Plat Note for Multi-Family Development Plan (Second Reading) [Construction Defects issue]
Body
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On December 15, 2015 Council voted 5-0 to approve the ordinance on first reading.
Executive Summary
Town Council had directed staff to review issues associated with the adverse impact that construction defect litigation seemed to be having on the development of owner-occupied multi-family residential projects in the Town and to bring an ordinance forward for Council’s consideration.
Since first reading, staff has had an opportunity to review additional comments, received shortly before first reading, through the Home Builders Association (HBA) related to suggested changes in the language to the ordinance. (The offered modifications were not substantive). Namely, the suggested amendments to the language specifically define construction defect claims, the development party, and the common interest community. Included in the proposed changes is additional detail related to the application of binding arbitration to construction defect claims that are more precisely defined to include damage or loss to, or 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.
Notification and Outreach Efforts
Staff conducted several meetings with the Town’s development community partners and EDC developer roundtable and staff, and the Town Attorney’s office met with representatives of the HBA. All involved agree with the proposed plat note option.
Discussion
Based upon discussions with representatives from the Colorado Municipal League (CML), staff and legal counsel in jurisdictions across the Front Range, Economic Development Council (EDC), staff and our development community partners, the burdens and costs associated with construction defect litigation seem to have direct impact on the cost of insurance, which is inordinately high and, in some instances, insurance companies are declining to write policies for condominium projects. It is believed that the high insurance costs have had a negative impact on the ability and willingness of builders and developers to undertake construction related to owner-occupied multi-family residential projects resulting in a reduction and, in some instances, a complete absence of that type of product in the housing market.
Primarily, municipalities that have undertaken efforts to address the lack of multi-family owner-occupied homes on the market have utilized two primary vehicles. The first is a plat note. Currently, Parker and Douglas County have adopted this approach. The plat note runs with the land and is recorded. Essentially, it advises homeowners that construction disputes/claims are subject to binding arbitration. The second entails a more substantial modification to municipal practices and code and involves a more comprehensive and ambitious addition to code. This approach has primarily been adopted by municipalities that are on the light rail corridor, that are “landlocked,” and that have little or no inventory of condominiums.
In an effort to encourage a diversity of housing opportunities, with an emphasis on the development of owner-occupied multi-family residential projects, staff brought forward an ordinance (in the form of a plat note) that is designed to balance the risk and exposure to builders and developers of owner-occupied multifamily projects while protecting homeowners where there are legitimate construction concerns. Staff offers that the proposed ordinance language will reduce costs and expenses attendant to construction defect litigation, thereby lowering insurance costs associated to such projects, and thus increasing the likelihood that developers and builders will be willing to undertake such projects.
Under the proposed ordinance, at the request of the developer, through a plat note on the site development plan, arbitration would be required, in lieu of submitting claims to a court of law. The proposed ordinance would apply to construction defect claims between two or more of the following persons or entities: any owner of any portion of the property; any common interest community association; the subdivider; or developer; any party that constructs or designs any portion of any residential dwelling units upon the property; and any construction professional as defined in the construction defect reform act.
The proposed staff option:
► Encourages resolution of issues related to alleged construction defects in a fashion that tends to better engage the parties to work toward resolution rather than escalating angst and hostility often associated with litigation.
► Is usually less expensive than proceeding through the courts insofar as the process is quicker and generally less complicated than court proceedings.
► Is more efficient, with the average time from filing to decision in arbitrated cases taking significantly less time than litigated cases to wend through the courts.
► Is often more flexible, unlike trials which must be worked into overcrowded court calendars, arbitration hearings can usually be scheduled around the needs and availabilities of those involved, including weekends and evenings and the use of simplified rules of evidence and procedure tend to make the process less stilted and more easily adapted to the needs of those involved.
It is believed that the nexus between the reductions in costs associated with arbitration, instead of litigation through the courts, will encourage building multi-family owner-occupied homes; result in greater diversity of housing stock; will broaden housing opportunities in Castle Rock to include more affordable housing thereby promoting the health, safety and welfare of the residents of Castle Rock.
This is an evolving area of the law, in terms of the approach and different concepts, with Denver adopting an ordinance as recently as last month. And, it appears that legislation will be presented during the next legislative session in an effort to adopt a state wide approach to addressing the problem.
State Legislators declined to take action on proposed construction defect bills in the three preceding legislative sessions. Consistent with the Vision and Master Plan, that encourages a variety of housing types in the Castle Rock Plan, there is strong interest, from the development community, to build owner-occupied residential housing in Castle Rock. However, there appears to be an unwillingness, or reticence, to build owner-occupied housing in Town due to concern over construction defect litigation.
Staff and the Town Attorney’s office researched construction defects ordinances across the Denver metro communities to determine what would work best for Castle Rock. The proposed ordinance incorporates a voluntary plat note (placed on the site development plan) that would provide legal protection to builders and owners of multifamily units while ensuring a reasonable process to resolve construction related concerns.
The proposed plat note, if exercised, would require the resolution of constructed related disputes through the arbitration process instead of litigation through the court system. This option is also consistent with the recent holding in Vallagio at Inverness Residential Condo Ass'n v. Metro. Homes, Inc., 2015 WL 2342128 (Colo. App. May 7, 2015) (covenants in a common interest community required Alternative Dispute Resolution, arbitration or mediation, for construction defect claims and the covenant could not be unilaterally eliminated by the Homeowners Association).
As noted, this option is consistent with the plat note implemented by Douglas County and Parker. Aurora also uses a form of the plat note as well as the broader ordinance. The plat note is voluntary. Staff research found:
- The Town of Parker plat note option has not been used.
- Douglas County has one project with a plat note, Verona. County staff stated they are not aware if the plat note reduced insurance rates for the owners.
After adoption of the plat note option, if agreed upon by Council, staff recommends Town Council inform the Colorado General Assembly and its leadership, the state legislators who represent the Town of Castle Rock and Douglas County, CML, DRCOG and other responsible entities of the action taken by Council.
Staff Recommendation
Based upon discussion and support by the Town’s development community partners and HBA, staff is recommending Council approve the proposed construction defects plat note option.
Proposed Motion
I move to approve the Ordinance Amending Chapter 17.24 of the Castle Rock Municipal Code by the Addition of a New Section 17.24.050 Concerning Plat Note for Multi-Family Development Plan, second reading.
Attachments
Attachment A: Ordinance