To: Honorable Mayor and Members of Town Council
From: Bill Detweiler, Director of Development Services
Title
Discussion/Direction: Construction Defects
Body
________________________________________________________________________________
Executive Summary
At the January 17, 2017 Council meeting, Council directed staff to prepare an information item outlining options for adoption of a construction defects ordinance and bring it back to Council for review, discussion and direction.
In January 2016, Council adopted an ordinance (in the form of a plat note) that was geared toward improving diversity of housing opportunities in Castle Rock, with an emphasis on owner-occupied multi-family homes. Under the ordinance, at the request of the developer, arbitration would be required to resolve certain types of construction related disputes, rather than submitting the claims to a court of law.
To date, no development teams have used the Council adopted plat note.
Background
State Legislators declined to take action on proposed construction defect bills in past 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 multi-family housing in Castle Rock. However, some builders have expressed an unwillingness to build owner-occupied multi-family housing in Town due to concerns stemming from the burdens of construction defect litigation.
Staff researched other jurisdictions that adopted construction defects ordinances to identify if there are any significant differences between a voluntary plat note and an ordinance. The City of Lone Tree adopted a construction defects ordinance four years ago, however, no development teams have used the ordinance in Lone Tree. The Town of Parker adopted the plat note ordinance four years ago and then adopted a construction defects ordinance in January 2016. To date, no development teams have used the plat note or ordinance in Parker.
Discussion and Key Issues
Included within this report is an overview of the recently accepted Metro Mayors Caucus Consensus Principles for Construction Defects Reform and an overview of Construction Defect Municipal Ordinances.
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 appears to have resulted in inordinately high insurance costs, and in some instances insurance companies are declining to write policies for condominium projects. 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 projects.
When this matter was discussed, in late 2015, consideration was given to an ordinance, in the form of a plat note, as well as an ordinance that would have encompassed broader principles. In January 2016, Council adopted an ordinance, allowing for use of a voluntary plat note to balance the risk and exposure to builders and developers of multifamily projects while protecting occupants where there are legitimate construction concerns. Although no development teams have used the plat note in Castle Rock, ongoing discussion about lack of action by the State Legislators raised concern among local jurisdictions whether or not there are options available to encourage use of the plat note or construction defect ordinances already in place.
Metro Mayors Consensus Principles
The Metro Mayors Caucus adopted consensus principles (Attachment A) to support bills introduced in the Colorado General Assembly that support construction defects legislation. Key issues noted in the consensus principles include:
• Provide fast and efficient dispute resolution for all parties, meaning mediation or arbitration instead of immediate litigation.
• Transparency for occupants, meaning HOA’s, should be required to provide written disclosures informing occupants of potential liabilities along with estimated costs when pursuing a claim.
• Informed consent of occupants, meaning HOA Boards should have written consent of a majority of occupants before filing a construction defects claim.
Construction Law
Approximately 15 home-rule jurisdictions adopted construction defect ordinances (Attachment B) to generally prevent HOA’s from amending CC&R’s to delete arbitration requirements. A majority of jurisdictions have adopted broad range claim notice procedures and owner-disclosure and consent-to-sue provisions. Based upon review of metro area jurisdictions, four general categories of construction defects ordinances have been adopted:
1. Notice-repair ordinances that allow for pre-suit notice to construction professionals and the ability to enter, inspect and repair any defects.
2. Disclosure-voting ordinances that mandate pre-suit disclosures to HOA members and allow HOA’s to vote before filing claims.
3. Substantive law ordinances that limit the scope of construction defect claims that a claimant may assert.
4. Plat note ordinances that allow construction professionals to record plat notes mandating construction defect arbitration instead of immediate litigation. The plat note is what Town Council adopted in January 2016.
Jurisdictions that currently have construction defect plat notes or construction defect ordinances include Arvada, Aurora, Castle Rock, Centennial, Colorado Springs, Commerce City, Denver, Durango, Fort Collins, Lakewood, Littleton, Lone Tree, Loveland, Parker, and Wheat Ridge. Westminster is considering adoption of an ordinance.
Construction defect ordinances generally include definitions and language requiring arbitration or other alternative dispute resolutions instead of immediate litigation, which can be cumbersome, costly, and time consuming. Many ordinances include declarations to outline the arbitration process. Many ordinances prohibit HOA’s from amending or deleting declarations that would eliminate the opportunity for arbitration. Arvada, Castle Rock, Parker, and Wheat Ridge use the plat note option to authorize construction document claim arbitration through provisions in the plats instead of arbitration agreements in individual purchase agreements. Plat note ordinances allow a final plat applicant to request that the plat include a prescribed statement specifying that claims be submitted to binding arbitration. This requirement matches the plat note ordinance adopted by Council in January 2016.
Should Council determine that a broader construction defects ordinance would be more effective in encouraging a diversity of housing opportunities, than the plat note ordinance provides then consideration can be given to drafting an ordinance that could encompass additional provisions that would cover a wider range of construction related issues that often arise within the context of building owner-occupied multi-family housing including:
• Notice and repair provisions, meaning the development team (contractor) is given the opportunity to provide notice, enter and repair any alleged defects rather than the HOA or homeowner immediately seeking litigation against the development team without the opportunity to repair alleged defects.
• Language that imposes penalties for noncompliance by the development team.
• Tracking of HOA or homeowner complaints to ensure receipt and action on proper notice and claims, ranging from 14 to 45 days.
• Site inspections and testing to establish agreed upon time to acknowledge and repair any alleged defect.
• Tolling of statutes of limitations.
• Repair warranty provisions.
• Certain pre-suit disclosures statements.
• Homeowner voting procedures to approve construction defect lawsuits.
• Evidentiary provisions related to the admissibility of building code violations, and evidence and spoliation during testing.
In summary, construction defects ordinances generally are more defined in terms of providing notice and repair options for development teams and HOA’s. The Council adopted plat note is voluntary. The ordinance would be mandatory and more comprehensive in terms of its scope and application.
Staff included information from the Metro Mayors Caucus and legal overview of construction defects metro jurisdiction ordinances for Council review and consideration. Staff does not offer a formal recommendation on whether Council should move forward with adoption of a construction defects ordinance versus continued use of the plat note. Staff will provide an overview of this issue at the public hearing and be available for any questions or clarification of the issue.
Proposed Motion
If Town Council decides to keep the existing construction defects plat note in place, staff recommends the following motion:
“I move to maintain the existing construction defects plat note.”
If Town Council decides to direct staff to prepare a construction defects ordinance for Council review and action, staff recommends the following motion:
“I move to direct staff to prepare a construction defects ordinance and bring it back to Council for action.”
Attachments
Attachment A: Metro Mayors Caucus 2017 Consensus Principles for Construction Defect Reform
Attachment B: Construction Law - Construction Defect Municipal Ordinances