The Colorado Supreme Court’s decision in Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., was deemed a victory for the development community in the context of ongoing construction defect litigation reform efforts. In sum, the court in Vallagio upheld a provision in a condominium declaration requiring that all construction defect claims be resolved through binding arbitration, and that such provision “shall not ever be amended” without the declarant’s written consent (the “Consent-to-Amend Provision).” The purpose of this article is to explore the potential reach of Vallagio to other covenant provisions.
Before addressing the potential reach of Vallagio, it is necessary to look at the underpinnings of the court’s reasoning.
First, the court addressed the argument that the consent-to-amend provision violated the Colorado Common Ownership Interest Act, C.R.S. section 38-33.3-217(1)(a)(I).
The association argued that requiring approval of 67 percent of the owners plus the declarant exceeded the 67 percent voting cap to amend. The court disagreed, holding that requiring declarant’s consent was a permissible, non-percentage based condition.
The association also argued that the consent-to-amend provision violated section 38-33.3-104, which prohibits a declarant from using any device “to evade the limitations or prohibitions” of CCOIA or the declaration. The court disagreed, noting that it already found that the consent-to-amend provision was not an illegal attempt to avoid the 67 percent voting threshold.
The court also pointed out that the underlying arbitration provision was consistent with the policies and purposes of CCOIA that encourage alternative dispute resolution.
Finally, the association argued that the consent-to-amend provision violated section 38-33.3-302(2), which prohibits provisions imposing requirements on the association that are more favorable to the declarant than other persons.
The court noted that only the owners have the power to amend the declaration, and thus the consent-to-amend provision did not limit any power granted to the association.
The court declined to address the validity of the underlying arbitration provision under section 38-33.3-302(2), as the argument had not been raised on appeal.
Potential Reach of Vallagio
The court was careful to note that its decision is limited to the “narrowly drafted provision” that “pertains solely to the resolution of construction defect disputes.” The dissent, however, warned that the majority’s logic “… will permit declarants to control homeowners’ associations’ affairs into perpetuity simply by drafting self-serving provisions and then including a consent-to-amend provision…”
This raises the question of what other provisions may be included in a declaration subject to a “consent-to-amend” requirement.
For instance, one could argue that a “right-to-repair” provision promotes alternative dispute resolution, and is therefore consistent with the “policies and purposes” of CCOIA. It could also be argued that a right-to-repair provision does not impose limits on an Association’s power to deal with declarant in violation of section 38-33.3-302(2) if the parties subject to such provision include persons other than just declarant and the Association.
Similarly, it may be necessary to include other construction professionals as third-party beneficiaries.
The Court of Appeals in Vallagio addressed this issue, ultimately remanding to determine whether the builder and certain board members were third party beneficiaries of the arbitration provision, which defined “respondent” as “Declarant and any contractor against whom such Construction Defect Claim is targeted.” The Vallagio decision certainly left room to allow provisions, other than mandatory arbitration, that are subject to a consent-to-amend provision. The enforceability of any such provisions would depend, in part, on their scope.
Moreover, there are other provisions that may properly be afforded protection with a consent-to-amend requirement so as to effectuate the development of the common interest community.
For example, with the rise of infill development, it is not uncommon for a declarant to discover that an easement is required from a neighboring owner in order to construct certain improvements, maybe on a zero-lot-line basis.
In order to obtain the necessary easement, a declarant may need to agree to tangential requirements, such as cost sharing or maintenance agreements. Such provisions are not “self-serving” as the dissent forewarns, but are critical to the development.
If incorporated into the declaration, these agreements could simply be amended away, unless a consent-to-amend provision required consent of the neighboring owner. As the court pointed out, there are other instances where a third party’s (other than declarant’s) consent to amend is properly required, as in the case of first mortgagees, and requiring the neighboring owner’s consent would then seem consistent with Vallagio and CCOIA.
The Vallagio decision opens the door to consider other consent-to-amend provisions. As the court pointed out, their decision was limited to the narrowly drafted provision pertaining to the resolution of construction defect disputes. While other covenants may properly be afforded protection through a consent-to-amend provision, the ultimate reach of Vallagio may be limited to the extent covenants are deemed “self-serving” protective measures for Declarant, as the dissent forewarned.
— Peter Schaub and Tasha Power are partners at Berg Hill Greenleaf Ruscitti.