As CAI’s Colorado Legislative Action Committee (CLAC)
was planning for the 2014 legislative session in Colorado, we were told by the
sponsors of the 2013 HOA Reform Package that they anticipated a quiet 2014
session for HOAs. Since five HOA bills
were signed into law in 2013, key legislators were committed to see how
implementation of those bills went before determining whether any further
legislation regulating associations was necessary. The sponsors of the HOA Reform Package stuck
to their word. However, a handful of
other legislators had a different approach.
During the 2014 session, five bills were
introduced which would have directly impacted HOAs. Of those bills, only two made it through the
legislative process and were signed into law. A synopsis of the bills that passed and those that did not pass are
outlined below.
HOA Records - On January 15, 2014, Representative
Diane Mitsch Bush (D-Steamboat Springs) introduced House Bill 14-1125 (HB 1125)
in the Colorado House of Representatives. Senator David Balmer (R-Centennial), at the request of CLAC, sponsored
the bill in the Senate. The purpose of
HB 1125 was to fix an inadvertent oversight in the association records law
which was overhauled during the 2013 legislative session. At the time HB 1125 was introduced, CCIOA
prohibited associations from publishing the telephone numbers and email
addresses of members. Obviously, this
statutory prohibition limited the information which associations could include
in their membership directors.
HB 1125 easily made it through the legislative
process and was signed into law by Governor Hickenlooper on March 27th. HB 1125 went into effect on August 6, 2014
and permits an association to publish email addresses and telephone numbers of
members and residents of the association, if those members or residents first
provide written consent to their association to publish this information.
Owners and residents may withdraw this written consent, but such withdrawal of
consent does not require their association to go back and “change, retrieve or
destroy” previously published telephone numbers or email addresses. Also, the
bill permits owners and residents to electronically provide or withdraw their
consent to their associations.
The LAC worked with Representative Mitsch Bush in
drafting HB 1125 and the LAC believes it’s an excellent fix to an inadvertent
oversight in the HOA records law.
Management Company Transparency-Prior to the 2014
legislative session beginning, the LAC informed by Representative Jeanne Labuda
(D-Denver) that she intended to introduce a bill which would cap at $50 (or
possibly even prohibit) transfer fees which management companies charge for the
work they perform relative to the sale of units in an associations they
manage. Based upon an impressive
response by CAI members to a Call to Action from CLAC, Representative Labuda
agreed to not cap such transfer fees. Instead, CLAC worked with Representative Labuda to introduce a bill to
promote management company transparency. At our request, Senator David Balmer (R-Centennial) agreed to sponsor
the bill in the Senate and was pivotal in ensuring that the bill was not amended
to cap the fees which management companies charge.
On April 18, Governor Hickenlooper signed HB 1254
into law. The bill requires the disclosure of fees charged to HOAs in Colorado
by management companies. HB 1254 will go into effect on January 1, 2015. Here’s
what you need to know about the bill:
it
requires managers and management companies to disclose their fees and charges
to associations during contract negotiations and on a yearly basis thereafter;
these
fees and charges must be disclosed as part of the written management contract
in order to be enforceable;
to
be enforceable, the transfer fees which management companies charge relative to
the conveyance of a home in an HOA must be disclosed in the management contract
or specified on a line item in the real estate closing settlement statement;
and
management
companies must also disclose any other remuneration the company or any
subsidiary, affiliate, or related person or entity receives that is in any way
connected to its relationship with the HOA.
Managers and management companies who fail to
make these disclosures would be subject to investigation and discipline by the
Division of Real Estate.
Construction Defects - With one week remaining in
the 2014 legislative session, SB 220 was introduced in the Colorado Senate.
While at the time it seemed to some that this bill was introduced too late in
the session to have any chance of passage, with relaxed rules in place for the
end of the session, a bill can technically make it through the entire
legislative process in three days. This bill was assigned to the Senate State,
Veterans & Military Affairs Committee and the Senate Judiciary Committee.
Sponsored by Senator Jesse Ulibarri (D-Commerce
City) and Senator Mark Scheffel (R-Parker), the bill sought to spur the
construction of condominiums in Colorado. Unfortunately, the bill was so
extreme that it would have guaranteed that owners of homes in HOAs would have
no recourse against builders for defective construction. The bill was killed
when the Senate Judiciary refused to take the bill up at the 11thhour.
As introduced, here’s what the bill provided:
HOAs are not permitted to remove or amend
mandatory arbitration provisions placed in declarations by developers.
The language of the bill says that a requirement
within the declaration to mediate or arbitrate “represents a commitment on the
part of the unit owners and the association on which a developer, contractor,
architect, or other person involved with construction is entitled to rely.”
This choice of language is interesting; these mandatory arbitration provisions
are placed in declarations unilaterally by developers and the homeowners have
no ability to negotiate whether arbitration is an appropriate alternative to a
jury trial.
Unless the association can prove that the
arbitration provider is unqualified, construction defect claims must be
resolved by the arbitration service provider named in the declaration by the
developer.
It is not unusual for developers to require the
use of arbitration service providers who are known for providing low awards for
construction defects. This results in a very one-sided arbitration process and
provides HOAs with no ability to participate in choosing the individuals who
will sit on the arbitration panel. Further, in addition to the strong
likelihood that the arbitration award for the defects will be much lower than a
verdict from a jury, the association’s responsibility for the costs of the
arbitration panel are taken off the top of the award for the defects. Taken
together, this means an association victimized by defects will not be awarded
enough money to make the required repairs.
Regardless of what is required in the
declaration, the arbitrator must be a neutral third-party as described by Colorado
law.
Colorado law provides that an arbitrator “who has
a known, direct, and material interest in the outcome of the arbitration
proceeding or a known, existing, and substantial relationship with a party may
not serve as an arbitrator if the agreement requires the arbitrator to be
neutral.” This added requirement in the
bill provides slim consolation because there is no “agreement” between the HOA
and developer that the arbitrator must be neutral. In addition, it is highly
unlikely that arbitration panels would be found not to be neutral, even when
they are known for providing low awards to HOAs for construction defect claims.
If an HOA intends to institute any legal action
(which would include proceeding to arbitration) for construction defects, the
association would be required to prepare and provide the following disclosures
to owners without the assistance of construction defect counsel:
-
The expenses and fees that the board anticipates
will be incurred, directly or indirectly, in prosecuting the action, including:
- Attorney fees, consultant fees, expert witness
fees, and court costs, whether incurred by the association directly or for
which it may be liable if it is not the prevailing party or that the
association will be required, pursuant to an agreement with its attorney or
otherwise, to pay if it elects not to proceed with the claim;
- The impact on the value of the units that are the
subject of the action, both during the pendency of the litigation and after its
resolution;
- The impact on the marketability of units that are
not the subject of the action, including the impact on the ability of owners to
refinance and buyers to get financing, both during the pendency of the
litigation and after its resolution;
- The manner in which the association proposes to
fund the cost of the litigation, including any proposed special assessments or
use of reserves; and
- The anticipated duration of the litigation and
the likelihood of success.
Without the assistance of construction defect
counsel, how could an association possibly answer these questions and provide
owners with meaningful disclosures? In addition, without first going through
the initial phases of testing and working through the Notice of Claims process
with the developer, it would be impossible for the association to provide
meaningful notice on many of these issues. Frankly, these disclosure
requirements set boards up for breach of fiduciary duty lawsuits.
The mandatory disclosures outlined above must be
provided to owners at least 60 days before the HOA is permitted to provide
notice of potential claims to developers as required by the Construction Defect
Action Reform Act (CDARA).
If the defects were discovered late, the timing
of these disclosures could result in an association not complying with
applicable statutes of limitations and repose. This means that the association
would be barred from pursuing construction defect claims against the developer.
The disclosures outlined above must also be
provided to owners before an HOA hires any experts or consultants or incurs or
agrees to pay expert fees or consultant fees in connection with the
construction defects.
It is impossible to comply with some of the
required disclosures without first obtaining the input from experts and
consultants. Not only would it be
virtually impossible for a board that does not have construction background to
advise the board as to the nature of defects, but without their help, how could
an association possibly provide a disclosure regarding the costs of
consultation fees, expert witness fees, and the likelihood of success against
the developer?
Associations are not permitted to pursue
developers for construction defects unless the association obtains written
consents from owners holding at least a majority of the total voting rights in
the association. This consent must be obtained directly from the owners and
proxies are not permitted to be utilized.
Obviously, it’s extremely challenging to obtain
written consents in associations. This is magnified when attempting to obtain
written consents from 51% of owners in large scale communities, mountain
communities where owners literally can live all over the nation and the world, and
communities that are largely made up of individuals in the military who may be
deployed. In a recent case, the Court of
Appeals held that if an association seeks an amendment by written consent, it
must comply with the Nonprofit Act requirement that such consents be obtained
within 60 days. This provision alone
will make it impossible for many HOAs to ever pursue construction defect claims
against developers.
Every purchase and sales contract for a home in
an HOA must include the following disclosure in bold-faced type:
The property is located within a common interest
community and is subject to the declaration for such community. The owner of
the property will be required to be a member of the owner’s association for the
community and will be subject to the bylaws and rules and regulations of the
association. The declaration, bylaws, and rules and regulations will impose
financial obligations upon the owner of the property, including an obligation
to pay assessments of the association. If the owner does not pay these
assessments, the association could place a lien on the property and possibly
sell it to pay the debt. The declaration, bylaws and rules and regulations of
the community may prohibit the owner from making changes to the property
without an architectural review by the association (or a committee of the
association) and the approval of the association. The declaration for the
community or the bylaws or rules and regulations of the association may require
that certain disputes be resolved by mandatory, binding arbitration. Purchasers
of property within the common interest community should investigate the
financial obligations of members of the association. Purchasers should
carefully read the declaration for the community and the bylaws and rules and
regulations of the association.
While this disclosure is not objectionable, we
all know that purchasers of new homes rarely read these types of
disclosures.
When taking all of these provisions together, it
became abundantly clear that this bill would successfully strip away all rights
of homeowners living in HOAs from being able to hold developers responsible for
their construction defects. This means that homeowners would have been left
paying the tab to repair such defects through special assessments or
significant assessment increases. Without taking these difficult financial
steps, the defects would go unrepaired and owners would be required to disclose
the defects as part of any sales transaction, which disclosure would likely
negatively impact property values.
While SB 220 was killed during the 2014
legislative session, the LAC expects construction defects to be a focus during
the 2015 legislative session.
Taxation of Residential Storage Condominium
Units - In addition to the construction defects bill, two other bills that would
have impacted associations were both filled during the legislative session.
HB 1143 was introduced to address how storage
condominium units are taxed. According to the bill, residential real property
is taxed at 7.96% while commercial property is tax at 29%. As a result, the
bill makes it possible to classify storage condominium units which are utilized
for residential purposes as “residential improvements” clearing the way for
those units to be taxed at the lower rate.
The LAC reviewed the bill and did not see any
unintended consequences for common interest communities. While the LAC did not
take a proactive approach to supporting the bill, we did not see any unintended
consequences for common interest communities in Colorado. However, the bill was killed by the House
Appropriations Committee.
CCIOA Exempt Associations - On January 28, 2014,
Senator Owen Hill (R-El Paso) introduced Senate Bill 14-140 (SB 140) which
would have impacted the lien rights of those HOAs which fall within the
Colorado Common Interest Ownership Act (CCIOA) exception for small new
cooperatives and small and limited expense planned communities. In order to be
permitted to record liens for past due assessments, to foreclose upon those
liens and to collect related fees and charges permitted under the declarations
for these associations, this bill would have require these HOAs to amend their
declarations to adopt all provisions of CCIOA.
SB 140 was postponed indefinitely by the Senate
Committee on State, Veterans & Military Affairs at the request of Senator
Hill. This meant that SB 140 was dead for the 2014 legislative session and
could not be reintroduced during the session. Senator Hill told the Committee
that the bill needed more work before potentially being reintroduced next year.