September 18, 2018
The Colorado Supreme Court’s decision in Vallagio at Inverness Residential Condominium Ass’n, Inc. v. Metropolitan Homes, Inc., 395 P.3d 788 (Colo. 2017) came 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 arbitration 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.
I. Overview of the Reasoning Underlying Vallagio
Before addressing the potential reach of Vallagio, it is necessary to look at the underpinnings of the Court’s reasoning.
A. Non-Percentage Based Requirements to Amend are Permissible
First, the Court addressed the argument that the Consent-to-Amend Provision violated the Colorado Common Ownership Interest Act (“CCIOA”), C.R.S. § 38-33.3-217(1)(a)(I), which provides that “[a]ny provision in the declaration that purports to specify a percentage larger than sixty-seven percent [to amend] is hereby declared void as contrary to public policy.” The Association argued that requiring approval of 67% of the owners plus the Declarant exceeded the 67% threshold in CCIOA. The Court disagreed, holding that requiring Declarant’s consent was a permissible, non-percentage based condition
B. Consistency with the Policies and Purposes of CCIOA
The Association also argued that the Consent-to-Amend Provision violated § 38-33.3-104, which prohibits a Declarant from using any device “to evade the limitations or prohibitions” of CCIOA 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% voting threshold. The Court also pointed out that the underlying arbitration provision was fully consistent with the policies and purposes of CCIOA that encourage alternative dispute resolution, and thus the Consent-to-Amend Provision was not being used to evade any limitations or prohibitions in CCIOA.
C. The Power to Amend Lies with the Owners, not the Association.
Finally, the Association argued that the Consent-to-Amend provision violated § 38-33.3-302(2), which provides that “The declaration may not impose limitations on the power of the association to deal with the declarant that are more restrictive than the limitations imposed on the power of the association to deal with other persons.” In response, 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 refused to address the Association’s arguments attacking the validity of the underlying arbitration provision under § 38-33.3-302(2), noting that the argument had not been raised on appeal.
II. Potential Reach of Vallagio
The Court was careful to point out that its decision is limited to the narrowly drafted provision in Vallagio. See, Id. at 795 and fn. 6 (“[W]e emphasize that we are concerned here with a narrowly drafted consent-to-amend provision that pertains solely to the resolution of construction defect disputes. We express no opinion as to the propriety of any other consent-to-amend provisions that may come before us.”). The dissenting justices, 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 subject to a “consent-to-amend” requirement a Declarant might permissibly be able to include in a declaration. At the time Vallagio was decided, construction defect reform efforts had long been underway, resulting in a number of municipalities passing local ordinances imposing a variety of requirements in construction defect actions. Shortly after the Vallagio decision, the Colorado legislature passed H.B. 1279. While H.B. 1279 was a significant step forward in construction defect litigation reform, it was not as robust as some of the municipal ordinances, and it is possible that those ordinances could be preempted by H.B. 1279. It is also possible, however, that certain municipal ordinance provisions that are not incorporated into H.B. 1279 could be included in private covenants subject to a “consent-to-amend” provision, similar to Vallagio. For instance, it could be argued that a “right-to-repair” provision promotes alternative dispute resolution, and is therefore consistent with the “policies and purposes” of CCIOA. 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 § 38-33.3-302(2) if the parties subject to such provision include persons other than just Declarant and the Association. See e.g., Triple Crown at Observatory Village Ass’n, Inc. v. Village Homes of Colorado, Inc., 328 P.3d 275, 282 (Colo. App. 2013) (holding that an arbitration provision did not violate § 38-33.3-302(2) because the definition of “Parties” subject to the provision encompassed persons other than just the Association and Declarant – i.e., it encompassed “all Persons subject to this Declaration,” and “any builder,” among others). In a similar vein, it may be necessary to consider language encompassing other construction professionals as third-party beneficiaries. The Court of Appeals in Vallagio addressed this issue, ultimately remanding to the district court to determine whether the builder and its principals were third party beneficiaries of the arbitration provision, which defined “respondent” as “Declarant and any contractor against whom such Construction Defect Claim is targeted.” Vallagio at Inverness Residential Condominium Ass’n, Inc. v. Metropolitan Homes, Inc., 412 P.3d 709 (Colo. App. 2015). 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 3rd 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 CCIOA.
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.