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Commentary: Where Have All the Condos Gone?

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There are currently about 15,000 apartment units but only 300 condominium units under construction in metropolitan Denver.

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Why? The answer is simple: Homeowners association lawsuits.

For several decades there has been a cottage industry composed of lawyers, engineers, architects and homeowner association management companies who have collaborated in bringing lawsuits against condominium developers, design professionals and contractors claiming defects in design and construction. Some of those lawsuits have been meritorious, some borderline and others without foundation.

The result of these lawsuits has been to discourage developers, design professionals and contractors from doing any new condominium projects, despite what many believe to be a ready and growing demand for them in the area.

The flip side of this issue is what effect those lawsuits have on existing condominium owners. That effect may be devastating.  Typically, attorneys who bring the lawsuits hire architects or engineers to inspect the projects with “fine-tooth combs” designed to identify every missing or misplaced nail, mislocated convenience outlet and other “problem.” They then compile laundry lists of “defects and deficiencies” for which thousands or tens of thousands of dollars of damages are claimed.

Most of the cases are settled before trial, but even after trial the dollar amounts recovered for the homeowner associations is typically less than originally demanded. After deducting the attorney fees and litigation costs, the homeowner association ends up with much less than the originally estimated cost of correcting the “defects and deficiencies.” So all of that work may not be done.

When owners attempt to sell their units, potential buyers are likely to become aware of the litigation and seek to negotiate over the purchase price by referring to items in the laundry list that have not been corrected.

Concerned construction industry members are currently looking for solutions that may not only provide business for them but will also provide the needed inventory of new condominiums. One solution under consideration is to require that more than a simple majority (a “super majority”) of homeowners authorize their associations to file lawsuits. That might result in fewer lawsuits. Also, owners might be better informed of the potential consequences of litigation upon the values of their units. It has been reported that at least one Colorado legislator is studying the possibility of a legislative action in an attempt to resolve the problems.

There may also be some assistance from the courts. In September 2013, the Colorado Court of Appeals ruled that laws governing condominium homeowner’s associations would allow that construction defect claims could be arbitrated rather than going to court—with the expectation that arbitrators, with construction-related experience, would be less likely than juries to make large awards.

The case also appeared to approve the requirement that a vote of more than a simple majority could be required for a homeowners association to assert construction defect claims. The case is not final because the Colorado Supreme Court has been petitioned to review the court of appeals decision.

Another solution might be to stick homeowners and even their attorneys for litigation defense costs if their claims lack merit or are overly inflated.

Albert B. Wolf is a principal in the Denver law firm of Wolf Slatkin & Madison PC.

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