Denver Mayor Michael Hancock this week unveiled a proposal aimed at reining in costs associated with construction defects lawsuits, an issue he believes has hampered the city’s ability to provide housing options for a booming city population.
The proposed ordinance is the latest effort by a municipality to deal with a polarizing issue that has yet to yield results at the state level.
“Cities are looking for leadership, and we’re looking for balance because ultimately we pay the price at this level when we don’t have the proper laws to allow us to implement a balance within our communities,” the mayor told reporters Tuesday.
Developers argue that a rise in lawsuits brought by condominium homeowners associations over construction defects has created a chilling effect on new condo development.
And reform supporters argue that high costs due to increased litigation have hurt cities like Denver, which is experiencing an affordable housing crisis. Because Denver is landlocked, it must grow “up” rather than out in order to accommodate booming growth, city officials say.
A recent study finds that condo construction in the Denver metro area makes up just 3.4 percent of all new owner-occupied housing. That’s nearly a 21-percent drop from 2007 numbers, according to information provided by the city.
Hancock believes developers want to construct high-rise condos in Denver but are prohibited from doing so because of extraordinary costs due to increased litigation risks.
“I think it’s important for us to understand that developers want to build this type of housing,” Hancock said.
The ordinance contains some similarities to Senate Bill 177, a construction defects reform measure that received bipartisan support in the Senate but died in a Democratic-controlled House committee earlier this year.
Like the Senate bill, Denver’s ordinance would require homeowners association boards to notify owners about the potential consequences of a lawsuit. And they would have to receive a majority vote of approval from condo owners before moving forward with litigation.
“If I’m sitting in a condo complex and whatever body decides to execute litigation, I have a right to know that you may be encumbering my property, or at least including my property in the litigation,” Hancock said. “And so, if I go to sell or refinance, it’s important to know that that would be an impediment or consideration that would have to be undertaken in that process.”
The proposal would also support development contracts that require alternative resolutions to litigation, such as binding arbitration. That’s been a major point of contention. Supporters of such efforts say arbitration reduces costs associated with litigation, but opponents argue that only the courts can provide a true level playing field.
City officials point to a recent Court of Appeals decision in a dispute involving a condo association and a developer. Vallagio at Inverness Residential Condominium Association sued Metropolitan Homes over construction defects, but only after the condo board voted to amend association bylaws that originally required arbitration as the resolution method.
The court decided that Vallagio could not do that without the homebuilder’s consent.
The proposed ordinance would codify the court’s ruling.
“If the private parties have set up a binding arbitration provision in lieu of litigation, we honor and reflect and reinforce that,” said Denver Assistant City Attorney David Broadwell. “We’re not imposing arbitration, we’re upholding the contracts where the private parties themselves have bought into and provided arbitration”
The ordinance would also limit technical building-code violations from being used in defects litigation. Broadwell said building-code violations, such as those having to do with plumbing and electrical codes, would only be “actionable if somebody has actually been hurt.”
“There has to actually be some sort of negligence leading to damage before our code can be used (in litigation),” Broadwell said.
Both Hancock and Broadwell stressed that state lawmakers still need to deal with this issue, regardless of whether the ordinance passes. If the city council approves the ordinance, Denver would join Aurora, Commerce City, Lakewood, Littleton and Lone Tree as cities that have passed local construction defects ordinances.
“Nothing we’re doing overrides the desire and need for us to still address this on a state level,” Hancock said. “And I think that’s important here. And if we can provide insight through our ordinances here to the state, then let us do that.”
But opposition to the proposal is already lining up.
Jonathan Harris, president of the Denver-based Build Our Homes Right, said the ordinance would have serious consequences because it would take protections away from condo owners.
Harris bought his Five Points area condo in 2004. Shortly after moving in, the condo board filed a lawsuit against the builder after water began leaking into units, causing flooding. The case finally settled three years ago.
“It was such an awful experience going through that,” Harris said.
Harris said forced arbitration stacks the cards against homeowners.
“Arbitration was created for large entities to resolve their differences,” he said. “What’s happening now is big businesses are picking on the little guy. It seems to me we’re losing our liberties, our civil rights, by having them stripped away.”
Opponents of recent construction defects reform efforts have argued there is no evidence to suggest that limiting litigation options would even result in more condo construction. Harris is one of them.
“There’s definitely a need for affordable housing, but there’s nothing in (the proposal) that says we’re going to do this to provide affordable housing. It says, ‘We’re going to do this and hope the builders do this.’”
Broadwell concedes that the proposal contains no guarantees that it will lead to more housing options in Denver.
“As you project out what effect this is going to have, whether it’s going to produce more condos, whether it’s going to produce more affordable condos, frankly, it remains to be seen,” he said.
Harris said he plans to meet with city council members and groups opposed to the proposal in hopes of rallying support to his side.
“I have some hopes that sanity will reign before we give it all away,” he said.
— Twitter: @VicVela1