Co-Authors: Cinthia M. Manzano, Esq. and Oliver E. Frascona, Esq.
Law regarding construction defect changed effective April 2003. Please see new article at:
Colorado has enacted a law affecting construction defect litigation. The Act, called the Construction Defect Action Reform Act, applies to actions filed on or after August 8, 2001. The Act has implications for real estate brokers to the extent they may be involved in disputes regarding construction defects in real property improvements. Some of the Act’s provisions are discussed below as they relate to real estate brokers.
The Act includes (1) a requirement for notice to members of homeowners’ associations before construction defect litigation is served on a defendant; (2) a restriction on claims for technical building code violations in residential construction; (3) a requirement for a list of construction defects to be provided by a claimant within 60 days after commencing a lawsuit or arbitration for construction defects; and (4) a change to the deadline for any claim by one defendant to obtain reimbursement from another person who may be liable. The latter provision requires a lawsuit for reimbursement to be brought within 90 days after settlement or final judgment in the underlying dispute. It may be considered the most significant feature of the Act.
Existing law has provided homeowner’s associations and other “common interest communities” with the power to bring certain lawsuits on behalf of the unit owners. The associations retain that right to act through their executive boards. However, the law is now amended to require the executive board of an association to give notice to the unit owners of any impending construction defect lawsuit, before the lawsuit is served on the defendant. The executive board is required to give notice of the nature of the action and the relief sought, and the expenses and fees that the executive board anticipates will be incurred in prosecuting the action.
This notice requirement may affect real estate brokers indirectly. In the past, homeowners not actively involved in their homeowner’s association could be unaware of existing construction defect litigation against the builder. Real estate agents often first learned of litigation from the association’s property manager when the manager was asked to disclose if the association was involved in any litigation. This resulted in many telephone calls prior to an inspection deadline or closing to obtain information needed to inform prospective buyers about the claimed defects. Many property managers would have to refer agents to the Association’s lawyers and agents would spend a considerable amount of time gathering information. The new law assists agents by eliminating the eleventh hour surprise of potential construction defects and eliminates many phone calls to learn the facts. On the downside, once a seller has received the notice, the possibility of construction defects will have to be disclosed even if a lawsuit has not been filed at the time.
Sometimes, lawsuits by homeowner associations for alleged construction defects result in real estate brokers being joined as parties, based on allegations that the brokers failed to disclose known defects or otherwise are at fault. Some believe that the new notice requirement will prompt unit owners to confront their executive board about whether the claims should be pursued, and possibly to cut back on the claims which otherwise would be brought. Indirectly, it may reduce the claims brought against brokers. Association meetings prompted by the notice requirement might also provide an opportunity for interested persons to obtain information, and perhaps, to influence decisions by the board.
The Act has provisions applying to other construction defect claims, not just claims by homeowner associations. One provision restricts negligence claims involving residential construction that is not in substantial compliance with an applicable building code or industry standard. It restricts negligence claims where the failure to comply does not result in actual or probable damage, loss, injury or safety risk. The restriction does not affect warranty claims and other sorts of claims, and it probably does not significantly change how Colorado courts applied existing law.
In commercial and residential construction cases, an initial list of construction defects must be provided by the claimant within 60 days after bringing a lawsuit or arbitration claim against any architect, contractor, builder, builder vendor, engineer or inspector. The list must describe the construction alleged to be defective. A trial date cannot be set until this has been done. The requirement may have the practical effect of forcing some claimants to do their homework earlier, to better specify what defects are alleged. It may cause the parties to winnow out or expand the claims to be pursued. It may allow earlier identification of subcontractors, inspectors or others (even brokers), who allegedly may be at fault and who might be joined in the action.
If a construction defect claim is settled or decided by final judgment in court, the party who settles or is held liable will have a limited amount of time to file a claim for reimbursement against any other person who may be responsible. The latter type of claim may consist of what is known as a third-party claim, for contribution or indemnity. The Act revises the statute of limitations to require such a claim to be filed within 90 days after settlement or final judgment, whichever comes first, on the underlying claim. Depending on the circumstances, this provision may apply to claims involving real estate brokers, even though they are not ordinarily subject to the same statute of limitations as are builders. Consider the following hypothetical examples.
Suppose a homeowner makes a claim against a builder for construction defects. The builder enters into a settlement with the homeowner, but the builder plans to seek reimbursement from others whom the builder considers at fault. The builder might blame a subcontractor. Perhaps the builder blames a real estate broker, who allegedly provided incorrect information to the builder or concealed a known defect, which affected the builder’s construction and liability to the homeowner. The builder’s claims for reimbursement must be filed in court within 90 days of settlement with the homeowner. Based on language in the Act, an argument can be made that the 90-day deadline applies to the builder’s claim against the broker, even though the broker is not a builder or other party directly involved in the construction process.
Consider another hypothetical. Suppose a property owner sues various parties for construction defects. One of the defendants is a real estate broker, whom the owner alleges had inspected the property and assured the owner it was free of defects. If a final judgment is entered against the broker, the broker might have 90 days to bring a claim for reimbursement against anyone the broker considers at fault for his liability, such as an engineer on whom the broker relied. The 90-day statute might apply to the broker to the extent he acted as an “inspector” of the construction. However, depending on the facts, arguments can be made that a different statute of limitations applies, which could run out sooner or later than under the other statute.
All considered, the new Act may bring about earlier disclosure of information. It may affect choices by property owners and others about what defect claims to pursue and when. It may have indirect effects on real estate broker liability, possibly resulting in fewer claims or earlier resolution of disputes.