Construction Defects Legislation: home owners await final version, changes required!

To date, the Colorado HOA Forum, Colorado's largest HOA home owner advocacy organization,  has mostly commented on the Colorado Construction Defects Bill, SB 15-177, by refuting empty contentions from the opposition.  We favor the Bill in principle as it could provide protections and empowerment for home owners in the use of their funds for litigation.  This Bill is still in the development stage and our FINAL approval must await the FINAL Bill.

 

It appears the primary purpose of this Bill was to mitigate the number of construction defects law suits and to provide for an environment to promote the building of affordable housing.  This is to be accomplished by changing State HOA law and further defining the rights of home owners and authority of HOA Boards.  Our recommendations, listed below, have been submitted to the Bill's sponsors and Legislative Committees that will review the Bill. Our final support for this bill will be determined by the inclusion/exclusion of our recommendations.

 

1.  This Bill will modify State HOA Law and thus should not limit the requirement for home owner approval on the use of HOA funds in litigation and/or approving legal action to only construction defects litigation but all litigation/court cases.  This will provide home owners with broader protections against using HOA funds on costly litigation without their knowledge or approval and still accomplish the intended purpose of reducing the number of law suits.

 

2.  The process to gain home owner approval through voting on the use of HOA funds in litigation and/or to pursue litigation must include a process of voting similar to that used by the HOA for other referendums and  this includes the right to proxy vote.  Without the use of proxies those not capable of attending a meeting in person to vote on litigation will have their rights violated as described in their HOA governing documents.  The specific groups to be harmed by precluding proxy votes are the disabled, seniors, and in particular military personnel (who quite often are deployed and not available for in person voting.  Additionally, proxy voting precludes using scheduling as a means to control the outcome of a vote whereby a date/time is chosen to conduct the in person vote when most can't attend.  Thus gaining a majority outcome, pro or con, is highly unlikely; this is an anti-home owner practice. We also find no precedence in HOA law to exclude proxy voting.

 

3.  It should be clear in the Bill that both plaintiff and defendant must agree upon the arbiter.

 

4.  A clause indicating that any sole home owner can pursue litigation using their own funds to bring a law suit in their behalf.

 

5.  Defined procedures to give both developer and home owner opportunities to resolve the construction defects issue prior to proceeding to litigation.

 

6.  The Bill indicates that a vote of home owners can't negate/remove the mandate in the original Declaration to use arbitration for construction defects litigation.  Although this is problematic as it limits the right of home owners to change the governing documents it also can serve to keep costly litigation out of the time consuming and costly court system.  There is no evidence that such clauses are changed in significant numbers so the impact of this mandate may be more insightful than have any real impact.  Also, home buyers are made aware of this restriction when they purchase the home like any other HOA restriction.

Colorado Construction Defects, SB 15-177: "protect the home owner" opposition in question

Let's be honest by acknowledging that any proposal on Construction Defects legal reform will not be ideal for either home owner or developer.  The high costs of unrestrained litigation, all fully funded on the backs of home owners without their knowledge or approval, simply needs change. Too often HOAs have their reserve funds depleted for legal costs and too often home owners are left with costly special assessments to pay for legal fees.  Then there is the argument by contractors that the proliferation and high cost of litigation associated with and instigated by HOA's thwarts the building of affordable housing. The system is broken, let's progress towards fixing it.

 

The predictable opposition to the Bill is from the Community Association Institute (CAI) and HOA trial lawyers.  They enjoy the current legal environment that results in a plethora of HOA court cases and unlimited funding of these cases through HOA bank accounts (and all without any involvement, knowledge, or approval of home owners).  The other opposition also comes from legislators on the "protect the home owner" band wagon. Their arguments are simply not consistent with their legislative actions.  Those legislators opposing SB 15-177 under the guise they want to "protect HOA home owners" have continually refused to support or sponsor Bills that would save home owners money, make current ineffective HOA laws effective, and improve HOA governance.  This legislative session they were asked to sponsor legislation to allow for an out of court binding dispute resolution process that would empower home owners in enforcing HOA laws with an affordable, expeditious, and accessible venue to resolve disputes (a process recommended in a State HOA Study);  end the abusive, excessive, and illegal HOA Transfer fee on home sales that costs home owners millions of dollars each year; to limit the excessive collection of fees and lawyer assessments on HOA debt; and most recently provide financial relief to small HOAs in the property manager licensing program.  It is difficult to understand and accept the "protect the home owner" argument when they have avoided every opportunity to do so in the past.  This is called being inconsistent.

 

The latest legislative contention is that this Bill would require a home owner to "seek a majority vote from all other home owners in the HOA to acknowledge their construction defect claim".  This is at best a half truth.  SB 15-177 does not to require home owners to acknowledge the validity of the construction defects claim but requires a Board to inform home owners of their intent on litigation (for any one or all home owners) and gain a majority of home owner approval to use HOA funds for litigation.  Thus, a vote is required if the individual home owner wants the HOA to use HOA funds to sue in their behalf.  This will mitigate the practice of HOA Boards and their lawyers taking on narrow and special interest litigation that is funded by home owners without community approval or benefit.  This is called open governance and protecting home owner interests.

 

Legislators on the "protect the HOA home owner" bandwagon must be challenged as to the validity of their opposition to SB 15-177 and also why, if they are so concerned about helping HOA home owners, they have failed to sponsor any substantive HOA reform over the past several years.

Phantom Opposition in Media on Colorado Construction Defects Bill

Colorado SB 15-177, construction defects reform, is aimed at reducing the number of law suits entered into by HOAs and to define, improve upon, and reduce the cost of dispute resolution.  This particularly impacts HOA home owners as it requires the approval of home owners prior to the HOA spending its' funds on litigation.  Too often HOA Boards at the encouragement of their lawyer enter into costly litigation without the knowledge or approval of home owners.  The consequences can be burdensome special assessments and increases in HOA dues to pay for the litigation and replenish reserve funds.

 

The Colorado HOA Forum, representing home owner interests, supports this legislation as currently proposed.  The Bill is opposed by the Community Association Institute (CAI) with a membership comprised mostly of property managers and HOA and trial lawyers. 

 

Lakewood, CO and most recently Lone Tree, CO have enacted local ordinances similar to the proposed SB 15-177.

 

We have monitored press releases on both the Lakewood and Lone Tree efforts.  The press (Denver Post, Denver Business Journal, and TV news) has again mentioned that opposition to the subject Bill is strong among HOA organizations and HOA home owners.  We challenged the media to identify just one HOA organization (members being HOAs) and/or one HOA home owner's organization (mostly home owners as members).  TO DATE NEITHER COULD IDENTIFY ONE!  THERE IS NO HOA OR HOA HOME OWNER's ORGANIZATION IN THE STATE TO OUR KNOWLEDGE OR THE MEDIA'S EXCEPT THE COLORADO HOA FORUM, NONE, LET ALONE ANY WHO OPPOSE SB 15-177.

 

This happens time and again with HOA issues: those representing the home owner's opinion being organizations and trial lawyers that are a hindrance to and block any HOA legislative reform such as the CAI.

 

This misrepresentation of who represents HOA home owners exemplifies why our issues for legislative reform and SB 15-177 have such controversy and difficulties in gaining support:  the opposition identified basically doesn't exist and/or misrepresents itself as supportive of home owners.

 

Below is a link to the latest article from the Denver Business Journal that suggests opposition from phantom organizations such as home owner groups and HOA entities:

 

http://www.bizjournals.com/denver/blog/real_deals/2015/02/lone-tree-to-take-up-construction-defects.html

 

We ask the press to once again get it right and verify who represents home owners and those who reject legislative reform that promotes home owner's rights and good governance.

CAI Threatened Over Empowering HOA Home Owners on the Use of Their Own Funds in Litigation: SB 15-177

The Community Association Institute (CAI), long incorrectly identified as a home owner centric organization in the press and by State legislators, is at it again in attacking HOA home owner’s rights.  The CAI represents the interests of property managers and HOA lawyers and not home owners.  This time they are objecting to a provision in proposed Colorado SB 15-177 (construction defects) that requires HOA home owners to approve the use of HOA funds in litigation.  Why the opposition?  The CAI and HOA lawyers view the HOA as a profit center and easy money and empowering home owners on decisions on the use of their own funds is considered disruptive and meddling.

Too often HOA lawyers raid HOA bank accounts for legal fees and costly legal cases that should not have been litigated leaving home owners with depleted reserve funds, special assessments to pay legal costs, and/or increases in HOA dues to replenish reserve funds. HOA Boards can currently enter into litigation without apprising home owners of their intent, the cost and consequences of litigation or how they intend to finance legal fees. Boards can incur unlimited legal expenses and even take out debt instruments to pay legal fees. Home owners in too many cases only know of the financial consequences after the case has been litigated and they are stuck with the bill.  This Bill simply reins in the authority of an HOA Board (that is highly influenced by HOA lawyers and property managers) in making decisions on litigation that can have significant if not catastrophic financial impact.

SB 15-177 would not preclude legal action but require a majority of home owners to approve litigation. This would mitigate the number of law suits and the abusive practice of an HOA Board suing in behalf of a very few (as few as two) vs the community at large.  More cases would be handled in the less expensive legal venue of arbitration thus saving HOA’s significant sums of money. Home owners could still pursue individual actions using their own funds.

The CAI is fabricating a tall tale in contending that any legal fees paid to an HOA lawyer related to routine advice and counsel would take a majority vote of home owners. This Bill doesn’t get involved in regulating or interfering with the operations and daily functions of the HOA. Legal counsel on enforcing covenants, controls, restrictions, and debt collection or other issues involving common and routine HOA issues would not require a majority vote of home owners. It’s just not in this Bill.  Payment of routine legal counsel doesn’t require a law suit today nor would it under this Bill. This Bill is directed at legal cases filed in a court of law that are specific, unique, non-recurring and financially impacting. The CAI is attempting in what should be an embarrassing statement to say that any payment to an HOA lawyer would have to be voted upon: this is called desperation.

The winner in this Bill will be home owners in HOA community associations (not the Community Association Institute) who will now be empowered with more control over the assets of the HOA and still retain the right to litigate construction defects.  This Bill does not impair the ability of any HOA Board to govern but contributes to open governance.

HOA Home Owners Snubbed Again Over Ending HOA Home Sale Transfer Fees

Our legislators can pass a bill naming the State Pet but treat HOA home owners like feral cats.  The Colorado HOA Forum, the State’s largest home owners advocacy organization, has lobbied legislators for  the past eighteen months to limit/end the illegally applied and costly (upwards of $10 million a year) HOA Transfer Fee on the sale of HOA homes.   Last year lobbyist killed a bill to limit this fee.  Realtors, legislators, many property managers (PMs), and home owners voice objections to this abusive and excessive fee.  Many believe the fee is a mandatory fee for expenses incurred by the HOA/PM in the sale of a home: not true.  The fee has been called extortion and highway robbery by PMs and legislators.  When interviewed, The Colorado Association of Realtors didn’t understand the fee and wouldn’t object to having their clients pay it at home closing.   A Denver News Channel 7 consumer reporter indicated if home owners are stupid enough to pay it they only have themselves to blame even if not paying it means no home closing.   The fee is deceitfully presented to home sellers on sales documents as levied by the HOA, the amount determined by and pocketed by the HOA, and benefits the HOA by their recovering additional expenses due to the home sale:  all not true.  The law states the fee is assessed for expenses uniquely incurred by a PM in relation to a home sale else it is illegal.  However, homeowners are never provided with an explanation or detailed invoice of transfer fee charges.   The fee is well known to supplement PM income, charged “because it can” be, and used to low bid HOA contracts with the expectation of subsequent Transfer Fee income.  Fees range from zero to over $1,150 with no relation or justification for work performed.  The fee can preclude approval of FHA/HUD loans if part of the home sale transaction.  The state agency in charge of real estate transactions (DORA) places no requirements for justifying the fee based on the law or even suggests a detailed receipt be provided the payee at closing thus enabling the fee to continue.  Finally, the main justification for charging the fee by some large PM companies is that if home buyers want accurate information upon closing on a home as to any amounts owed the HOA they must pay extra for it.  Otherwise, they will simply get the regular monthly billing produced for the home owner that has the same information: what is on the regular billing, inaccurate information!  What else need be said to end this abusive fee!

Yes, this fee is a big deal.  It is costly, abusive, unjustified, and amounts to an unwarranted tax on HOA home sellers.  It should be easy to end/limit through HOA legislative reform but is viewed less important than identifying the State pet which passed without objection.  The Colorado HOA Forum will continue to fight to end this fee.

HB 15-1040 Would Remove Protections under Property Manager Licensing

A Bill, HB 15-1040, was introduced for legislative consideration and could have the affect of derailing HOA home owner protections from abusive practices in the property management industry.  The Colorado HOA Forum has reviewed the Bill in its' original form and we urge legislators vote against it.  The Bill would effectively reduce the number of HOA property managers (aka Community Association Manager (CAM)) required to be licensed by about 80% thus nullifying HB 13-1277 (the CAM Licensing Bill).  HB 15-1040 would require only those  CAMs in HOAs with 200 or more homes to be licensed.  Thus approximately over 7,700 of the 9,600 registered HOAs would be exempt from their CAM being licensed and allowing the CAM to operate without any oversight, guidelines, and with little accountability: the very problems that prompted licensing. 

Licensing was implemented to provide oversight and prevent abusive practices in the CAM industry in ALL HOAs and improve the skills and credentials of ALL CAMs.  There is no relationship between the size of an HOA and vulnerability to abuse.  In fact the opposite may be true as smaller HOAs more heavily rely on the CAM for all facets of asset and financial management  The reasons prompting this Bill have not been mentioned but surely won't be corrected by simply excluding smaller HOAs which is an arbitrary solution to an undefined problem in the licensing law.  As with any law there can be improvements when it causes unintended problems.  Minor changes to the law may be needed as we suggest below but NO consideration should be given to excluding CAMs from operating rules and guidelines simply because they manage a small HOA, 

A very important feature of the licensing law is that it provides for HOAs and home owners in small and large communities with an out of court dispute resolution process that otherwise requires complaints to be resolved in our costly, time consuming, and litigious court system.  The out of court dispute resolution saves HOAs and home owners on legal costs and allows an affordable and accessible venue for home owner and HOA problem resolution.  This right should be afforded to ALL HOAs but this Bill would exclude this process to home owners in smaller HOAs.

Smaller HOAs deserve the same protections afforded to those in larger HOAs and this Bill would do the opposite.  The educational requirements, cost to acquire a license, and/or type of license for those serving small HOAs (under 50 homes) might be revisited with just cause based on experience with the law but under no circumstances should CAMs serving smaller communities be allowed to operate outside of and not accountable under the CAM licensing law.

HOA Property Manager Licensing: Fees Transparency is a License to Abuse

The Community Association Institute (CAI), HOA lawyers, and large property management companies know one thing is certain: laws on transparency and disclosure will not inhibit abusive practices in the HOA property management industry.  In 2014 these groups combined their legislative, political, and financial efforts to kill a Bill (HB 14-1254) that would have ended or limited the dollar amount of the illegal and unjustified HOA home sale transfer fee.  They legislatively completed this by changing the Bill to address the transfer fee as a "disclosure item" in the upcoming property manager licensing law.  This was completed to avoid any direct oversight, scrutiny, or rules to ensure no change took affect.  Even the idea of real disclosure and accountability on justifying the legality/use of the transfer fee were so feared in the watered down Bill that ALL definitive language was removed:  no requirements to disclose why the fee was charged, who determined the amount and pocketed the fee, who benefited from the fee, what work was performed that was extraordinary/unique due to the sale of a home that was not already paid for by HOA dues, that the HOA did not mandate the fee and it was neither a mandatory or legal requirement, and that if not paid could hold up the sale of a home.  The modified Bill also avoided stating that that any excessive and unjustified fee COULD NOT be challenged by the home seller/buyer and if found to be inappropriate by the State property manager licensing authority COULD NOT be directed for refund or reduced in amount .  Thus the crafted disclosure Bill had nothing to do with justifying the fee or reining in abuse but only to ensure its' unabated continuance.

So the lesson in Disclosure and Transparency Legislation 101: A Bill portrayed to rein in abuse and misuse through disclosure will present the illusion of change, enforcement and consumer protection but change nothing with the most significant impact being that the abused be informed (and only minimally) of how they are to be abused.

The Colorado HOA Forum will continue its' efforts to educate the public and legislators on HOA issues and to legislatively end/limit the HOA Transfer Fee to save Coloradans millions each year.