HOA CASE TO WATCH 14:06, September 25, 2015

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Does a Declarant Have Perpetual Authority over its Declaration?

A recent Colorado case with far reaching implications has had a petition for certiorari filed to the Colorado Supreme Court involving perpetual declarant approval of HOA declaration amendments.  In May, the Colorado Court of Appeals decision in Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc. et al held that a declarant consent requirement to amend a mandatory arbitration provision was enforceable.

The association’s declaration, recorded in 2007, contained two developer consent clauses.  The first provision was a general provision on amendments which stated that owners could amend their declaration by 67% vote – however – consent of the declarant was also required. It is important to note that the declarant consent had an expiration date which had passed.  The second and more specific clause that was at issue involved a mandatory arbitration clause.  That clause set forth provisions specific to construction defect claims, including the requirement that such claims be submitted to binding arbitration.  The clause further provided that it would not ever be amended without the consent of declarant and without regard to whether declarant owns any portion of the real estate at the time of the amendment.

The members voted to amend the declaration by removing the provision related to construction defects and the mandatory arbitration without obtaining consent from the declarant.  Shortly after the amendment, the association filed an action in district court which included construction defects.  Not surprisingly, the defendants moved to compel arbitration arguing that original arbitration provision was enforceable and the amendment invalid because declarant consent to remove it was not obtained.

The Colorado Court of Appeals held that developer consent was required to remove the mandatory arbitration clause. In general, it was determined that arbitration is favored in Colorado and valid and enforceable arbitration clauses will divest the court of jurisdiction over all arbitrable issues.  The court found no ambiguity existed in the original clause and therefore the amendment was not enforceable as it lacked the declarant’s consent.

The association argued that there were numerous violations of CCIOA.  However, the Colorado Court of Appeals felt differently.  The court found no violation of C.R.S. §38-33.3-302(2) – this section prohibits restrictions on an association’s power that are “unique to the declarant.” The clause did not limit itself to claims against the declarant, but rather applied to disputes between other parties.  Further, the court determined that C.R.S. §38-33.3-302(1) list of association powers does not include amending a declaration. The power to amend belongs to the owners and therefore the declarant consent requirement did not impose a limitation of the power of the association.

The association further argued that C.R.S. §38-33.3-217(1)(a)(I) was violated as declarant consent would have the effect of requiring more than the 67% vote to amend a declaration.  That section of CCIOA governs amendments to declarations and states that no more than 67% can be required. The Colorado Court of Appeals disagreed holding that the section only addresses unit owners and does not explicitly preclude a declaration from imposing additional requirements

The association further argued that C.R.S. §38-33.3-104, which states that a declarant may not use any device to evade the limitations or prohibitions of this article or the declaration, did not apply.  There was nothing which would allow the declarant to control the owners’ votes.  Further, the association’s arguments regarding C.R.S. §38-33.3-303(5), which discusses a declarant’s right to appoint and remove members of executive board, did not apply. The question of whether a third party could enforce the arbitration agreement was sent back to the trial court.

It will be interesting to follow this case to see if the Colorado Supreme Court grants the petition for certiorari.  It would also not be surprising if legislation is introduced to amend CCIOA to address this situation.

If you have further questions regarding CCIOA please contact Chris LaCroix () in Aspen, Kursten Canada (), Tracy Kinsella () in Avon, or David McConaughy () in Glenwood.