Recently, McKenzie Rhody & Hearn (MRH) won an important ruling in the Colorado Supreme Court that protects the rights of homeowners associations and individual homeowners to pursue claims for construction defects.
The case, A.C. Excavating et al. v. Yacht Club II Homeowners Ass’n Inc., involved a homeowners association’s claim for construction defects against the builder, general contractor and subcontractors who built the project.
In the trial court, the contractors argued that the HOA’s case should be dismissed based on two arguments:
1. The HOA did not have “standing” (also known as the legal right) to bring claims for defects in the individual units because it did not own that property; and
2. The HOA’s claims for negligence against the contractors should be dismissed under a legal doctrine called the “economic loss rule”, which requires certain claims to be based on breach of contract.
Both of these arguments were rejected by the Colorado Supreme Court in Yacht Club II.
The Colorado Common Interest Ownership Act (CCIOA) Provides HOAs Standing To Bring Claims For Construction Defects In Individual Units.
In Yacht Club II, the Supreme Court affirmed the McKenzie Rhody & Hearn (MRH) victory in the Court of Appeals holding that CCIOA grants an HOA standing to bring claims for construction defects in the common areas and the individual units. This is a major victory for Colorado Homeowner Associations.
Prior to Yacht Club II, defendants in construction defects cases argued that HOAs could not pursue claims for defects in individual units. This created potentially fatal problems for associations trying to recover for defects in basement slabs, foundations, windows and other components defined as individual interests in the HOA’s governing documents.
Now that the Supreme Court has upheld HOAs’ rights to pursue these types of claims on behalf of their members, HOAs have the ability to protect their members’ legal rights for claims of defective construction in every aspect of their communities.
Colorado Homeowners Associations Have Direct Claims For Negligence Against All Developers And Contractors Who Constructed Their Projects.
In Yacht Club II MRH also re-established that Colorado HOAs have direct claims for negligence against the parties who constructed their projects. The contractors in the case had argued that the HOA’s claims were barred by the economic loss rule.
The economic loss rule requires a plaintiff to file its claims based on contract damages, instead of negligence damages, when a contract is present in the relationship between the parties. Applying such a limit to residential construction defect claims could seriously impair an HOA’s ability to recover the full amount of damages necessary to make repairs to its community, potentially necessitating special assessments by the HOA.
Before the ruling, defendants in many construction defect cases argued that damages should be restricted to limited warranties that seldom covered more than the most minor construction problems. Often, these contractual remedies were further limited by time restrictions requiring the issue be raised in a short time-period. Making this situation even more unfair was the fact that the HOA was usually not a party to the contract being enforced against it.
Recognizing these inequities, the Court in Yacht Club II stated that, “the economic loss rule does not apply to negligent construction claims against homebuilders because homebuilders have an independent duty of care to act without negligence in the construction of homes.” As a result of this holding, HOAs and individual homeowners are not subject to the restrictions of the economic loss rule and can therefore fully pursue their construction defect claims.
Both of the rulings coming out of Yacht Club II will go a long way in protecting the legal rights of HOAs and individual homeowners in construction defect claims relating to their homes and communities.