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November 19, 2013

When a planned residential development is created, the owners’ association is governed by a Declaration of Conditions, Covenants and Restrictions (“CC&Rs”).  Very often, the developer who creates the CC&RS will include an alternative dispute resolution procedure in the CC&Rs so that if the owners’ association has claims against the developer, for example a construction defect claim, the owners’ association has to follow a specific procedure, such as mediating the claim first, or file the claim in a specific forum, such as arbitration. 

What we often see happen is, just prior to a claim being filed, the association will amend the CC&Rs to remove the alternative dispute resolution procedure.  This is undoubtedly done at the urging of the association’s construction defect attorney who does not like the procedure or forum outlined in the CC&Rs. 

In an effort to reinstate the alternative dispute resolution procedures, a battle often ensues about whether the amendment was done properly according to the CC&Rs themselves (i.e. had the requisite number of votes of the association membership, etc.).  On October 24, 2013, the Colorado Court of Appeals issued a ruling in Triple Crown at Observatory Village Association, Inc. v. Village Homes of Colorado, Inc., wherein a novel approach to this issue was taken by the developers.  In Triple Crown, the association amended the CC&Rs to remove an arbitration provision.  The developers argued that the amendment was ineffective because the association is a nonprofit organization and under the Colorado Revised Nonprofit Corporation Act (CRNCA) an action of a nonprofit corporation taken without a meeting is ineffective unless the corporation receives the requisite number of consent forms within 60 days after the earliest dated consent form is received by the corporation.  Here, it took the association 120 days to receive the requisite number of consent forms. 

The association argued that CRNCA did not govern this amendment, but rather the terms of the CC&Rs themselves, as well as the Colorado Common Interest Ownership Act (CCIOA), both of which were silent on the issue of the timing of securing the consent forms.

The trial court concluded that the association had to comply with both CRNCA because it chose to be a non-profit organization, and CCIOA, and therefore found that the amendment was ineffective and the association’s purported revocation of the arbitration provision was invalid.  The Colorado Court of Appeals has accepted the association’s petition for interlocutory review of this decision. 

We will keep you informed of the appellate court’s ruling on this when it is issued.  In the meantime, we wanted to share with you our experience on this issue.  The best way to avoid this particular issue is for the developer to insert a provision in the CC&Rs saying that the alternative dispute resolution procedure cannot be amended or revoked for a set period of time.  The most advantageous way to phrase this is to link that time frame with the statue of repose on construction defect claims, because that is typically the longest period of time relevant to a claim that the association might bring. 


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