When the Developer Controls the Homeowner Association Board: the Benevolent Dictator?

• Publication year: 2002
• Pages: 91

31 Colo.Law. 91 Colorado Lawyer 2002.

2002, January, Pg. 91. When the Developer Controls the Homeowner Association Board: The Benevolent Dictator?

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91

Vol. 31, No. 1, Pg. 91

The Colorado Lawyer
January 2002
Vol. 31, No. 1 [Page 91]

Specialty Law Columns
Construction Law Forum
When the Developer Controls the Homeowner Association Board The Benevolent Dictator?
by Ronald M. Sandgrund, Joseph F. Smith

This article discusses the potential conflicts of interest and liabilities a real estate developer faces when it acts as builder, vendor, declarant, and property manager for a Colorado common interest community, such as a multi-family development, and potential solutions to these problems

This month's article was written by Ronald M. Sandgrund Greenwood Village, a partner with Vanatta, Sullan, Sandgrund & Sullan, P.C. - (303) 779-0077, and Joseph F. Smith, Greenwood Village, an associate with Vanatta, Sullan, Sandgrund & Sullan, P.C. - (303) 779-0077.

A real estate developer may experience potential conflicts of interest and liabilities when it acts in different capacities - for example, builder, vendor, declarant, and property manager - for a Colorado common interest community ("CIC"), such as a multi-family development. Possible solutions to some of these difficulties (none fully satisfactory) are explored below.

Conflicts come into sharp focus if suspected construction defects begin to manifest themselves during the period the developer controls the community association's board. During this time, capitalism confronts socialism in the form of a for-profit business assuming management and control over, along with the legal responsibilities of, a not-for-profit homeowner association board.

In one case, a creative settlement valued at over $10 million was reached after several years of bitter litigation that pitted neighbor against neighbor. The situation escalated when a developer-controlled board allegedly failed to properly investigate and remedy slope stability and fill problems affecting the community's road system. Ultimately, a class action suit was certified against several board members and the declarant-developer who appointed them. These board members also controlled or managed the affairs of the declarant-developer. The declarant-developer allegedly was responsible for the defective condition of the roads and various claimed misrepresentations and nondisclosures accompanying the sale of lots in the community when acting in its capacity as developer-vendor.

Colorado's Common
Interest Ownership Act

Colorado's Common Interest Ownership Act, CRS §§ 38-33.3-101 et seq. ("CCIOA"), enacted by the General Assembly in 1992, was intended to provide a "clear, comprehensive, and uniform framework for the creation and operation of common interest communities."1 CCIOA is the embodiment of a legislative effort to promote planned communities, which the General Assembly determined was critical to the "continuation of the economic prosperity of Colorado."2

CCIOA attempts to establish a balance between developer and homeowner interests. For example, CCIOA: (1) provides for the strengthening of homeowner associations by, among other things, giving associations the power to sue on behalf of the individual unit owners who make up the community; (2) serves to promote "effective and efficient property management through defined operational requirements that preserve flexibility" for homeowner associations; and (3) gives "developers flexible development rights with specific obligations within a uniform structure of development of a common interest community that extends through the transition to owner control."3 These "specific obligations" may create legal trouble for the developer, particularly during the period that the developer controls the association's board.

Developer's Role During Period of Declarant
Control

CCIOA describes the role typically occupied by the developer of a CIC as that of "declarant." A declarant is any person or group of persons acting in concert who: (1) as part of a common promotional plan, offers to dispose of to a purchaser such declarant's interest in a unit not previously disposed of to a purchaser; or (2) reserves or succeeds to any special declarant right.4 A declarant may have one or more "affiliates" - namely, "any person who controls, is controlled by, or is under common control with a declarant." A successor affiliate of a special declarant is subject to the same obligations imposed by CCIOA on the declarant.5

CCIOA grants a declarant, through a written and recorded declaration,6 the power to provide for a "period of declarant control," during which time the declarant, or persons designated by the declarant, may appoint and remove the officers and members of the executive board.7 The period of declarant control begins no later than the date the first unit in the CIC is conveyed to a purchaser. Unless required by the terms of the declaration to terminate sooner, the period of declarant control lasts until: (1) no later than either sixty days after conveyance of 75 percent of the units to unit owners other than the declarant; (2) two years after the last conveyance of a unit by the declarant in the ordinary course of business; or (3) two years after any right to add new units was last exercised.8

The rights and responsibilities of the developer during the period of declarant control are clearly set forth in CCIOA,9 while related provisions prohibit or limit a declarant's ability to modify these rights and responsibilities. Except as expressly provided in CCIOA, the provisions of the statute "may not be varied by agreement," and rights conferred by CCIOA "may not be waived." Additionally, a declarant may not use any device to evade the limitations or prohibitions of CCIOA or the declaration. A court may limit the application of any contractual clause relating to a CIC to avoid an unconscionable result. Every contract or duty governed by CCIOA imposes an obligation of good faith in its performance or enforcement. Finally, any officers and members of the executive board of the association who are appointed by the declarant are required to exercise the care of fiduciaries toward the unit owners.10

Declarant's Potential
Liabilities as Developer, Builder, and Vendor

When a developer also acts as builder and vendor of CIC housing units, three areas of the developer's commercial activities may create potential liability for construction defects: (1) marketing, (2) sales, and (3) construction. Serious conflicts of interest can arise if the developer also effectively assumes the duties of the community's board. As a matter of law, the developer effectively becomes the advocate for and guardian of the unit owners' interest in the condition and performance of the community's common elements.

Marketing Activities

Like any other builder-vendor, a developer-builder has a duty to disclose all material facts known to it that "in equity and good conscience should be disclosed" when marketing a CIC.11 This duty may arise under the common law,12 or pursuant to state or federal statute.13

Intentional misrepresentation and concealment are actionable against a developer-builder.14 Negligent misrepresentation is another potential basis for a developer's liability arising from its marketing practices. Colorado recognizes the tort of negligent misrepresentation in two circumstances: (1) where the negligent providing of false information causes physical harm to the plaintiff's person or property;15 and (2) where the negligent providing of false information occurs during the course of a business transaction causing financial loss.16

A nondisclosure or omission also can constitute a misrepresentation.17 Thus, the negligent omission of material information also can be actionable.18 The duty of care owed by the supplier of information is measured by the use to which the information will be put, weighed against the magnitude and probability of loss that might attend that use if the information proves to be incorrect or incomplete.19

Developer-builders also face potential liability under both state and federal statutes. Colorado's Soils and Hazard Analyses of Residential Construction Act20 requires every developer or seller to provide to the purchaser of a new residence, including a unit in a CIC, a copy of a summary report of the property's "analysis" and "site recommendations" no later than fourteen days before closing. Where a...