Chapter 3 - § 3.7 • MARKETING REGULATIONS

• Jurisdiction: Colorado

§ 3.7 • MARKETING REGULATIONS¹⁵⁷

The Uniform Common Interest Community Act includes an Article 4 with extensive consumer protection requirements. Colorado, however, did not include Article 4 in the CCIOA. Some other restrictions on marketing are discussed in this section.

§ 3.7.1—Colorado Division of Real Estate

Residential common interest communities can be "subdivisions" and subject to subdivision regulation.¹⁵⁸ Under Colorado law, registration information provided to the state must include true statements by the developer regarding: (1) whether a common interest community is to be or has been created within the subdivision; (2) whether that community is or will be a small cooperative or small and limited expense planned community;¹⁵⁹ and (3) the existence of any common interest community association, including whether the developer controls funds in that association.¹⁶⁰ The Division of Real Estate is authorized to impose administrative fines, issue letters of admonition, place registrants on probation under its close supervision, or refuse, revoke, or suspend registrations if it determines a developer, or any director, officer, or stockholder with controlling interest has, inter alia, disposed of, concealed, diverted, converted, or otherwise failed to account for any funds or assets of any purchaser of any interest in any homeowners association under the control of the developer or director, officer, or stockholder.¹⁶¹ The state may also audit the accounts of any homeowners association whose funds are controlled by a developer.¹⁶²

Under the applicable rules, subdivision developers must supply certain information to the state, and before contracting with the public, subdivision developers must disclose that information to prospective purchasers in a sales contract or a separate written disclosure document. Among the general disclosures that must be made are: an explanation of the type of ownership or occupancy rights being offered;¹⁶³ a general description of all amenities and accommodations, including ownership of those amenities and their projected completion date;¹⁶⁴ a statement in bold print immediately prior to the purchaser's signature line on the sales contract concerning the rescission right available to purchasers and that the rescission right cannot be waived;¹⁶⁵ a general description of all judgments and administrative orders issued against the seller, developer, homeowners association, or managing entity that are material to the subdivision plan;¹⁶⁶ and any taxes or assessments, existing or proposed, to which the purchaser may be subject or that are unpaid at the time of contracting.¹⁶⁷

Whenever a subdivision has a homeowners or similar association,¹⁶⁸ the required disclosure information must include:

• Whether membership in the association is mandatory.
• An estimate of association dues and fees that are the responsibility of the purchaser and of the developer.
• A description of the services provided by the association.
• Whether the developer has voting control of the association and the manner in which that control can or will be transferred.
• Whether the developer has any financial interest in or will potentially derive any income or profit from the association, including the developer's right to borrow or authorize borrowing from the association.¹⁶⁹

Additionally, developers must maintain in a Colorado place of business, and they must produce for inspection, on reasonable request by the Colorado Real Estate Commission, copies of certain documents, including records that show receipt and disbursement of any money or assets received or paid on behalf of any homeowner or similar association managed or controlled by the developer.¹⁷⁰

Practice Pointer
Regardless of whether there are any applicable mandatory disclosure requirements — or how broad or narrow those requirements may be — counsel for the declarant may want to advise the declarant to provide more, rather than less, disclosure. One commentator recommends broad disclosure both for risk management and to avoid misunderstandings over covenants and rules that typically generate controversy.¹⁷¹ The declarant will likely worry that an abundance of disclosure documents will discourage buyers, but over the long term, buyers who, rightly or wrongly, feel mislead are bad advertising, as well as potential plaintiffs.

§ 3.7.2—Conversion Building¹⁷²

The Condominium Ownership Act¹⁷³ has a statute on conversion of rental units to condominium ownership¹⁷⁴ that is effective for all common interest communities.¹⁷⁵ The statute requires a developer who converts an existing "multiple-unit dwelling" to notify each residential tenant of the dwelling of the conversion upon the recording of the required declaration.¹⁷⁶ The statute neither specifically explains the meaning of "conversion" nor defines "developer." When the statute applies, the required notice must be in writing and sent by certified or registered mail, postage prepaid, and return receipt provided.¹⁷⁷ It is complete upon mailing to the tenant at his or her last known address. No lease may terminate fewer than 90 days after the date the notice is mailed or delivered, unless the tenant and developer consent to an earlier termination date.¹⁷⁸ If there is an existing written lease agreement,¹⁷⁹ the residential tenancy may not terminate before the expiration date of that lease, if any, unless both the tenant and developer consent to an earlier termination. The notice of conversion constitutes a notice to terminate the tenancy — often called a "notice to quit" — under the applicable Forcible Entry and Detainer (FED) statute.¹⁸⁰ The FED statute requires a notice to quit to "describe the property and the particular time when the tenancy will terminate," and to contain the signature of the landlord or tenant, the party giving the notice, or his or her agent or attorney.¹⁸¹ The conversion statute itself does not prescribe any contents for the conversion notice other than the fact of the conversion.

The conversion statute also provides that a tenancy may be terminated within the prescribed 90 days when the tenant agrees to termination in exchange for the developer paying all the tenant's moving expenses "or for such other consideration as mutually agreed upon."¹⁸² The statute attempts to protect those who apply for a residential tenancy after a declaration is recorded by requiring them to be informed that a declaration has been recorded at the time of application. Any lease executed after the declaration is recorded may provide for termination within less than 90 days provided that the terms of the lease conspicuously disclose the intent to convert the property containing the leased premises to condominium ownership.¹⁸³

§ 3.7.3—Federal Interstate Land Sales Full Disclosure Act

The underlying purpose of the Interstate Land Sales Full Disclosure Act (ILSFDA)¹⁸⁴ is to ensure that, before buying real estate, a buyer is informed of facts that will allow him or her to make an informed decision.¹⁸⁵ It presents an opportunity for buyers to back out of a sales contract.¹⁸⁶ However, a 2014 amendment to the law effectively exempts condominium units from the provisions that require registration and disclosure.¹⁸⁷ The Act prohibits developers¹⁸⁸ from using "any means or instruments of transportation or communications" in interstate commerce or the mails in connection with the sale or lease of real property without meeting the Act's requirements.¹⁸⁹ The requirement that is usually at issue is that a printed property report must generally be provided to buyers before any contract or agreement for sale is signed.¹⁹⁰ If a developer fails to comply with that requirement, a buyer may revoke any contract to purchase within two years from the date of execution of that contract, and if the developer does not give the mandatory notice of the right of rescission,¹⁹¹ the rescission period is extended until two years after that disclosure is correctly made.¹⁹²

A large planned development may have a master developer, but consist of separate parcels developed by different entities. In a Colorado case, a master developer sold a parcel that was part of its larger development to a separate company that was to develop it as a condominium project. That company failed to provide property reports to buyers. The buyers rescinded their contracts, but the development company became insolvent and never returned deposits to the buyers. They sued the master developer. The court found that the master developer did not directly or indirectly sell the lots at issue and was not, therefore, liable for failure to file a statement of record or deliver a property report when the buyers entered the contracts with the developer of the condominium project. The fact that the master developer marketed the entire development, including the condominium project, did not make it an "indirect" seller subject to liability.¹⁹³

One of the early and important cases interpreting the Act was Giralt v. Vail Village Inn Associates,¹⁹⁴ a decision of the Colorado Court of Appeals. In Giralt, a would-be purchaser of a condominium unit brought an action under the Act to revoke the purchase agreement and recover his earnest money deposit. He claimed, inter alia, that he was not given a property report before signing the purchase agreement. The developer conceded that the plaintiff did not receive a property report, but argued the Act did not apply because it only concerns the sale or lease of lots in a subdivision and a "lot" is land, not a condominium unit.¹⁹⁵ The appellate court noted that the federal agency that administers the Act — the Office of Interstate Land Sales Registration — treats each condominium unit as a lot,¹⁹⁶ and that other jurisdictions that have addressed the issue have uniformly held that condominiums are included in the definition of lots. The court agreed and held that condominium units are lots subject to the federal Act. The developer then...