Contractor’s right of retention: the contractor’s entitlement to retain possession of the building that it has constructed until the client has paid the invoices that are due. This is a powerful means for the contractor to exert pressure to force the client to pay after all.
But what about the contractor’s right of retention in the event of the client becoming insolvent? This contribution clarifies a number of aspects that the contractor should pay attention to when exercising its right of retention in the event of the client becoming insolvent.
Requirements for exercising the right of retention
Retaining possession of the property already implies that the contractor must have de facto control of the building in order to exercise its retention right. It must also be clear to third parties that the contractor is exercising its right of retention on the building that it has constructed. This can be done by installing fencing around the building with notices stating that the contractor is exercising that right. It is also advisable to register the right of retention in the land register – although that is not a requirement – so as to make the right of retention known to parties levying an attachment or mortgage holders.
The contractor can basically also exercise its right of retention in the event of the client becoming insolvent (Section 60(1) of the (Dutch) Bankruptcy Act [Faillissementswet]). When successfully exercising the right of retention, the contractor can in principle take priority in recovering from the proceeds from the building. However, the contractor should not immediately be overoptimistic after submitting its claim to the insolvency trustee [curator] for verification.
We will explain all these aspects according to the following four possible scenarios.
Scenario 1: The insolvency trustee pays the contractor’s claim
If the contractor’s claim is acknowledged and the client’s liquidation assets are sufficient to cover that claim, the insolvency trustee may choose to demand the retained property from the contractor after payment of the latter’s claim.
This situation may arise if purchasers have made themselves known to the trustee and selling the property is in the interest of the insolvency assets. After payment of the contractor’s claim, the contractor’s right of retention is nullified and the insolvency trustee can sell the building to a purchaser.
Important: In many insolvencies the assets are not sufficient to pay the contractor’s claim. The insolvency trustee will then be more likely to choose to lay claim to the building and proceed to sell it (scenario 2).
Scenario 2: The insolvency trustee lays claim to the retained building and proceeds to sell it
Pursuant to Section 60(2) of the Bankruptcy Act, the insolvency trustee has the power – after authorisation by the delegated judge – to lay claim to the building and then sell it. The contractor must cooperate with this. However, it does retain its priority over other unsecured creditors in recovering from the proceeds from the building.
All this does not affect the fact that the contractor shares in covering the liquidation costs. In concrete terms, that means that the contractor will only be paid after payment of the insolvency trustee’s salary and in so far as anything is then still left. Moreover, payment to the contractor then only takes place towards the end of the process of settling the insolvency.
Scenario 3: The contractor sells the building
The contractor can also sell the property itself if the insolvency trustee does not do so. The contractor must first allow the insolvency trustee a reasonable period in which to pay the contractor’s claim (scenario 1) or to lay claim to the property and proceed to sell it (scenario 2). If the insolvency trustee does not do so within the set period, then the contractor can sell the building itself, assuming that it is not encumbered with a mortgage right. If that is the case, then scenario 4 applies.
However, the contractor must notify the insolvency trustee within 14 days after the expiry of the aforementioned period, by means of a bailiff’s writ, that it intends selling the building. The bailiff’s writ must then be entered in the land register. If the contractor fails to register it, then its right to sell will lapse.
The advantage for the contractor of selling the building itself is that it does not share in covering the liquidation costs and does not have to wait for settlement of the insolvency before it is paid (as it does in scenario 2).
Unlike if it exercises the right of retention outside the context of insolvency, the contractor does not first need to obtain an entitlement to enforcement [executoriale titel] (i.e. a judgment) from the court or arbitrator in order to sell the building.
Scenario 4: The mortgage holder sells the building
Besides the contractor as a retentor, the mortgage holder (often the bank that is providing financing) also has the right to proceed to sell the building (summary foreclosure [parate executie]). As the secured creditor [separatist], the mortgage holder can exercise its rights as if there were no insolvency. The insolvency trustee will therefore first need to allow the mortgage holder a reasonable period to proceed with the sale before the trustee can proceed with the sale itself (Section 58 of the (Dutch) Bankruptcy Act).
If the mortgage holder proceeds to sell the property, then the contractor’s privileged position as retentor means that it will be the first to be paid out of the net proceeds (Section 3:292 BW), after which it’s the mortgage holder’s turn. The amount that remains after that, ends up in the insolvency assets held by the insolvency trustee.
Because the sale does not take place via the insolvency assets in this case either, the retentor does not need to share in covering the liquidation costs and it can recover from the net proceeds.
It is advisable, however, for the contractor to consult with the mortgage holder. If the contractor proceeds to sell the building (scenario 3) and it is encumbered with a mortgage right, the expected yield from the building will be lower. And the mortgage holder can still basically enforce its mortgage right even after the building has been sold.
A contractor can also continue to exercise its right of retention in the event of insolvency. However, the contractor is then obliged, if the sale takes place via the insolvency assets, to share in covering the liquidation costs. In practice, that can result in the contractor being left empty-handed. But if the contractor’s claim can be paid, fully or partly, it must first wait for settlement of the insolvency before its claim will be paid.
It is therefore advisable to in any case allow the insolvency trustee a reasonable period in which to pay the contractor’s claim (scenario 1) or to lay claim to the property and proceed to sell it (scenario 2).
If the insolvency trustee fails to pay the claim within the set period or to lay claim to the building and sell it, the contractor can basically proceed to sell it itself. If the building is also encumbered with a mortgage right, the contractor must consult with the mortgage holder – which can also proceed to summary foreclosure – regarding sale of the building.
If you would like more information about this subject or if you have any questions after reading this article, please contact our Real Estate Law team. They will be happy to advise you.