Insolvent property developers: Consequences for builders and subcontractors

A decision could be made to announce withdrawal from the construction project because grace periods have expired. That would be fatal. Because this means property developers lose their last chance of insolvency protection, their last chance of rescue:

This is because the conveyance notice in the land register would be deleted, which would identify the builder as the owner of the property in the future. The conveyance notice is the only means for builders that can create security in the event of insolvency.

Only if the building owner has an advance payment guarantee in accordance with Section 7 MaBV can he even think about allowing himself this financial exit.

If the construction company goes bankrupt while the house is being built, this is a real problem for many builders. If the property developer goes bankrupt, advance payments are often lost. The bankruptcy will cause construction to stall, which will lead to delays and additional costs. In the worst case scenario there is a total loss.

If the construction company goes bankrupt while the house is being built, this is a real problem for many builders.



If the property developer goes bankrupt, advance payments are often lost. The bankruptcy will cause construction to stall, which will lead to delays and additional costs. In the worst case scenario there is a total loss.

It should be checked at www.insolvenznachrichten.de whether the construction company has already filed for insolvency and is listed there.

What are the consequences for the builders?

Everything that builders have paid to companies in advance is usually completely lost. Creditors of a company insolvency often only receive less than ten percent of their claims back.

Subcontractors delay construction progress because they are held back. The builder could make a mistake here due to delay and

Although the completion and thus the property has been lost, the real estate loan is still running. The builders must continue to serve this!

It is therefore important to check and implement the following steps before starting the construction project.

It can be built on your own property with a general contractor (GÜ) or general contractor (GU). A company bankruptcy is then not as dramatic as for builders who buy from the developer but use their own property.

Since GÜ or GU build on the property owned by another developer, in the property developer model, the property including the land remains the property of the developer until the end. Even in the event of bankruptcy.

The property is usually encumbered with the property developer's financing mortgage. The bank financing the loan secures access to these assets in the event of default. This puts a strain on the builder.

The builders have to look for companies that are willing to continue building despite increased indebtedness and from this point on they often have to assume liability for the unfinished building.

For all property developer contracts concluded from 2018 onwards, the application of the free and extraordinary right of termination is no longer applicable in this case! Anyone who relies on a property developer and has a property developer contract has no choice whether to get out or not, even in the event of insolvency.

Payments only if the construction project progresses:

A builder can protect himself from the consequences of the developer's insolvency by ensuring that the payments to the developer match or correlate as closely as possible with the actual construction progress. Higher payment amounts should not be made in advance, but advance payments should be made depending on the progress of the construction site.

If certain work has not been carried out, it must be re-contracted and paid for by another company. The risk can therefore be significantly minimized if builders and property developers follow the regulations of the Brokers and Property Developers Ordinance.

A bank guarantee can also provide protection

The builder can obtain a completion and warranty bond from the developer. Property developer insolvency can be covered with a bank guarantee. If the developer runs out of steam, the bank must ensure completion according to the construction contract - even if the developer goes bankrupt only after moving in and defects still arise later.

A bank guarantee also provides security.

These guarantees are expensive and banks often charge three percent of the loan amount. Therefore, the builders often have to cover the costs and the developers do not want to contribute financially.

But if you negotiate cleverly, this sum can be divided up as part of the special services or additional equipment.

Building warranty insurance is another effective means of protection.

Although this solution is not often used in Germany, construction completion insurance (also construction guarantee insurance) is taken out by the building contractor. This ensures that the property can be completed at the agreed price. Even if the property developer is insolvent and insolvent. Around 3% of the construction sum is due for this type of insurance.

Check contracts for the possibility of termination

If the suspicion of insolvency is confirmed, builders should check whether they can terminate the work contract before the official declaration of insolvency.

After the proceedings have been opened, the insolvency administrator decides whether to continue the contract or not.

The decision-making phase of continuing construction

During this decision-making phase, the construction site comes to a standstill, which can take several months.

Termination usually occurs due to the standstill of construction work and the contractor's default. However, there is the option to continue the construction project in collaboration with the construction partner and avoid bankruptcy.

Ensuring the respective construction statuses

A construction lawyer recommends ensuring at each payment phase that the appropriate status of the construction has been reached and that it has been accepted.

If a property developer becomes insolvent, the outstanding claim of its subcontractor is considered an insolvency claim and can be entered into the insolvency table in the insolvency proceedings. This already leads to economic damage because the subcontractor will not receive the full amount of his claim in this case. This damage can increase if the property developer's insolvency administrator asserts warranty or compensation claims against the subcontractor despite invoices not being paid to the subcontractor.

But subcontractors, who are thus obliged to pay for repairs and compensation by the developer, have a possible way out:

You can point out to the property developer's insolvency administrator that you are only obliged to make repairs or pay compensation (instead of fulfillment) if the insolvency administrator for his part chooses to fulfill the contract and the subcontractor's payment claim becomes a mass claim in the first step. Then the subcontractor is no longer referred to the claim registration in the table and the expected (usually low) quota at the end of the procedure but has a claim to payment with regard to the remaining wages as a claim against the insolvency estate.

However, this only applies if both the property developer and subcontractor have not fully fulfilled their contractual obligations and therefore there is a work contract that has not been fulfilled by both parties within the meaning of Section 103 InsO.

It is advisable to seek legal advice before termination in order to avoid formal errors and minimize further risks.

Calling in an external specialist such as an architect or civil engineer can also help to identify defects promptly. In the case of serious defects, it is possible to assert the right of retention and refuse payment.

This approach can protect the developer from financial losses while at the same time putting pressure on the project developer to ensure the quality of the construction.

Consult specialist lawyers for advice

You should also contact a construction lawyer and involve professional debt counseling services.

Receive professional support with heart during your insolvency proceedings.