Insolvent property developers: consequences for builders & subcontractors

table of contents

• First steps if the developer is suspected of being insolvent
• Consequences for developers in the event of the developer's insolvency
• protective measures for building owners
• consequences for subcontractors
• Get legal advice

Construction with a property developer differs from construction with a general contractor (GC) or general contractor (GC) . Bankruptcies of the property developer can have serious consequences for builders and subcontractors , ranging from delays to the total loss of financial investments. A property developer offers a turnkey handover of the property and takes over the entire construction process, which increases the risk of bankruptcy.

It could be decided to announce the withdrawal from the construction project because grace periods have expired. That would be fatal, because it would mean that property developers would lose their last chance of insolvency protection, their last chance of rescue:
This is because the preliminary entry in the land register would be deleted, which would identify the developer as the owner of the property in the future.
Preliminary notice of transfer of ownership is the only means for property developers to 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 consider financially allowing himself to make this exit.

If the construction company goes bankrupt during the construction of the house, this is a real problem for many builders. If the developer goes bankrupt, advance payments are often lost. The bankruptcy means that construction comes to a standstill, which will lead to delays and additional costs. In the worst case, there is a risk of total loss.

Suspect the developer is insolvent? Check current entries in the insolvency register.

You should check at www.insolvenzbekanntmachungen.de whether the construction company has already filed for insolvency and is listed there.

First steps if the developer is suspected of being insolvent

• Check current entries in the insolvency register at www.insolvenzbekanntmachungen.de .
• Do not hesitate to seek legal advice at an early stage .
• Be careful with hasty actions such as termination as this can have serious consequences for the developer.

Is it your own property?

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 it is for builders who buy from a property developer but use their own property. Since the GÜ or GU build on the property of another property developer, with the property developer model the real estate including the property remains the property of the property developer until the end. Even in the event of insolvency.

Consequences for developers in the event of the developer's insolvency

1. Advance payments are often lost : If the developer goes bankrupt during construction, advance payments are often no longer recoverable. This leads to construction being stopped and additional costs.
2. Ownership : Developers retain ownership of the land and property until it is fully paid for and completed. In the event of insolvency, the financing bank has priority over the land, which places additional burdens on developers.
3. No extraordinary right of termination : Since 2018, there is no longer any extraordinary right of termination for developers under property development contracts.

protective measures for building owners

• Payments only according to construction progress : Make sure that payments are only made according to the actual construction progress in order to minimize your risk.
• Bank guarantees : A completion or warranty guarantee from the developer can help to secure the construction project even in the event of insolvency.
• Construction Completion Insurance : This insurance ensures that the property will be completed at the agreed price even if the developer becomes insolvent. Also known as construction warranty insurance.

consequences for subcontractors

1. Insolvency claims : Subcontractors can file their outstanding invoices as insolvency claims, but often only receive a small fraction of their claims back.
2. Warranty claims : The insolvency administrator can also assert warranty or damages claims against subcontractors after insolvency. In such cases, subcontractors can demand fulfillment of their payment claims under certain conditions.

Get legal advice

• It is advisable to consult a construction lawyer and involve professionals in the design and construction industry to minimize risks and avoid legal errors.
• Bringing in an external expert 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.
• A construction lawyer can help secure payment phases and have construction progress checked regularly.