The Position of Clients in Construction Projects – Blog V 🏗️

Erwin

This is the fifth and final blog in the series 'The Position of the Client in Construction Projects,' and in this blog, we specifically discuss the revised 5% rule, which provides additional guarantees to private clients. The 5% rule stipulates that a private client having a house built has the right to withhold 5% of the contract sum and deposit this amount with a notary. For instance, if there are still defects upon completion, the deposit serves as a guarantee that the contractor will rectify the issues. Until 1 January 2024, this 5% rule had several disadvantages, especially for the client. Private clients were often unaware that the funds would be released three months after completion if they did not timely indicate unresolved defects and their desire to retain their security. It also frequently occurred that when a contractor wanted to access the deposit funds, they would offer an alternative form of security in the form of a bank guarantee. However, bank guarantees often came with many more conditions that had to be met to release the funds compared to a deposit.

From 1 January 2024, several changes to the 5% rule have been implemented to strengthen the position of the private client.

Article 7:768 of the Civil Code now states:

  1. The client can, without invoking Article 262 of Book 6 and while retaining their right to delivery, withhold a maximum of 5% of the contract sum on the final instalment(s) and deposit this amount with a notary instead of paying it to the contractor.
  2. The contractor must give the client, no later than two months after the time of completion but not earlier than one month after that time, written notice to indicate whether they wish to use the authority granted in Article 262 of Book 6. The contractor must send a copy of this notice to the notary.
  3. The notary will release the amount to the contractor three months after the time of completion if they have received the copy mentioned in the second clause unless the client wishes to use the authority granted in Article 262 of Book 6. In that case, the client must inform the notary of the amount to be retained in the deposit.
  4. The notary will also release the amount to the contractor if the client consents, the contractor provides equivalent security to the deposit, or a binding decision states that a deposit is not or no longer justified.
  5. If the client owes damages to the contractor due to the deposit mentioned in clause 1 or the equivalent security provided by the contractor, this will be set at the statutory interest referred to in Article 119 of Book 6. During the three months referred to in clause 3, this is not owed, even if no defects are found.

Therefore, 5% of the contract sum can still be deposited with the notary. However, the notary can no longer release the deposit funds to the contractor after the three-month period post-completion without conditions. The notary may only release the funds if the contractor has given the client the opportunity to indicate whether they wish to exercise their right to suspend payment. Between one and two months after completion, the contractor must inform the client in writing of their right to suspend payment and send a copy of this notice to the notary. The notary will only release the funds if they have received this notice from the contractor and if the client has not indicated that they wish to retain the deposit (partially).

Because the client can no longer be surprised by the automatic release of the deposit, they now have a stronger position. They can timely indicate that the funds or a portion thereof should remain in the deposit, especially if there are still unresolved defects. The new rule also reduces ambiguity about whether the house has been completed, as the contractor must send the notice between one and two months after completion. This additional step incentivizes the contractor to ensure the house is delivered without defects. Contractors should ensure that the written notice to the client is sent by registered mail to avoid disputes about whether the notice was received.

However, the client cannot retain the deposit indefinitely. If they wish to retain the deposit beyond the three-month period, they must meet the requirements of Article 6:262 of the Civil Code. There must be shortcomings on the contractor's part significant enough to justify holding the funds in the deposit, and there should be a balance between the severity of the shortcomings and the amount retained (proportionality).

A final change in the new rule concerns the requirements for alternative security. In practice, instead of the deposit amount, a bank guarantee might be provided after completion as security for any unresolved defects. Previously, the terms of these bank guarantees often offered less security to the client than the deposit or required additional actions from the client. This is no longer allowed. If a contractor wants to offer alternative security, it must be equivalent to the deposit. Legislative history indicates this is the case if the security (in the form of a bank guarantee) is enforceable under the same conditions as the deposit. No additional requirements may be imposed.

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De Haij & van der Wende

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Dennis Oud

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Erwin den Hartog

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