In the purchase contract draft, there is a section on the Construction contractor’s liens (which seems to a standard clause for new construction).
One clause in this section mentions that - Although it’s legally possible for contractors to file liens up to 4 months after the work is done, the Buyer agrees not to withhold part of the purchase price as a security reserve to protect against this risk.
So, if I understand correctly, in case the seller does not pay the contractors for the completed work and they file any lien post the handover date, it is the buyer responsibility to clear the lien.
What would the best way to negotiate this clause to offer the buyer protection against the contractor liens?
P.S. I can add the exact wording from the contract if required.
The possibility for the contractor to put a lien on the building up to 4 months after construction is a legal right guaranteed by the federal Civil Code (art. 837) that doesn’t need to be in a contract to exist and be applied. It can’t be waived by contract.
If a lien is written down on the land registry but no longer applies because the debt has been paid in full, it is the asset owner’s responsibility to get it cleared.
A withholding of 10% of the amount of each bill that gets released against an insurance guarantee of 10% of the total amount of the works for 2 years once the works are done is a very standard clause coming from the SIA standard 118. That witholding is meant to protect the owner against malpractice and/or bankruptcy from the contractor. I may waive it when dealing directly with small contractors doing specific work as they might need the liquidity and the amount involved should be limited. I would not waive it for a developer or general contractor who should have it implemented in their business model if they’re serious about it.
The SIA standard 118 is very commonly applied in construction projects. It codifies the relationships between the owner and the constructors and comes from the experience of thousands of construction projects. It will be cited as a base for the contract by any engineer/architect worth their salt. Even the umbrella organisation of contractors considers that its full application is beneficiary: https://baumeister.swiss/fr/la-norme-sia-118-doit-etre-appliquee-integralement-2/ (in French but you can use the menu to get it in German or Italian).
The worst cases where liens occur as a result of an unpaid contractor come from subcontracting and happen when the main contractor themselves don’t pay the subcontractors. In that case, the subcontractors can get a lien against the real estate asset even if the owner did pay the required amount to the main contractor but the contractor didn’t pass it up to the subcontractors. Worst is if the main contractor enters bankruptcy and recovering the amount they have withheld from their subcontractors becomes very difficult to impossible, meaning the owner may have to pay twice for the work done on their asset.
Best ways to protect against that, to me, would be:
Get representation before signing the contract. A good engineer or architect can make sure that all the proper clauses are in the contract as well as exert pressure on the prices and deadlines so that they are adequately followed (unless you carry a lot of weight and have multiple projects per year, it’s no silver bullet but it does help knowing what is actually happening, what your rights are, what the standard practices are, what work is likely to have been done or not on the project, what can reasonably be claimed and what would be preposterous and so on). I’d aim for someone with a good reputation.
Protect against subcontracting. Set a max amount of work that can be subcontracted in the contract so that it caps the amount you would be liable to pay twice. Put in the contract that:
all subcontractors and the extent of the work they’re contracted to do must be dutifully disclaimed to the buyer before any work is done by them on the project.
all bills from subcontractors must be joined to the main bills from the main contractor, proof of their payment must be given at worst 30 days after the buyer has paid the main contractor, no new bill issued by the main contractor shall be paid until those proof of paiment have been provided.
.
This would help you get early warnings if things are going wrong and could provide an opportunity to lawyer up while something can still be done to avert the worst.
If you are not yourself knowledgeable of common construction practices (as is the case for most private buyers) and would rather skip paying for representation by an engineer/architect, I would err on the safe side and forego opportunities that have red flags.
Reading through the response, some of the details you have mentioned would be applicable when signing a contract where the construction is yet to start. Maybe giving some details of our specific situation would help -
The project is for building 3 single-family houses for which the land was acquired by the seller
He has taken a line of credit to fund the construction and is working with an architect / total contractor for the construction.
The construction is currently underway (around 60% completed) meaning all the subcontracting, etc. was already completed when we decided to purchase.
The following is mentioned in the purchase contract - “The Seller confirms that they have declared SIA Standard 118 (“General Conditions for Construction Work”) as applicable in all work contracts concluded with the contractors and SIA Standard 102 or 103 in the current version as applicable in all architect and engineer contracts.”
This is exactly my worry - either the main contractor or the seller not paying the subcontractor resulting in a lien.
Few options that I was thinking of for our (buyer) protection -
Notary to withhold portion (5% or 10%) of the purchase price to be released after 4 months to the seller - this can be used to clear any outstanding dues
Add a clause in the contract that the seller undertakes responsibility of payment in case of any liens
Payment bond to cover the costs in case the seller does not pay / goes bankrupt (not sure of the process or who can provide this)
I had indeed misunderstood your situation thanks for the clarification.
Please note that my area of knowlege is only in construction management. Financing and real estate sales are another area of knowledge which I do not master though I’ve seen a few bad cases that could have been avoided with proper planning when I worked in a municipal administration.
There’s usually value in putting together pieces of the puzzle and understanding the technical and financial constraints the seller is submitted to may help in negociating so I’ll try my hand anyway.
For my understanding, how is the deal structured?
is the price fixed with exceptions for specific buyer decisions (the risk of unplanned costs is born by the seller)?
How much of the purchase price must be paid at the signing ? When is the final payment scheduled (I guess when ownership is transferred)? Are there intermediate payments at specific points in time?
That would be my choice. A 4 months delay for part of the selling price should be bearable financially for the seller.
It wouldn’t protect against bankruptcy of the seller but it would cover most cases. It is functionally the case anyway as the seller is still the creditor of the companies that haven’t been paid but it would add a liability toward you that may (or may not, I have no experience with this) be used by your own lawyer and give you agency to solve the problem.
In all cases, I would ask to get a copy of all construction contracts signed, of the minutes of the works (PV de chantier, in French) on which the name of the contractors being present should be stated and an attestation by each contractor mentioned that all of the bills they have issued have been paid and that they have paid in full all bills from their subcontractors if there are any.
The leverage you have in negociating varies depending on the attractivity of the area so you might aim for more, or you might have no actual leverage at all, depending on where the project is located.
Your leverage may also be lower right now than it would be at the end of the construction, though you would loose the opportunity to personalize the interiors if waiting until the construction is finished. If you can afford to let the opportunity pass, walking away from the table might be a negociation tactic that could give results if the seller doesn’t look ready to discuss (though, to underscore it, one potential consequence is to have the property sold to someone else and miss out on the opportunity altogether).
It is a fixed price with any inflation and unplanned costs the responsibility of the seller. Specific buyer decisions (e.g. kitchen, sanitary, parkett) have a specified budget and any difference is to be borne by the buyer.
Payment 1- 50k reservation (already paid); Payment 2 - (10%-50k) at notary (planned this month); Payment 3 - 90% at handover when the land register entry is done to transfer the ownership.
Regarding the leverage, I have learned the hard way that real estate in Switzerland is a seller’s market. The property is an area where we were looking for nearly 2 years and getting the right house for our needs can be counted on the fingers of a single hand.
So, while the leverage is lower, I would want to amicably find a solution along with the seller not to expose myself to unnecessary risk.
1 Like
By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, tu confirmes avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/
Durch das Lesen und die Teilnahme an diesem Forum bestätigst du, dass du den auf http://www.mustachianpost.com/de/ dargestellten Haftungsausschluss gelesen hast und damit einverstanden bist.
