Eschborn/Bonn, 9 January 2023: The insolvency of a property developer can turn into a nightmare for building owners.
Instead of the dream property being built, there is the threat of construction being halted and incalculable cost risks – good legal advice is worth its weight in gold here.
Standardised property development contract
BRRS partner lawyer Markus Ritterrath had to deal with such cases in 2022. In the mid-2010s, interested parties purchased properties from a property developer and at the same time commissioned the developer to construct the building (so-called uniform property development agreement). Prior notices of conveyance were entered in the land register in favour of the purchasers. After construction was initially delayed, the property developer finally filed for insolvency in 2020. At this point, the properties were neither completed nor were the purchasers registered as owners in the land register. It turned out that the property developer was one of more than 200 companies in the German Property Group GmbH group of companies. The insolvency proceedings gained international notoriety.
Action threatened
When the insolvency proceedings were opened, the insolvency administrator chose not to fulfil the construction contract, meaning that the properties were no longer completed. The insolvency administrator had also filed a notice of insolvency pursuant to Section 208 InsO. The purchasers were to pay for the construction work carried out to date in accordance with the progress of construction. In addition to the lack of completion, there were defects, in particular in the partition plan, so that the purchasers asserted counterclaims. The progress of the construction work and the extent of the defects were disputed. After unsuccessful attempts to resolve the matter, a lawsuit was filed. In this situation, several creditors approached lawyer Ritterrath and asked for advice on insolvency law.
Splitting up the property development contract
The applicability of the provisions of Section 106 InsO was of central importance. In principle, the party entitled to a priority notice is entitled to consent to the transfer of ownership if the consideration has been paid and its own obligations have therefore been fulfilled. A standardised property development contract contains both a part under sales contract law and a part under works contract law. This distinction is important. The part under sales law (transfer of ownership) and the part under works contract law (defect-free construction work) must be considered separately in legal and conceptual terms. A priority notice serves to secure in rem a claim under the law of obligations to the registration or cancellation of a right to a property. The priority notice therefore exclusively secures the contractual claim under sales contract law. With the opening of insolvency proceedings, the uniform property development contract is split up legally by way of exception.
High cost risk in the event of insolvency
“Construction processes can drag on for several years and are often associated with considerable costs. In this case, the situation was aggravated by the strong impact of insolvency law. An appropriate out-of-court settlement can save money, time and nerves,” explains Ritterrath. As long as there is an insufficiency of assets in the proceedings, claims filed in the insolvency table are economically worthless, as there is no prospect of a quota. Even the equalisation of so-called (new) liabilities of the estate is not guaranteed. This means that even in the event of a subsequent procedural victory, there is a default risk for the court, lawyer and expert costs incurred.
Mr Ritterrath then contacted the insolvency administrator and discussed the situation. After consultation with the clients, a settlement agreement was reached. “Even if the key points have been clarified, agreements can still fail when it comes to the actual drafting of the contract, especially when the case is as complex and multi-layered as this one,” says Ritterrath, describing the settlement negotiations and the drafting of the contractual provisions. He ultimately achieved the transfer of ownership of the properties in favour of the clients without having to take legal action.