Cash Retention

Discussion in 'Development' started by AnneC, 23rd Apr, 2020.

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  1. AnneC

    AnneC Well-Known Member

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    As part of their building Contract, has anyone ever come across

    "The owner must hold cash retention as trustee for the builder in a separate bank account."

    Thanks, Anne
     
  2. JDM

    JDM Well-Known Member

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    Holding a cash retention as trustee for the builder means the retention can likely be accessed by creditors in the event of insolvency. This is why bank guarantees are commonly used.
     
    Terry_w likes this.
  3. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    It's not a common clause but I have heard of it requested for when a project is self funded - ie not funded by a bank or there is a significant part which is self funded. Bank funding doesn't kick in until your funds have been used and there is a risk to the builder that he will commence works and then you run off with your money or something like that.

    It is up to you if you chose to agree to that clause. I would seek some guidance from a lawyer before committing to it.
     
  4. AnneC

    AnneC Well-Known Member

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    This clause is supposed to be for the benefit of the owner.

    It is described as Security to owner by cash retention. It is to provide security for performance of the builder's obligation under the contract. As the build progresses and money is owed to the builder. A certain amount is retained and kept in a bank account , up to a maximum of 5% of the contract price. This money is kept in a special bank account in the event that at the end of the build, if the builder does not remedy defects this money can be accessed and used for this purpose.
    At the end of the build, if there are no defects, then 50% of this money is given to the builder. The other 50-% is retained for 6 months and then another inspection is undertaken. If no defects, then the rest of the money is released to the builder. If there are defects and the builder does not fix them, then this money can be used.

    Has anyone ever had experience with this?

    What sort of bank account would you need to set up?

    Thanks, all
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    If the owner is holding as trustee for the builder it is for the benefit of the builder. It is security for the builder.

    Any type of bank account
     
  6. AnneC

    AnneC Well-Known Member

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    In the contract, it says
    Hi Terry,

    This is money deducted from money owed for works, to be used to rectify defects in the event the builder defaults. I dont understand why it would be for his benefit.


    Anyway, our bank doesnt do these type of accounts.

    So, how would we set one of these up?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    You should seek legal advice.

    If you are holding money on trust for him, he is the beneficial owner of the money.