The Construction Contracts Amendment Act 2015 introduces significant and important new rules governing holding and payment of retentions into the Construction Contracts Act 2002 from 31 March 2017.
Retentions are defined as an amount withheld by a party to construction contract (party A) from an amount payable to another party to the contract (party B) as security for the performance of party B’s obligations under the contract.
Presently, retention money is an asset of the party that is holding it, and if that party goes broke, the money is distributed to secured and preferential creditors (ie banks, staff, IRD etc) with any residual monies (seldom any) divided among unsecured creditors including the contractors and subcontractors who had actually earned that money.
From 31 March 2017, retention monies held by one party to a commercial construction (which by definition includes all subcontracts irrespective of whether they relate to residential building projects) above a certain value and entered into or renewed on or after that date, must be held on trust, either in cash or liquid assets that may readily be converted to cash, for the subcontractor or contractor from whom the retention was withheld.
In the event of an insolvency, these assets will be trust money to pay out the retentions or fix any defects relating to a specific retention in respect of which the asset is held. These assets rank ahead of all other parties in a liquidation including secured creditors. The retention regime is being introduced largely in response to the Mainzeal collapse in 2013 (which left a trail of unpaid subcontractor creditors) with the intention of protecting subcontractors from the potential insolvency of a head contractor holding retention monies under a commercial construction contract and using those funds as a source of working capital. When Mainzeal collapsed, it had $11.3M owing to it in retentions yet it was holding back $18.3M in retentions from its subcontractors. Plainly those subcontractors would likely never get paid the monies they had earned. The Mainzeal collapse highlighted the scale of abuse of the current retentions regime and the risk to subcontractors of losing retention monies when the head contractor/employer uses those monies as working capital and subsequently goes broke.
Who must hold retention money in trust?
• Property developers who deduct retentions. • Head Contractors who deduct retentions. • Subcontractors who in turn use. subcontractors and deduct retentions. • Residential property owners where the property is an investment property or the owner is a company (that is not a trustee for the occupants) who deduct retentions relating to construction works on their land.