House Construction Contract - Is the clause unlawful or not?

Hello everyone,

our house construction contract is about to be signed. After that (provided the KfW still confirms the loan), construction can start immediately.
All planning is already completed, the execution planning is in its final stages, the building permit has been granted, approval for geothermal energy obtained, construction electricity and water arranged, etc.
The construction company has delivered all the aforementioned services before the contract was signed. Motto: Should the customer still back out – tough luck. According to statements, no one has backed out yet – I believe that too.
Therefore, we also have a high level of trust in the construction company.
Nevertheless, we commissioned the [Bauherren-Schutzbund] to review the contract.

They pointed out to us that the following passage is not correct – according to their words – it violates legal requirements:

“Interim payments on the installments specified in the payment plan are considered agreed upon. If a trade is omitted, this installment will be added to the following installment. Interim payments are considered agreed upon. § 632a paragraphs 3 and 4 of the Construction Code do not apply.”

The highlighted section is disputed.

The aforementioned § 632a paragraph 3 includes the right of the customer (i.e., my right) to withhold a security deduction of 5% (of the total purchase price) with the payment of the first invoice. This amount is then paid upon handover/acceptance of the building if there are no significant defects to the building. In the case of minor defects, an appropriate part of this amount can still be withheld until they are remedied.

For my contract, this would mean that I can/should/must withhold 5% of the construction sum directly with the first invoice (which also remunerates the already rendered services mentioned above).

I understand that I cannot expect legal advice here. But I think the construction professionals here can certainly tell me whether such an exclusion is unusual or common?

That is of course really bad and absolutely not usual.

I would never forego a completion guarantee. The construction company demands payment in installments? Then it should also be able to provide security for the completion of the contractually agreed work. 5% is customary and legally required. The client can withhold this from the first invoice and pay it at the end, after defect-free completion. However, the contractor can also provide a guarantee for this amount, which must be returned after defect-free completion.

Now there will be someone who explains to you that this can also be conditioned. In any case, I would not recommend that you agree to it. It has been introduced for good reason and was already common practice before.

1. Why does the contractor not want to provide this usual security?
2. What kinds of payment securities are demanded from you?
3. How many houses does the company build each year?
4. Have all houses always been completed or are there many construction sites with remaining work?

You should be careful at this point, as it would unduly disadvantage you. Of course, it would be different if the construction company is willing to collect 10% only with the final payment.

Good evening,

All planning is already completed, the execution planning is in its final stages, building permit granted, approval for geothermal energy obtained, construction electricity and water initiated, etc.
The construction company has provided all the aforementioned services before the contract was signed. Motto: If the customer still drops out - tough luck.

These advance services are the reason why I did not claim the down payment in the other thread. Usually, installment payments should only be made after a service has been provided. For most other contracts, this means after the building application has been submitted.

He gave us the indication that the following passage is not correct - according to his words - and violates statutory requirements:

"Interim payments on the installments specified in the payment schedule are considered agreed. If a trade is omitted, this installment will be added to the next installment. Interim payments are considered agreed. § 632a paragraphs 3 and 4 of the Construction Code do not apply."

The highlighted section is disputed.

In this case, the gentleman from the Homeowners Protection Association is correct, § 632a cannot be partially or wholly excluded; it serves the security of the client.

I can understand why the builder takes this approach, as it avoids the long-standing favorite pastime of many homeowners to withhold the final installment - in this case together with the security retention - under dubious reasons. For this reason, we have resolved it with a contract performance bond in the amount of 5%, which after contract fulfillment converts into a 5-year warranty bond. Our customer has the choice between insurance or bank.

What securities are named in the contract?

Rhenish regards

In this case, the gentleman from the Bauherren-Schutzbund is right, § 632a cannot be partially or completely excluded; it serves the safety of the client.

I can understand why the BU is taking this approach; it avoids the longtime favorite sport of many clients, which is to withhold the final payment – in this case along with a security retention – under flimsy excuses. For this reason, we solved it with a contract fulfillment guarantee of 5%, which, after contract fulfillment, transitions into a 5-year warranty guarantee. Our client has the choice between insurance or bank.

What securities are named in the contract?

Rhenish regards

By the way, I can also understand the reason you wrote. Unfortunately, there are enough examples where money was unjustly withheld. However, of course, there are also counterexamples.

As far as I can tell, only the warranty obligation according to the Construction Code is mentioned as security. I have not found anything else. No completion or contract fulfillment guarantee, and no warranty guarantee either. Are there any other points that could be mentioned?

Hello construction expert, hello home seller,

thank you very much for your support. I have just received the revised version of the contract from the BU. I will summarize the results from the thread "Schwundrisse" and this one:

Topic Schwundrisse: I have had the following sentence inserted as a general statement: "The current DIN standard and the current state of technology apply." Thus, in the event of a dispute, I could refer to the applicable standards and, if necessary, demand remediation. Correct?

Topic: Sentence "§ 632a Abs. 3 und 4 Baugesetzbuch finden keine Anwendung." This sentence was deleted. So now I have the right to withhold the 5% security. I have one more question: MUST this security retention necessarily be from the first installment payment, or can I also apply this retention later, for example, if I discover major defects later?

I see it this way: if legally possible, I would like to pay my BU for their services accordingly (without making a so far "unjustified" security retention) and would only activate this security retention in case of "imminent danger." <-- as I said: if the law allows me this possibility. The BU does not want to issue a completion bond, as according to their statement, too much capital would be tied up (which I don’t understand, since to my knowledge, no "cash collateral deposit of the bond amount" is required for a bond).

The BU also offers me the option of concluding a warranty insurance. The following text about it: It covers construction damages up to €100,000 and an insurance-appointed expert to prevent damages in advance. Valid for 5 years, i.e., during the warranty period. The cost is €4,950 for everything. We could split the costs.

Now my question is whether this approach is common? Of course, I can imagine that the company does not want to bear an additional cost of €5,000. Other companies that offer something like this have probably included this cost item directly in the offer price (so you pay it unknowingly).

Furthermore, the question arises: Is the warranty insurance even useful since the contract already stipulates the 5-year warranty period according to the Building Code?

The last question regarding this: If an expert appointed by the insurer visits the construction site to prevent damages in advance – is this then equivalent to an expert (whom I might commission myself)? Then I could use the planned costs for my own expert for the insurance cost share and would still have an added value (provided the insurance expert is not incompetent [I can’t assess that] and visits the construction site 5–7 times like a regular expert).

I hope you can tell me something about this based on your experience. And I swear – once this thing is finalized, I won’t bother you with contract matters anymore.

Hello,

I have just received the version of the contract revised by the BU. I will summarize the results from the thread "Schwundrisse" and this one:

Topic Shrinkage cracks:
I have had the following sentence inserted as a general statement: "The current DIN standard and the current state of technology apply."
Thus, in the event of a dispute, I could refer to the applicable standards and, if necessary, demand rectification. Correct?

Correct. You could have done that even without this sentence – in the worst case, a judge would have pointed this out to your BU anyway. But formulated this way, this preliminary discussion belongs to the past.

Topic: Sentence "§ 632a paragraphs 3 and 4 of the Building Code do not apply."
This sentence was deleted. So now I have the right to retain the 5% security.
One more question: MUST this retention of security be necessarily from the first installment, or can I also make this retention later, for example if I discover severe defects later on?

I would not go down that path at all. Clarify with your BU whether they would instead issue you a guarantee from a bank or insurance – whichever you prefer.

I see it like this: that I (if legally possible) want to pay my BU for their services accordingly (without making an “unfounded” security retention so far) and would only activate this security retention in case of “imminent danger.” <-- as I said: if the law allows me this option.

If you decide on direct retention, you must also deduct it from every invoice and place it in a separate interest-bearing account.

The BU does not want to issue a completion guarantee because, according to their statement, too much capital is tied up (I do not understand that, since to my knowledge a guarantee does not require a “cash deposit of the guarantee amount”).

No capital is tied up, it costs your BU money. Put simply, this completion guarantee serves the purpose that via the bank your single-family house is completed at the contract price in the worst case.

The BU also offers me the option of concluding a warranty insurance. The following text about it:
It covers construction damages up to €100,000 and an insurer-appointed expert to avoid damages in advance. It is valid for 5 years, i.e., during the warranty period.
The costs are €4,950 for everything. We could split the costs.

This means in my opinion that this insurance acts during the construction period as a performance guarantee that transforms into a regular warranty insurance after completion. You must return it after 5 years regardless of any warranty claims.

Now the question arises whether this approach is common? Of course, I can imagine that the company does not want to bear an extra cost of 5,000 euros. Other companies that offer something like this probably include this cost item directly in the offer price (you pay it unknowingly).

For us, they are part of the contract for work; not hidden, but communicated openly. Over recent years, it has become clear that the average customer builder has a greater need for security. Considering some contractual constructs from so-called cheap providers on my desk, I can understand it from the bottom of my heart.

Furthermore, the question arises: Is the warranty insurance even sensible since the 5-year warranty period according to the Building Code is stated in the contract?

Stiftung Warentest writes about this:

Protection Against Insolvency
Protection against insolvency is also important. If the construction company becomes insolvent during the construction period or before removing any defects, the builder faces severe losses. Having another contractor finish the construction almost always leads to considerable additional costs. If the contractor goes bankrupt after project completion, fixing construction defects, claims for damages, and subsequent price reductions due to inferior services may fail. Builders should definitely insist on a completion guarantee and a warranty guarantee. Such guarantees can be secured by construction companies through banks. If the company goes bankrupt, the bank is liable for fulfilling the construction contract. The guarantor must be reliable and solvent. Otherwise, the guarantor itself could become insolvent when payment is due.

And further:

Ideally, the bank guarantee should not only protect the builder from the project being stalled. It should also ensure that the builder can enforce his claims if construction defects arise after completion.

Construction defects are common with insolvent construction companies, reports Rainer Huhle, managing director of the Builders’ Protection Association: “Most buildings affected by insolvency have defects. According to our studies, builders incur financial damages averaging €15,000 to €20,000, not including additional costs for experts and lawyers.”

“However, in practice it is often difficult to obtain a bank guarantee,” explains Gabriele Heinrich, board member of the consumer protection association ‘wohnen im eigentum.’ “It restricts the liquidity of the company and is expensive. That is why companies often require builders to bear the costs.”

The last question here: If an insurance-appointed expert visits the construction site to prevent damages in advance – is this equivalent to an expert (whom I might hire myself)? Then I could use the planned costs for the expert for the insurance’s cost portion and still have added value (provided the insurance expert is not incompetent [I cannot assess that] and that he visits the construction site 5 - 7 times, like a normal expert).

Here, as everywhere by the way, applies: “He who pays the piper calls the tune.”

If you agree to this insurance, then you must be aware that the expert is primarily obligated to his client – the insurance. Whereas the expert you commission is obligated solely to you.

Perhaps you can find a compromise such that the insurance obligates your expert? Either way, you have to pay.

Rhenish greetings