Securing Release of Retention

It is industry recognised that 50% of retention is released at practical completion, (although when practical completion is achieved is, in itself, a separate hot topic).  However, when agreeing contract terms, little attention is paid to when the remaining 50% retention is released.

Since the Construction Act was amended [1], and which applies to any contract entered into on or after 1 October 2011, any contract term which ties in payment under one contract with the performance of obligations under another contract is not valid and cannot be enforced.  Therefore, the old style practise of linking release of retention under a sub-contract to the completion of all works, including defects, under the main contract is no longer acceptable. By way of further example, in the context of a main contract, a clause which links release of retention to a housing developer completing the sale of the final plot is now prohibited.

It is therefore worth checking your contracts entered into since 1 October 2011, particularly the older ones, in case they contain any such prohibited conditional payment clause which could entitle you to demand immediate release of any remaining retention.

To avoid falling foul of the amended Construction Act, it is now usual for contracts to contain a defined ‘retention release date’ in order to identify when the second tranche of retention is released. 

A retention release date might be fixed by reference to a specific date on which retention falls due. Sub-contractors and contractors alike overlook how far into the future a fixed calendar date for retention release may be, and miss the opportunity of negotiating a more reasonable date.  Once the date is inserted into the contract there is no way, other than by express agreement, that the date can be brought forward, so this is a point that should be reviewed and negotiated before entering into a contract.

More complicated contractual provisions for calculating the due date for release of retention are also common in contracts.  Whilst these can give rise to apparent uncertainty, they will not necessarily fall foul of the Construction Act. It is common to see in sub-contracts a provision which defines the retention release date as being a fixed period of time after the planned main contract completion date and the expiry of original rectification period under the main contract.  This may, at first sight, appear to fall foul of the Construction Act but it does not in fact tie in release of sub-contract retention to the main contractor actually completing all notified defects by the end of that period, which would be prohibited.  It simply provides for how the release date is calculated based on information provided from the original main contract.  

By way of working example, under a bespoke sub-contract the retention release date was defined as “the day after expiry of the period from the main contract completion date equivalent to the main contract rectification period plus a further 12 months”.  The sub-contractor’s works were planned to complete in August 2017, followed by other trades.  Buried as an appendix to the sub-contract were particulars of the main contract, including a planned completion date of 31 August 2018 and a rectification period thereafter of 12 months.  There was no reference to the sub-contract retention release date being linked to actual completion of the main contract works or to the main contractor rectifying all defects within 12 months thereafter, and so it did not fall foul of the Construction Act.  What it did mean was that the date for the release of the final tranche of retention under the sub-contract was 36 months from sub-contract completion in August 2017, as it was calculated, from the detail provided regarding the main contract particulars, as the main contract planned completion date of 31 August 2018 plus the main contract rectification period of 12 months plus another 12 months. 

It is therefore important to understand on what terms you are being asked to contract before you sign up to an overly extended retention release date.  Even if already bound by such terms. It is worth double checking whether they are in fact Construction Act compliant or could be interpreted as prohibited by that Act.

Another issue we quite often come across is there being no express procedure written into the contract for release of retention, whether at practical completion and/ or (more often) when the final tranche will be released.  There is no implied right to retain retention and the Construction Act contains no provisions governing the withholding and repayment of retention.  This could leave the party wishing to retain the benefit of retention until all defects are completed facing a claim for early release of such retention with a possible claim, in addition, for interest for any wrongful withholding.

If you wish to seek further advice generally regarding the release of your retentions or regarding any specific contract term you are being asked to agree or to which you are already bound, please contact Andrew Rimmer or Emma Judge.

[1] Housing Grants Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009. 

Emma Judge, Construction Partner

Emma Judge