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Property developers and insolvency


The insolvency of a property developer is still the number one business insolvency in the construction sector. The insolvency of a developer usually means that the property ordered by the buyer cannot be completed, additional costs are incurred and the entire construction project comes to a standstill.

If insolvency proceedings are to be carried out, it is first of all imperative that there is a reason for insolvency (§ 16 InsO) and that the debtor’s assets are sufficient to bear the costs of the insolvency proceedings. This is stipulated in § 26 InsO. If the developer does not have enough assets to cover the costs of the proceedings, the insolvency court will dismiss the case for lack of assets. The company is then liquidated. In this case, the rights and obligations of the respective contracting parties remain in force. The developer must therefore complete the building owed and transfer it to the purchaser. The purchaser must pay the agreed price, § 650u BGB.

Formal insolvency is spoken of when insolvency proceedings are opened. However, the developer may already be materially insolvent irrespective of the opening of proceedings. In other words, the developer can no longer meet its obligations on time; it is insolvent or overindebted, §§ 17 ff InsO. If the creditor becomes aware of the material insolvency, he may be able to challenge the contract under §§  119, 123 of the German Civil Code and claim damages.



When insolvency proceedings are opened by order of the insolvency court, the debtor loses the power to dispose of his assets, § 80 InsO. At the same time, there is a prohibition of enforcement by creditors by way of individual compulsory enforcement. The insolvency administrator becomes the central figure of the insolvency proceedings. The insolvency court appoints him. His task is essentially to determine the insolvency estate and divide it among the creditors. In doing so, he must increase the insolvency estate as much as possible during the insolvency proceedings in order to satisfy the creditors.



The insolvency administrator has a right of choice here, § 103 InsO. However, a right of choice exists only if the contract has not yet been performed or has not been performed in full.

He can choose between the fulfillment of the contract instead of the debtor and thus also demand the fulfillment of the payment claim or leave it at the effect of the opening of the insolvency proceedings. The creditor must then file his claim in the insolvency table and is served according to his quota.

As a result, the insolvency administrator can have the construction project completed, but is not obliged to do so. There is no deadline for this decision. If delays occur as a result of the decisions, he is not liable for damages. The decision-making criteria for the selection are purely economic. The focus is always on increasing the insolvency estate. However, the creditor may request the insolvency administrator to exercise his right of choice, § 103 II 2 InsO.



If the insolvency administrator opts for performance, the content of the contract remains unchanged. The main and ancillary performance obligations of the contract to be performed become so-called obligations of the insolvency estate (§ 55 InsO I No. 2 InsO), as do the warranty or defect claims or contractual penalties, even if they arose before the opening of proceedings. This also means that both contracting parties are bound by the terms of performance. If the contractual partner is obliged to perform in advance, he cannot, for example, invoke the plea of uncertainty pursuant to § 321 of the German Civil Code.

If he decides against performance, the contracting parties merely lose the enforceability of their claims. It remains with the consequences that the opening of insolvency proceedings entails. §103 II p.1 InsO grants the creditor a claim for damages for non-performance. This must be filed in the insolvency table and will then be served according to its quota in the proceedings. If the client has independently remedied the defects or had the building completed, the insolvency administrator can claim damages because it has been made impossible for him to perform.



If the insolvency proceedings of a developer are opened and the insolvency administrator refuses performance, the concluded developer contract is divided into a part relating to the purchase contract and a part relating to the contract for work.

If a priority notice of conveyance for the creditor has already been entered in the land register at this point in time, the purchase contract part must be fulfilled in accordance with § 106 I InsO. Thus, the purchaser retains the claim to fulfillment, since the priority notice secures the claim. He, therefore, retains his claim to transfer of ownership vis-à-vis the building entity at the time of insolvency.

The part of the contract for work and services involves the production of the contractually agreed work and as such cannot be enforced against the insolvency estate. The purchaser is entitled to damages for non-performance. If the purchaser has already paid the full amount, he shall be entitled to a claim for damages in the amount of the overpayment against the state of construction.  There is no obligation to complete in this case.



A special problem is the termination of the developer’s contract by the purchaser in the insolvency of the developer. Reasons for this can be the late completion or the presence of serious defects. This renders the registered priority notice of conveyance invalid, as it is accessory to the claim under the law of obligations. This means that it is dependent on it. As a result, the insolvency administrator can then demand approval of the cancellation of the priority notice without having to refund the purchase price to the purchaser from the assets. In this respect, the termination may have serious consequences.



The insolvency of a developer is particularly problematic if the purchaser wishes to assert warranty rights. This is the case if a defect occurs after the property has been handed over.  If the developer is already insolvent, it is highly likely that it will be difficult to assert warranty rights. The creditor has no claim to subsequent performance against the craftsmen commissioned by the developer. In some property development contracts, an assignment of these claims is agreed upon. Then, and only then, does the creditor have a direct claim against the craftsmen. However, these assignment clauses are the absolute exception. Even after the opening of insolvency proceedings, the creditor has the option of demanding the assignment of the claims from the insolvency administrator.

The risk of insolvency can also be included in the contract in other ways. By way of a warranty bond (also called a defect bond), the builder can demand that the developer provide a guarantee for completion and warranty. Another possibility is to agree on a performance security in the form of a down payment amounting to 5% of the construction sum. This can be retained by the builder. Thus, in the event of insolvency of the developer or incomplete partial performance, the project can be advanced from these funds. The aforementioned performance security is standardized by law in Section 632a (3) of the German Civil Code (BGB).