The Right of Retention as a Debt Collection Tool: What You Need to Know

The right of retention is one of the strongest rights a contractor has when faced with a delinquent payer. Incidentally, the right of retention applies not only to contractors but also to other creditors, such as hotel owners, freight forwarders, carriers, and leaseholders. Auto repair shops can also exercise the right of retention, for example, on a car they have just repaired.

What does the right of retention entail?

The right of retention is a creditor’s right to withhold the transfer of an item (such as a home) to the debtor until the outstanding invoice is paid. In the case of a contractor’s work, this involves the completion of the project and the subsequent handover of the keys. In effect, a contractor can therefore withhold the property and keep the keys until payment is made. Until then, the debtor has no access to his home. The right of retention can also be invoked against third parties who have a claim to the property.

Furthermore, the right of retention is indivisible. This means that the right of retention remains in effect until the entire claim has been satisfied. It may happen that the claim relates to multiple items. Even in that case, the general rule is that the creditor exercising the right of retention (the retentor) is not obligated to release any of those items—not even if a corresponding portion of the invoice has been paid.

You can't just exercise a right of retention!

However, the right of retention cannot be exercised arbitrarily. Three conditions must be met. First, the contractor must claim due and payable have over its client. In addition, the contractor must actually have control over the work. The contractor must also give notice of its exercise of the right of retention.

First requirement for a right of retention: a claim that is due and payable

The contractor’s claim must be due and payable and must be sufficiently related to his obligation to deliver the work. As a general rule, the retainer’s claim arises only once he has performed the obligation owed by him. This may differ if the parties have agreed otherwise. In the case of a contract for services, according to the Supreme Court (November 17, 2017, ECLI:NL:HR:2017:2901):

“With regard to contracts for services, the law does not generally specify when wages become due (see Art. 7:405 of the Dutch Civil Code). However, it follows from the nature of such a contract that the claim for payment of wages (unless the parties agree otherwise) arises after the agreed-upon work has been performed. If the contract involves work to be performed over a longer period of time, or relates to work consisting of multiple parts, this may result in claims for wages arising in the interim—that is, before the contract has been fully performed.”

In the case of an agreement contracting work The rule is that the claim only arises once the work has been delivered. However, a contractor’s performance often consists of several partial deliverables. It is therefore common to agree that the contract price should be paid in installments. These installments are then linked to the completion of specific parts of the work. This was the ruling of the Supreme Court on December 2, 2016 (ECLI:NL:HR:2016:2729):

“3.6.5 This case involves construction contracts for the construction of a residence commissioned by a natural person who is not acting in the course of a profession or business, as referred to in Article 7:765 of the Dutch Civil Code. The obligations under these contracts—the construction of a residence on the one hand and the payment of the contract price on the other—are divided therein into various, reciprocal (partial) obligations, namely the various construction activities and the installments of the contract price. The order for the additional work and payment thereof are regulated in a similar manner in those agreements (see section 3.1(iv) above). This contractual arrangement means that the installments of the contract price, and the remaining amount (75%) of the additional work contract price, respectively, may only be invoiced after completion of the relevant construction phase or the additional work. This provision is in accordance with the provisions of Article 7:767 of the Dutch Civil Code, which stipulates that the client may only be obligated to make payments that, at least approximately, correspond to the progress of construction; this provision serves to protect the client referred to in Article 7:765 of the Dutch Civil Code, and from which the agreements at issue here may not deviate to the client’s detriment (Article 7:769 of the Dutch Civil Code).”

The claim must also be due and payable. If no deadline for performance has been agreed upon, the claim is due and payable immediately. A contractor will often have to deal with a debtor who fails to pay the invoice. The claim becomes due and payable as soon as the invoice’s due date has passed. Therefore, sending an invoice and invoking the right of retention the very next day is unlawful. After all, the invoice has not yet become due at that point.

Actual control over the matter

In addition to the retainer having a due and payable claim, there must be an obligation to surrender the property. This means that the contractor must actually have control over the work. This means that the retainer’s exercise of control must be such that it prevents the entitled party from freely using the property.

Actual power can be either direct or indirect. An example of indirect control is when a contractor exercises a right of retention through a security company or a subcontractor. Once the keys have been handed over to the customer, the contractor no longer has actual control over the work.

A further condition is that the party exercising the right of retention must have acquired actual control as a result of the normal performance of its duties. This means, therefore, that a right of retention cannot arise on its own through a unlawful assumption of actual control over the matter.

Disclosure Requirement, the Third Requirement

Third, the contractor must notify third parties that it is exercising its right of retention. This can be done by posting a sign on the fence surrounding the property stating that the contractor is exercising its right of retention.

How do you exercise the right of retention?

After you have verified that you have a due and payable claim against your customer and you have actual control over the goods, you can begin to exercise your right of retention. However, you will want to retain actual control over the goods. After all, as soon as the item comes under the actual control of the entitled party, the right of retention ends. To validly exercise the right of retention, the work must be actually completed or otherwise made inaccessible. This can be done, for example, by erecting fences, changing locks, or withholding keys.

The exercise of the right of retention must also be made known. A common way to do this is to place a sign at the work site with text along the following lines:

                               “The right of retention is being exercised here.”

So: complete the work, and post a sign stating the right of retention.

Waiver of the Right of Retention

The right of retention ends when the item comes into the debtor’s possession. As the debtor, you can also seek to have the right of retention lifted in a summary proceedings. Another way to persuade the contractor to rescind the contract is to provide him with security to satisfy his claim, for example, by providing a bank guarantee.

Right of Retention in the Event of Bankruptcy or Seizure

The right of retention also applies if the debtor has been declared bankrupt. However, the trustee does have the authority to reclaim the property for the benefit of the estate and to sell it. The party exercising the right of retention may, however, set a reasonable deadline for the trustee to proceed with such reclamation and sale. If the trustee does not sell the item within that period, the party exercising the right of retention may still sell it.

If the property subject to a lien is subsequently seized, the lienholder may also exercise his right against the attachment officer. The situation is different if an attachment had already been made before the right of retention was exercised. In this case, the party exercising the right of retention cannot invoke that right against the attaching party.

Consequences of Unlawful Exercise of the Right of Retention

If the three conditions mentioned above are not met and the right of retention is therefore invoked unlawfully, the contractor is liable for damages. The contractor must then compensate for the damages resulting from the unlawful exercise of the right of retention. However, determining those damages is not so straightforward. For example, the District Court ruled East Brabant It was recently reported that there is no causal link There was a connection between the damage and the assertion of the right of retention, and the claim for damages was therefore dismissed.

In short, there are pitfalls associated with the right of retention, and the unlawful exercise of this right can have serious consequences for contractors. Nevertheless, the right of retention remains a very powerful collection method. In fact, violating the right of retention is a criminal offense (see Article 348 of the Penal Code).

Are you dealing with a delinquent payer? Seek sound legal advice regarding your options for exercising your right of retention.