Make safe your retentions by injunction – a timely remedy when developers are in trouble

This article was written by our colleague and barrister Finn Collins of Lambton Chambers, with whom we work closely with on construction law matters and assisted us in obtaining a recent court injunction to secure retentions.

It’s one thing to have the comfort of knowing your retentions are held on a statutory trust, [1] but who is really holding them for you, the developer or the lender, and what is the risk that they have been spent or that the funding has been exhausted?  Sure you can, as a beneficiary of trust money, ask for the records of the retention money, but what do those records really tell you and what if they don’t comply. Sometimes we see, after making a request for such records, a dollar number on a screenshot, but the account is clearly an everyday business operating account so there is no way of knowing if these funds will be there the next day.

You can consider issuing a statutory demand for the retentions, if they are due for release, but that takes time and it’s easy enough for a developer, with the benefit of strategic legal advice, to delay a statutory demand from expiring. In our experience, it is usually developers who are not complying with the statutory retention regime, and they are typically the weakest link in any project in regard to solvency.

In many cases a better option is to insist that the retention money is held in an independent lawyer’s trust account. If they refuse, and have been late with any payments, then the question has to be why are they refusing? If retention money is genuinely being held for you on trust, then it be should not really matter whether it is held in their bank account or a lawyer’s bank account.  If the project is being funded by development finance, then the lender should be aware of the fact that a part of the funds, not yet drawn down, is retention money. It is likely that some local and overseas funders may not be aware of our statutory trust regime, and if that’s the case then its best they know as soon as possible.

Applying for an injunction from the Court to place the retention money in a lawyer’s trust account has a range of advantages:

1. There is no reason why you should not be able to recover your legal costs in doing so; the statutory trust regime is quite clear that all retention money is held on trust and if you have been paid late - or there is a dispute over them of dubious merit, then you would be justified in making such an application - provided you have given fair notice that you require the retentions to be set aside in an independent trust account.
2. It preserves the status quo. There may be a genuine dispute over when retentions should be released and in respect of any deductions for defects, but no significant harm should be caused to either party by holding these funds in trust until that is resolved. Surely, its best to ‘take the sugar of the table’ [2] and avoid the retentions being misapplied or seen as an easy cash grab.
3. The last thing any contractor wants to do is to wait for the developer to be placed into liquidation and then have to wait for the liquidators to locate the retention money, and then possibly have to put in funding towards an action against the directors or an overseas financier if that retention money has been misappropriated.
4. It is better to take action sooner rather than later and force that money to be held in a separate trust account.  If a liquidation then happens, then at least you know that these funds are safeguarded without further effort. If the developer cannot pay the retentions into an independent trust account, then that will force the inevitable liquidation to occur earlier, and you will have saved a few other trades from incurring bad credit with that developer.

The statutory trust arrangement over retentions was based in part of the recommendations in the New South Wales Independent Inquiry into Construction Insolvency Report. [3]  This is available online and contains many nuggets of useful information. A link to this Report is here.  One of those nuggets is that the Court can order a mandatory injunction to place retentions into an independent trust account. But, in regard to knowledge by lenders of their obligations around retention monies it has drawn on experience from Canada, where a statutory trust over retentions also exists, and has this to say:

The WALRC also stated that:

“Many cases in Canada deal with the question of whether or not the bank was aware of the nature of the funds. A statutory trust itself does not constitute notice of a trust: Macklem and Bristow 9-28. If a bank is aware that the funds are trust funds, the bank is a participant in a breach of trust which makes it liable to the beneficiaries. In any case, the trustee is in breach of the trust for failing to preserve trust assets. If the trustee is a corporation, its officers and directors who are its operating mind will be personally liable: ibid 9-50 to 9-51.”

Lenders will justifiably be alarmed by this. The statutory trust arrangements over retentions may mean that they end up being a party to an injunction application for retention funds to be deposited in a lawyer’s trust account, if these funds had not been drawn down. This is unlikely to cause any serious issues for the traditional bank lenders in New Zealand, but for local and overseas based development financiers, this will be very unwelcome news. An injunction requiring the funds to be deposited into an independent trust account will also cause additional financing costs to the developer, who at this stage is probably already under water.

So how many injunctions to date have been sought in New Zealand to secure retention money through deposit to an independent trust account. Surprisingly very few, but they have been granted and on a mandatory basis i.e. requiring the defaulting party to perform the specific act of paying the retention money into an independent trust account. I suspect the small number of applications to date is, in part, because contractors are not aware that this is a very powerful and effective way to secure retentions. We obtained one very recently resulting from a developer under pressure, with the current downward pressure on residential sales and pre-sales having evaporated away. [4] The injunction was obtained in matter of days and legal costs were awarded. In this current environment, with many residential developers under pressure, it is a remedy that more contractors should be seriously considering.

We are happy to provide copies of the judgments referred to upon request.

If you would like to discuss your retentions and how you can protect your business, contact Jaesen Sumner or Finn Hollingworth.

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[1] Subpart 2A of the Constructions Contracts Act 2002 treats all money withheld as retentions, as being held on a statutory trust. This has been the case since 31 March 2017, but these provisions and any non-compliance with them were ‘beefed up’ in regard to construction contracts signed after 5 October 2023.

[2] A comment made by a witness on the issue of retention money and referred to in the New South Wales Government Final Report “Inquiry into Construction Insolvency in NSW” Bruce Collins KC, November 2012 at 113.

[3] Ibid.

[4] Wellington Developments Ltd v Cannon Point Development Ltd [2024] NZHC 1798, with the other known decision on an interim injunction to preserve retentions by holding them in Court being Hanlon Plumbing Ltd v Downey Construction Ltd [2020] NZHC 2457.