Types of financing
What types of financing are used for construction projects in your jurisdiction? Which are the most common? Are there any restrictions on available financing methods?
Under a facility agreement, the credit becomes due either in full or in instalments pursuant to the progress of the construction work (usually confirmed by a certified engineer). If a developer also owns the real estate, they may grant a mortgage as security. In addition, the parent company may grant share pledges or a corporate guarantee. Austrian corporate law has very strict capital maintenance rules and thus parent companies cannot execute facility agreements and property companies cannot provide security. Cross-collateralisation may also pose difficulties. As nullity is the consequence, parties are strongly recommended to check any financing structure prior to implementation.
What forms of security are used in construction project financing?
Borrowers and lenders can agree on the forms of security in place. The most common kinds are:
- mortgages (which may be registered in the electronic land register);
- share pledges;
- company guarantees; and
- assignments of claims regarding third parties.
Lenders may request a right to step into a construction contract if the borrower defaults.
Methods and timing
What are the typical methods and timing of payment for construction work? Are there any restrictions on ‘pay when paid’ and ‘pay if paid’ provisions? Do any other rules, restrictions or procedures apply?
Pursuant to Section 1170 of the Civil Code, employers must effect payment after completion and handover of construction work, but parties can agree on the contrary. Parties regularly agree on instalments pursuant to the progress of the construction work (confirmed by a certified engineer). While contractors may request security of up to 20% (or 40% in certain cases) of the unpaid consideration pursuant to Section 1170b of the Civil Code, employers sometimes request a performance guarantee (bank guarantee). Pay-when-paid and pay-if-paid clauses are not uncommon for subcontractors, but may be deemed unfair and excessive.
How can the contractor secure itself against non-payment by the employer? Under what circumstances can the contractor suspend work for non-payment?
Contractors have the right to request security as a percentage of the agreed consideration pursuant to Section 1170b of the Civil Code. This provision is mandatory and cannot be waived. Contractors can request security after execution of the contract of up to 20% of the unpaid consideration whereas for contracts with terms of less than three months, the contractor may request 40%. If an employer does not provide the security within reasonable time, the contractor is entitled to refuse the provision of services and ultimately to rescind the contract. The employer can choose between a security in the form of cash, deposit, security account, bank guarantee or insurance (in practice, the bank guarantee is the only viable option). The contractor must bear the costs for the security up to 2% of consideration.
How can subcontractors secure themselves against non-payment by the contractor? Under what circumstances can subcontractors suspend work for non-payment?
Subcontractors can request security pursuant to Section 1170b of the Civil Code. Thus, the same regime applies between contractors and subcontractors as applies between employers and contractors.
On what grounds can payments be withheld?
Contractors must effect payment according to the contract (eg, after completion of specific construction phases and the provision of respective invoices) or, in the absence of an agreement, after completion and handover of the construction work. Employers have the right to withhold payments if the conditions for payment are not fulfilled – in particular, if specific construction phases have not been completed.