Right of retention

A business owner who holds a customer’s property in their possession for the purpose of performing work (for example, a car that needs repair) must return the property to the owner upon request. However, if the customer fails to fulfill their obligations towards the business owner – such as paying the agreed price for the work performed – the business owner may invoke a right of retention. The right of retention allows the business owner to postpone the return of the customer’s property until the outstanding invoice has been paid. This right can also be invoked by the business owner (the retentor) against the bankruptcy trustee during the customer’s insolvency proceedings.

Legal basis and purpose

The right of retention is governed by statutory law under Article 3:290 et seq. of the Dutch Civil Code (Burgerlijk Wetboek, BW). It is designed to protect creditors whose invoices remain unpaid. The right of retention primarily grants the creditor the authority to temporarily suspend their obligation to return a property. Exercising this authority does not require judicial intervention. By invoking this right, the creditor gains leverage to compel payment from their counterparty. Furthermore, the retentor may recover their claim from the property with priority over anyone against whom the right of retention can be asserted. In practical terms, this means that the retentor may sell the property they hold in order to satisfy unpaid invoices. The retentor thus enjoys a preferential right over other creditors.

Requirements for Invoking the Right of Retention

To validly invoke the right of retention, three statutory requirements must be met. Firstly, the unpaid claim must be enforceable. In most cases, a claim becomes immediately due unless a payment term has been agreed upon. If a payment term applies, the claim becomes enforceable once that term has expired. Furthermore, there must be sufficient connection between the unpaid claim and the obligation to return the property belonging to another party. Lastly, the property over which the right of retention is exercised must be under the actual control of the retentor.

A property is under the physical control of the retentor when it is held in their possession. In the case of a repair, it will be quite straightforward to assess whether this requirement has been met. However, it becomes more challenging when dealing with immovable property, such as real estate. The right of retention can also be exercised over immovable property, provided that the retentor has effectively restricted access to the premises for third parties. For instance, the retentor may replace the locks on a building without providing keys to its owner or install fencing around the immovable property.

Rights Against Third Parties

Once the retentor has met all three aforementioned requirements, the right of retention can be asserted not only against the debtor but also against third parties. For example, the right of retention can be invoked against a third party who purchased the debtor's property while it was in the retentor's possession. Even this new owner must respect the right of retention until the invoice giving rise to it has been paid. Furthermore, the right of retention takes precedence over third-party security interests such as pledges and mortgages. These secured creditors may only reclaim the property once the invoice has been settled.

Payment of Claims

The primary purpose of the right of retention is to ensure that the debtor ultimately pays their outstanding invoices. If a debtor is unable to pay, the retentor may sell (execute) the property in their possession to satisfy their claim with priority from the proceeds of such sale. However, the retentor cannot proceed with execution arbitrarily; they must first obtain an enforceable title. To obtain such a title, legal proceedings must be initiated. Once a favorable judgment is rendered, the property may be sold through a public auction.

Retention in Bankruptcy

As previously mentioned, the right of retention can also be invoked against a bankruptcy trustee during insolvency proceedings. The trustee may decide to pay off outstanding invoices and reclaim possession of the property. Alternatively, with permission from the supervisory judge (rechter-commissaris), the trustee may demand possession of the property without first paying off the invoice. In such cases, the right of retention ceases to exist; however, the retentor retains a preferential claim on proceeds from any sale of that property. This allows them to recover their claim with priority, provided there are sufficient funds in the bankruptcy estate. A disadvantage here is that the retentor must share in general bankruptcy costs. If insufficient funds are available to pay all estate creditors, the retentor’s preferential claim may not result in payment.

To avoid uncertainty, a retentor may impose a reasonable deadline on the bankruptcy trustee within which they must decide whether to reclaim possession of the property. If this deadline passes without action from the trustee, the retentor acquires an immediate right to execute and may independently sell the property to recover their claim from its proceeds. For movable assets – such as cars, bicycles, or machinery – the rules governing execution under pledge rights apply to retentors. For immovable assets – such as a parcel of land – the statutory rules applicable to mortgage rights must be followed during sale.

Conclusion

The right of retention serves as protection for creditors whose claims remain unpaid by debtors. It allows creditors to suspend their obligation to return a debtor’s property until payment is made. Additionally, it grants retentors authority to sell (execute) such property and recover their claims with priority from its proceeds. Even in bankruptcy proceedings, retentors may refuse to return property until payment is made or impose deadlines on trustees for decision-making regarding reclamation. If trustees reclaim property without payment, retentors retain preferential rights over sale proceeds but are subject to bankruptcy costs and risks associated with insufficient estate funds.

Should you wish to learn more about the right of retention, please contact Lucas van Walraven.

(Last updated on 26 January 2024)