Overview of Retention Trusts
over first-tier subcontractor retentions
What is a Retention Trust?
The head contractor is the trustee of the Retention Trust and becomes the trustee when the Retention Trust is established.
Who are the beneficiaries of a Retention Trust?
The beneficiaries of a Retention Trust are:
A head contractor:
- becomes a beneficiary of the Retention Trust when the trust is established; and
- ceases to be a beneficiary when the Retention Trust is lawfully dissolved.
- becomes a beneficiary of the Retention Trust when a retention amount is withheld from payment to the subcontractor under the Retention Trust Contract; and
- ceases to be a beneficiary when it has been paid all retention amounts it has a beneficial interest in.
Therefore, there may be a disagreement as to whether a particular subcontractor is a beneficiary of the Retention Trust e.g. if the head contractor believes that the subcontractor has been paid all that it is entitled to be paid under its subcontract, but the subcontractor disagrees.
What are the beneficial interests in a Retention Trust?
Under a Retention Trust:
- subcontractors have a beneficial interest equivalent to the amount withheld from payment to the subcontractor by the head contractor; and
- the head contractor has a beneficial interest in what is left over i.e. the amount held in trust after deducting all amounts subcontractors have a beneficial interest in, in connection with their subcontracts.
However, the subcontractor’s beneficial interest in a retention amount ends:
- if and when the head contractor becomes entitled to be paid the amount under the Retention Trust Contract; and
- to the extent the head contractor becomes entitled to be paid the amount under the Retention Trust Contract. [Example]
In theory, a subcontractor can take legal action against the head contractor for a breach of trust if the head contractor uses trust money that it is not permitted to use, however, in practice, the subcontractor will need to first prove that it has a beneficial interest in that amount under its subcontract before it will be able to successfully prove a breach of trust. It is important that subcontractors take action as quickly as possible if they believe that they are owed an amount under a subcontract related to a Project Trust.
When is a Retention Trust required?
A Retention Trust is required for an amount withheld from payment to a subcontractor under a Retention Trust Contract. if the head contractor holds the retention in the form of cash under the Retention Trust Contract, and the head contract is a Project Trust Contract.
The requirement for a Retention Trust starts on the first day the head contractor withholds the retention amount from payment to the subcontractor and continues until all of the retention amount has been released to the parties entitled to it under the Retention Trust Contract, regardless of any of the following:
Charge over amounts held in Retention Trust
In addition to the Retention Trust, a charge is also placed in favour of the subcontractor over the retention money that is held for that subcontractor in the Retention Trust Account for securing the release of the amount when the subcontractor becomes entitled to it.
A charge is a legal right over the money that is in addition to any contractual right over the money. The charge is also a statutory interest under s73(2) of the Personal Property Securities Act 2009. This is likely to give the subcontractor more security over the money in the event the head contractor becomes insolvent – see here for more information about the Personal Properties Securities Register.
If the head contractor becomes entitled to some or all of the retention money under the terms of the Retention Trust Contract, the charge is released but only to the extent that the head contractor becomes entitled to that amount.
Legal bit that relates to a charge over money in the Retention Trust Account
A subcontractor may enforce the charge as if the charge had been given to it under a written agreement between the subcontractor and the head contractor. Any act done to defeat, or purporting to operate so as to defeat, the charge is of no effect against the subcontractor i.e. it will not be successful.
The Principal does not have any rights or obligations in relation to a Retention Trust for a subcontract. However, a principal does have obligations when it is operating a Retention Trust itself for head contracts that are Project Trust Contracts. Click here to understand how Retention Trusts affect principals.
This page considers the situation where Retention Trusts apply to subcontracts. Unless noted otherwise, all references to a ‘subcontractor’ in relation to a subcontract Retention Trust refers to a subcontractor that is a beneficiary of the associated Project Trust.
If a head contract requires a Retention Trust, the rules set out on this page are the same but the principal is the ‘trustee’ and all head contractors are ‘beneficiaries’ for head contracts that are Project Trust Contracts.
If a lower-tier subcontract also requires a Retention Trust, the rules set out on this page are the same but the higher tier subcontractor is the ‘trustee’ and its subcontractors are ‘subcontractor beneficiaries’.
Last updated: 1 January 2022