Retention clauses in property transactions – a cautionary tale
25 February 2015
A recent case highlights how vital it is to include sufficient detail in retention clauses to ensure that the circumstances in which monies are to be released are fully set out.
In late 2014, the High Court considered the detailed drafting of retention clauses in the context of a share purchase agreement (*1). The seller of a business brought a claim against the buyer for payment of sums under the agreement and the buyer claimed breach of warranty by way of set-off.
The agreement required a sum of money to be paid into a retention account held and operated by the buyer’s solicitor. If the buyer had a claim under the warranties, the seller should be notified of the claim and the retention released to the buyer. The buyer issued a letter of claim and the buyer’s solicitor released to the buyer the monies held in the retention account.
There was no provision for determination of disputes. The seller argued that there was an implied term that the buyer must substantiate any claim before monies are released under the retention clause.
It was decided, in favour of the buyer, that it is not possible to imply whole clauses into agreements. It was not for the courts to put either party in a commercially advantageous position.
The seller claimed unjust enrichment, ie the buyer had profited from an unfounded claim. The judge held that the buyer must have a valid claim, although with no means for settling a dispute in the agreement, the onus was on the seller to prove that the buyer’s claim was unfounded.
Having rejected the seller’s arguments that the retention should not have been released, the judge considered a number of claims many of which related to whether a breach of warranty amounted to a reduction in the value of the company.
Whilst this case relates to a business sale, retention clauses are often used in the context of property transactions, for example where a seller is still to deal with some issue after completion, and a part of the purchase price is withheld pending the issue being satisfactorily resolved, when the funds are then released. The case highlights the importance of ensuring that contract wording is sufficiently detailed as to the precise circumstances in which the retention monies may be released, including a dispute resolution mechanism where appropriate.
(*1) Bir Holdings Ltd v Mehta  EWHC 3903 (Ch)
This article was written by Alexander Gold.
For more information please contact Alexander on +44 (0)20 7427 6436 or firstname.lastname@example.org