Large-scale building refurbishments or complete redevelopments are extremely popular in Cape Town. These projects, which see older buildings with lower occupancy rates and lacklustre facilities transformed into on-trend, in-demand spaces, attract highly desirable tenants and buyers.

If you’re considering redeveloping your building, there’s definitely a lot of upside potential. But as with every business transaction, there are risks involved.

One of them is a contractor who goes out of business before the job is complete.

Don’t let your building become an abandoned construction site

It’s every building owner’s nightmare. After paying a contractor millions to redevelop your building, work suddenly stops on the project halfway through. As workers down tools due to not being paid, the contractor informs you that they’ve declared bankruptcy.

A half-renovated, unfinished and unmarketable building or commercial property Cape Town is a disaster scenario for any property owner – and it’s not impossible in the current economy.

Recently, a number of big construction firms in South Africa have been experiencing financial troubles. Group 5, which is a household name in SA and throughout the African continent, went into business rescue recently.

Construction giants Basil Read and Liviero are also in business rescue, while Aveng is trading at near-bankruptcy levels.

With the construction industry facing tough times and giant corporates taking a fall, smaller contractors are especially vulnerable. Before you embark on a large-scale project, you’ll need to know that your contractor is on a firm financial footing.

What recourse do I have if a contractor goes under?

If you’ve signed a construction contract and paid a large deposit or milestone payment to your contractor, you’re a creditor of their business.

Should the contractor declare bankruptcy, you’ll be entitled to take legal action to recover your money – but will they be in a position to pay you out?

Generally, the first creditors to be paid out in bankruptcy cases are banks and major creditors, followed by company employees. As a client, you may find yourself at the back of the line when creditors are paid out.

It’s also worth remembering that to make a claim against a bankrupt company’s estate, you’ll need to appoint an attorney to act on your behalf.

This will add a significant amount of costs (in legal fees) at a time when you’re already stressed over the amount you’ve paid the contractor and losing rental income from your building.

In short, getting paid out as a creditor is never easy – and if the contractor is severely bankrupt, you may only receive cents on the Rand.

Avoiding the pitfalls of a broke contractor

If you’re thinking of hiring a contractor for a major construction project, here are some things to bear in mind.

  • Are they in good financial shape? It’s essential to ask for references from recent clients and follow up to ensure that all their projects were completed without any problems.
  • How much are you paying them? Large deposits are risky – it’s much better to pay your contractor in tranches as each phase of the project is completed.
  • Is your entire building unusable? It may be possible to renovate your building in stages, leaving part of it intact and able to generate an income.

If you’d rather avoid the uncertainty of dealing with contractors altogether, we’d love to introduce you to some of the turnkey projects we have in our portfolio.

Our commercial properties are modern, in-demand and ready for the rental market. To learn more, contact us today.