Late Payment Penalty: What You Need to Know About the Individual House Construction Contract

You have signed an individual house construction contract for your future home in Chenôve, in the suburbs of Dijon. The works are ongoing, but you are facing an unforeseen cash flow problem: you cannot pay the instalment due under the contract. The builder then demands a late payment penalty from you. But is this legal? And at what rate?

This question is asked by many owners. The answer lies in a decision of the Court of Cassation dated 25 September 2013 (No. 12-21.231). It clarifies that the individual house construction contract (CCMI) may indeed provide for a late payment penalty payable by the project owner (the owner). But beware: this penalty is not free. The rate cannot exceed 1% per month if, in return, the late delivery penalty payable by the builder is limited to 1/3,000 of the price per day of delay. In other words, there is a balance to be respected.

In this article, I will explain to you concretely what this decision changes for you, whether you are an owner, a future buyer or even a builder. And I will give you practical advice to avoid disputes.

The Facts: A Story That Happens Every Day

Mr X, a resident of Auxonne in Côte-d'Or, had signed an individual house construction contract with a construction company. The contract provided for a total price and a payment schedule. But Mr X encountered financial difficulties and did not pay certain instalments on time. The builder then claimed the balance of the contract, together with late payment interest calculated at a daily rate of 0.33% (i.e., approximately 10% per month). At the same time, Mr X complained of defects and late delivery on the part of the builder and relied on the contractual penalty of 1/3,000 of the price per day of delay.

The case was brought before the Court of Appeal of Reims. That court ordered Mr X to pay the balance of the contract, with late payment interest at a daily rate of 0.33%. But the Court of Cassation quashed this judgment. Why? Because the Court of Appeal did not verify whether the rate of the late payment penalty complied with the legal limit.

In short, the contract provided for a late delivery penalty capped at 1/3,000 of the price per day. In this case, Article R. 231-14 of the Construction and Housing Code imposes that the late payment penalty must not exceed 1% per month of the unpaid sums. However, the rate of 0.33% per day is equivalent to approximately 10% per month, which is ten times higher than the permitted limit. The Court of Appeal's decision was therefore contrary to the law.

The Reasoning of the Court — Analysed

The Court of Cassation relied on Article R. 231-14, paragraph 2, of the Construction and Housing Code. This provision states that when the individual house construction contract stipulates a late delivery penalty payable by the builder (limited to 1/3,000 of the price per day), the late payment penalty payable by the project owner must not exceed 1% per month of the unpaid sums. In other words, the legislature intended a balance between the rights of both parties.

But why such a rule? The idea is to protect the owner, who is often the more vulnerable party. Without this limit, a builder could impose exorbitant penalties, which would be deterrent for the project owner who is late in payment, even for a minor delay. Conversely, the late delivery penalty is capped to protect the builder from excessive compensation.

However, be careful: the Court of Cassation did not say that any late payment penalty is prohibited. It simply recalled that if the contract provides for a late delivery penalty capped at 1/3,000, then the late payment penalty cannot exceed 1% per month. If the contract does not provide for a late delivery penalty, or if it is higher, the rule may be different.

What few people know is that this rule is a matter of public policy: it cannot be waived by a contractual clause. Thus, even if the contract provides for a higher rate, that clause is deemed unwritten (it is void).

What This Changes for You — Concretely

For an owner building his house, this decision is a protection. If you are late in payment, the builder cannot claim more than 1% per month on the sums owed. For example, if you owe €10,000 with one month's delay, the maximum penalty will be €100, no more. On the other hand, if the builder delivers his house late, you can claim compensation of 1/3,000 of the price per day. For a house worth €200,000, this represents approximately €66 per day of delay.

For a builder, this decision reminds of the importance of drafting the contract correctly. If you wish to provide for a late payment penalty, ensure that it complies with the 1% per month ceiling, especially if you have also provided for a late delivery penalty at the legal rate.

Let's imagine a concrete example in Auxonne: you sign a contract for a house worth €180,000. The builder has 12 months to deliver, but delivers 3 months late. You can claim from him €180,000 x 3 x 1/3,000 = €180 per day, i.e., €16,200 for 90 days of delay. At the same time, if you paid an instalment of €20,000 2 months late, the builder can only claim €20,000 x 2 x 1% = €400, and not €20,000 x 60 x 0.33% = €3,960 as in the case decided.

If you are in this situation, you must check your contract: what penalties are provided for? If the builder claims a rate higher than 1% per month, you can challenge it. Do not hesitate to consult a lawyer specialising in property law.

Four Tips to Avoid This Type of Dispute

• Read the penalty clauses carefully: before signing a construction contract, check the rates of the late payment penalty and the late delivery penalty. They must be balanced. If the late payment penalty exceeds 1% per month, ask for a modification or refuse to sign.
• Anticipate cash flow problems: if you foresee payment difficulties, inform the builder as early as possible. You can negotiate an amicable payment schedule without penalties, or request a grace period (a deferral of payment) which can be granted by a judge in case of dispute.
• Keep all evidence: keep letters, emails, bank statements and receipts. In case of a dispute, you will need to prove the date of your payments and any delays by the builder.
• Use a professional to draft the contract: a lawyer or notary can help you negotiate balanced clauses and avoid pitfalls. This is an investment that can save you much larger costs.

Further Analysis: Related Case Law and Developments

The Court of Cassation has rendered several decisions on the same subject. For example, in a judgment of 17 September 2009 (No. 08-17.319), it held that the late payment penalty provided for in a construction contract must comply with the 1% per month ceiling, even if the contract does not provide for a late delivery penalty. On the other hand, in a judgment of 6 July 2017 (No. 16-18.982), it specified that if the contract provides for a late delivery penalty higher than 1/3,000, the late payment penalty may be higher, provided it is not abusive.

The trend of the courts is therefore to protect the project owner against unbalanced clauses. Judges systematically verify that penalties are proportionate and comply with regulations. undefined, I have encountered cases where builders claimed late payment interest at usurious rates (more than 10% per month). Thanks to this case law, we were able to have these clauses annulled and reduce our clients' debt.

For the future, it is likely that the courts will continue to strictly apply Article R. 231-14. Builders must therefore be vigilant in drafting their contracts, on pain of having their clauses annulled.

In Practice: What to Do

FAQ:

1. What if the builder claims a penalty higher than 1% per month? Reply to him in writing citing Article R. 231-14 of the Construction and Housing Code. Offer to pay the legal penalty. If he insists, apply to the interim relief judge to have the clause declared void.
2. Can I negotiate a higher late payment penalty if the builder agrees? No, because the rule is a matter of public policy. Even with your consent, a clause exceeding 1% per month is void.
3. What are the time limits to challenge a penalty? You have up to 5 years from the signing of the contract (general limitation period). But it is better to act quickly as soon as the first claim is made.
4. What is the cost of legal action? Proceedings before the judicial court can cost between €1,500 and €5,000 in lawyers' fees, depending on complexity. But a well-drafted formal notice may be enough to make the builder back down.
5. What if I have already paid excessive penalties? You can claim reimbursement of the overpayment, with interest. The limitation period is 5 years from each payment.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →