In construction, licensing is serious business. In many states, unlicensed contractors and subs can’t file mechanics liens (if licensure is required, of course). But that’s not the worst case scenario. Recently, we wrote about unlicensed contractors facing steep penalties in Florida. While not quite as dire, the penalties in Tennessee can be steep too.
Tennessee License Limits Mean Business
With design changes, scheduling delays, and unexpected costs lurking behind every corner, it’s common for a construction job to exceed budget. Such is life in the construction industry. Often, rising costs will create disputes between a contractor and the owner or developer. But there are other issues to consider, too.
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Specifically, contractors’ licenses have limits. If that limit is exceeded, a contractor who might otherwise fulfill all licensing requirements might find themselves up a creek without a paddle.
Best Practices Construction Law has a great article on this topic.
Prior to a 2009 legislative amendment, only “unlicensed” contractors were limited. If an unlicensed contractor needed to pursue some legal remedy to recover payment, that recovery was limited to the actual costs they incurred on a job by Tennessee Code Section 62-6-103. Profit margin and payment for labor provided were out the window. That is, if the dispute went to court.
But a question remained. “Is a contractor considered “unlicensed” if they have a license, but just exceed their limit?”
The wording of the Tennessee Code didn’t provide any answers, so this issue was raised in court. On inspection, courts typically found that a contractor was not unlicensed under the Tennessee Code merely because the contractor’s limit had been exceeded. Apparently, the Tennessee legislature didn’t like that.
The “New” Rule
Back in 2009, the rule changed. Section 62-6-103(b) now reads, “Any contractor required to be licensed under this part who is in violation of this part or the rules and regulations promulgated by the board shall not be permitted to recover any damages in any court other than actual documented expenses that can be shown by clear and convincing proof.”
What’s that mean? It means that if a contractor exceeds their license limit, their ability to recover is diminished… A lot. If a contractor exceeds their license limit – even by accident – the only damages recoverable in court will be actual documented expenses.
Of course, there’s a way to recover payment without going to court. A mechanics lien filing, in and of itself, is not a lawsuit. Plus, the Tennessee lien statutes don’t address the issue of licensure. It follows, then, that unlicensed contractors should be able to file a mechanics lien in Tennessee. However, if enforcing the lien becomes necessary, a can of worms would be opened. At that point, the dispute would become a lawsuit. Conceivably, a court could limit the amount of a lien at the time of enforcing the lien. Life is just easier when the necessary licenses are obtained.
Now, most construction payment disputes don’t reach a courtroom. And if a project goes swimmingly, licensure requirements might never even come up. But the gamble isn’t worth the risk! If a license is required, a contractor or sub should obtain the necessary license.