As we wrote about last year, the Tennessee prompt payment laws work on behalf of claimants – in a case against Krispy Kreme, some requirements were relaxed in favor of the claimant. Now, another case shows us that the Tennessee retainage laws also work to speed up payments. Rather than donuts, this project involved a fireworks store. Though there was a payment dispute on a project, the court found that payment of retainage was still due within 90 days. Also, the court found that contractual provisions would not extend that time frame.
Tennessee Retainage Laws
In Tennessee, retainage is limited to no more than 5% of the contract. These funds must be kept in an interest bearing account, and securities may be substituted in lieu of retainage. Retainage must be released to the original contractor within 90 days of work. Any funds that the original contractor withholds from a sub (while waiting for retainage to be released) must be released within 10 days of the original contractor’s receipt of those payments.
These rules can be found in our Tennessees Retainage FAQs.
Here’s the full text of Beacon4 v. I & L Investments.
Beacon4 agreed to serve as general contractor for I & L Investments (the property owner) for the construction of a fireworks store in Blountville, Tennessee. As the project went along, tempers flared and sparks began to fly. However, the general contractor elected to continue work in order to deliver the project on time. Beacon4 kept track of its costs, though.
At the end of the project, Beacon4 filed a mechanics lien for $213,000 which represented the amount retained by I & L and change orders- both approved and unapproved. I & L claimed that the retainage was being properly withheld and that the other amounts in the lien had been exaggerated. Months beyond when the retainage payment was due, payment was offered by I & L, but this payment would have required Beacon4 to release its lien. Since the lien claim far exceeded the retained amount, Beacon4 did not accept.
Pursuant to the Tennessee retainage laws, I & L was required to pay the retained amount ($47,000) within 90 days of the completion of the project (marked by (1) when the permit for occupancy or use is granted, (2) when the certificate of substantial completion is granted, or (3) when the project is put to use or could be put to use by the owner). I & L presented several arguments that supported moving back the project’s completion date.
While there was dispute as to when the project was actually completed, all potential dates would put I & L in default for failing to pay retainage. However, I & L argued, Beacon4 had failed to satisfy contractual preconditions to the release of retainage. Under the contract, Beacon4 agreed that final payment and/or retainage would not be due until the contractor presented certain documents to the architect. Because Beacon4 had not fulfilled those duties, I & L claimed, retainage was not due.
The court was unswayed and found for Beacon4. It held that the provisions of a contract could not, in fact, affect the date that retainage would be due. The court noted that even if the alternative completion dates proposed by I & L were accepted, retainage would still have been long overdue.
Here are 5 things you should know when filing a Tennessee mechanics lien.
Tennessee retainage laws really go to bat for claimants. Often, we see strict deadlines and requirements as a detriment to those asserting payment claims. Considering even small errors can invalidate a mechanics lien, it should come as relief that this also applies to property owners. In Tennessee, it appears as though retainage has an absolute deadline of 90 days. However, when that 90 days begins could still be up for argument depending on the case.
For more on Tennessee construction payment laws, here are our Tennessee Resources. Not in Tennessee? Select your state.