The Tennessee Construction Industry Payment Protection Act was signed into law on June 22. The Act addresses or reallocates certain risks associated with non-payment on construction projects under Tennessee's Prompt Pay Act (PPA) and is intended to increase clarity and consistency in the PPA and in Tennessee's mechanics' lien law, Truth in Construction and Consumer Protection Act, and construction defect notice statutes, as well as amending Tennessee's statute of repose for construction and design defects.
The changes took effect July 1, and apply to actions occurring and contracts entered into, amended, or renewed on or after that date. Highlights of the Act include the following.
Clarifications Regarding Payment and Retainage Requirements
The PPA requires retainage to be deposited into a separate, interest-bearing escrow account with a third party and generally requires the release of retainage within 90 days after substantial completion of the project. Failure to comply with these requirements is a Class A misdemeanor, subject to potential criminal fines of $3,000 per day. Failure to properly escrow retainage also exposes the withholding party to civil damages of $300 per day.
Injunctive Relief and Stopping Work
The PPA permits parties who have not timely received payment to send a notice to the nonpaying party. If the party does not respond within 10 days with "adequate legal reasons" for not paying, the unpaid party, among other things, may seek injunctive relief—presumably requiring payment. Previously, the unpaid party had to furnish a bond in double the amount claimed before obtaining injunctive relief. The multiple now has been removed, and the bond must equal the amount claimed. The PPA also now provides that an arbitration provision does not prevent a party from seeking injunctive relief in court.
New language also permits a party to stop work if it does not receive payment or adequate legal reasons for nonpayment and entitles the party to an extension of the contract schedule.
Notice to Owner of Beginning Work No Longer Required on Commercial Projects
Before beginning work on any project, the Truth in Construction and Consumer Protection Act previously required a contractor to deliver a written notice to the owner it was about to begin improvements and there would be a lien on the property to secure payment. That section has been revised to apply only to improvements of residential real property (defined as a building consisting of one to four dwelling units where the owner intends to reside in one of the units).
Lien Subordination Agreements Possibly No Longer Enforceable
A provision in the PPA states that certain provisions of the Act may not be waived by contract. Added to that list is the provision in the mechanics' lien statutes that establishes the time of attachment of mechanics' liens. Those liens attach upon "visible commencement of operations," which generally means the start of construction (with some exceptions). The intent of the addition is not clear, but it calls into question the enforceability of "subordination agreements," by which project lenders seek to assure the priority of their liens when construction has commenced before the recording of a mortgage or deed of trust.
Brian Dobbs is a member at Bass, Berry & Sims PLC where he represents clients in the drafting and negotiation of construction and design contracts for real estate projects throughout the United States. Brian also defends clients in various types of construction-related claims and disputes, including contractor licensing matters, pre- and post-award bidding disputes, among other matters.
Wearen Hughes is a member at Bass, Berry & Sims PLC and focuses his practice on construction contracting and litigation, and dispute resolution. Wearen assists clients with construction and related real estate needs, minimizing exposure by helping them navigate design, construction and related contracts and various project delivery options.