Tennessee Enacts New Construction Legislation in 2020

July 28, 2020
Firm Publication

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. Revisions to the PPA include:

  • The civil damages accrue from the date retained funds were first withheld until properly escrowed or paid.
  • The bankruptcy or insolvency of a party is not an excuse for failing to release sums allocated by, or provided or committed to, an owner (including retainage) when those sums otherwise become due (note the federal Bankruptcy Code might affect this).
  • The fines and damages do not apply to public entities, including the state, counties, municipalities, the University of Tennessee, and other departments, agencies, and subdivisions of the state, or banks and financial institutions.

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.

Contractors May Request Adequate Assurance of Owners’ Financial Arrangements

A new provision requires a project owner, upon written request from the contractor, to furnish reasonable evidence the owner has procured a loan or made financial arrangements sufficient to make payments under the contract. The contractor also may include the request with a notice under the PPA (discussed above), and there is a statutory form for the notice that can be used. If the owner responds with reasonable evidence of its financial arrangements, it may not materially vary those arrangements without prior notice to the contractor. The consequences of the owner’s failure to respond to the request are unclear.

Interest on Late Payments

If a written construction contract does not include an interest rate for late payments, the default rate is now 1.5% per month (18% per annum). This rate was previously determined using the formula for interest on judgments, which, as of this writing, was 5.25% per annum.

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).

Applicability of Construction Defect Notice Statute

Tennessee’s construction defect notice statute has detailed procedures to be followed in seeking to remedy defects on commercial projects. Revisions now provide that the requirements do not limit or replace any rights, obligations, or duties under a contract that provides for notice and opportunity to cure construction defects. Those contractual provisions take precedence and are in lieu of any obligations or rights provided under the statute.

Applicability of Construction Statute of Repose

Under Tennessee’s statutes of limitation and repose, “actions” to recover damages for deficiencies in the design and construction of improvements to real property generally must be brought within three years after the deficiency is discovered, but in no event later than four years after substantial completion. The four-year statute of repose, in addition to “actions,” now includes “arbitrations” and “other binding dispute resolution proceedings” to recover such damages, all of which must be brought within the required period. A similar change was not made to the three-year statute of limitations, which still applies only to “actions.”

Limitations of Liability Not Against Public Policy

A new provision states it is not against public policy for agreements related to the design or construction of improvements to real property to limit the liability of the person furnishing the labor, materials, or services to a reasonable monetary amount.

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.

If you have any questions about how this legislation will impact your company, please contact one of the authors or any member of the firm’s Construction Contracts & Litigation Practice Group.

The authors would like to thank summer associate Bruce Johnson for his contributions to this article. Bruce is a law student at Vanderbilt Law School and is not licensed to practice law.