Retainage Laws In Tennessee Are Revised

Thinking of Withholding Retainage? Tennessee Say Be Careful or Risk Penalties

Responding to complaints that retainage is being improperly withheld, deposited or released on Tennessee Projects, the legislature made sever amendments to retainage statutes.  These amendments went into effect on July 1, 2012 and include requirements for owners relating to notice.

Administrative Requirements
The amendments also add some new administrative requirements to the retainage escrow provisions. Retainage must be deposited into a separate, interest bearing, escrow account with a third party and the account “must be established upon the withholding of any retainage.” What this really means is that no retainage can be withheld unless and until a proper escrow account has been opened.

Notice Requirements
The withholding party also has an “affirmative duty” to provide written notice to the prime contractor that it has complied with the retainage escrow requirements that must include (1) identification of the financial institution with which the escrow account has been established, (2) the account number and (3) the amount of retained funds that are deposited in the account.

New Penalties
The maximum retainage that can be withheld on any project, public or private, is 5 percent of the contract amount. Retainage must be paid to the prime contractor within 90 days of completion. If the amount of the prime contract is $500,000 or more, the retainage must be “deposited in a separate, interest bearing, escrow account with a third party.” This escrow requirement is mandatory and may not be waived by contract.
Failure to comply with any of these requirements is currently a Class A misdemeanor, subject to consecutive fines of $3,000 for each day of noncompliance. Further, if the party withholding the retainage fails to properly deposit it into an escrow account, that party is responsible for paying an additional $300 per day to the contractor to whom the funds are owed.
Effective July 1, 2012, failure to comply with any of the foregoing requirements is a Class A misdemeanor, subject to fines of $3,000 for each day of noncompliance. Also, if the retainage is not in an escrow account, a fine of $300 per day is due to the contractor to whom the funds are due. The new statute also subjects the offending party to court-ordered “restitution” payable to the contractor. In determining the appropriate amount of restitution, the court is required to use the “formula” established in the criminal statute concerning restitution as a condition of probation. This leaves the determination to the discretion of the court, taking into consideration the “financial resources and future ability of the defendant to pay.”