Rochelle, McCulloch & Aulds, PLLC
Rochelle, McCulloch & Aulds, PLLC

Don’t Sleep on Your Retainage Escrow Account Rights

Don’t Sleep on Your Retainage Escrow Account Rights

Most contractors are aware that the retainage provisions of the Tennessee Prompt Pay Act, T.C.A. §§ 66-34-101 et seq. (the “Act”), limit the maximum retainage withheld in any public or private construction contract to five percent (5%). However, it might surprise some contractors that T.C.A. § 66-34-104 of the Act requires that, for “all prime contracts and all subcontracts thereunder for the improvement of real property when the contract amount of such prime contract is five hundred thousand dollars ($500,000) or greater, notwithstanding the amount of such subcontracts,” all retainage must be deposited “in a separate, interest-bearing, escrow account with a third party which must be established upon the withholding of any retainage.” As such, when the total amount of the prime contract is $500,000 or greater, regardless of the total amount of any subcontract thereunder, these escrow account requirements apply.

Section 66-34-104 provides that “the party with the responsibility for depositing the retained amount in a separate, interest-bearing, escrow account with a third party shall have the affirmative duty to provide written notice that it has complied with the requirements of this section to any prime contractor upon withholding the amount of retained funds from each and every application for payment, including:

(1) Identification of the name of the financial institution with whom the escrow account has been established;
(2) Account number; and
(3) Amount of retained funds that are deposited in the escrow account with the third party.”

Section 66-34-104 also provides that, “[u]pon satisfactory completion of the contract, to be evidenced by a written release by the owner or prime contractor owing the retainage, all funds accumulated in the escrow account together with all interest on the account shall be paid immediately to the prime contractor or remote contractor to whom the funds and interest are owed.”

The penalties for not complying with Section 66-34-104 are robust as it provides that, “[i]n the event that the party withholding the retained funds fails to deposit the funds into an escrow account as provided herein, such party shall be responsible for paying the owner of the retained funds an additional three hundred dollar ($300) penalty per day for each and every day that such retained funds are not deposited in to such escrow account.” Furthermore, § 66-34-104 provides that “[f]ailure to deposit the retained funds into an escrow account as provided herein, within seven (7) days’ receipt of written notice regarding such failure, is a Class A misdemeanor.”

Importantly, § 66-34-104 provides that “[c]ompliance with [§ 66-34-104] shall be mandatory, and may not be waived by contract.” Section 66-34-104 also provides that it applies to all construction contracts with the State of Tennessee or any department, board or agency of the State of Tennessee, although there are slightly different requirements for the escrow accounts established by these public entities. Notwithstanding any of the above escrow account requirements, however, § 66-34-104 provides that any dispute over unpaid retainage is still “subject to rights of the person withholding the retainage in the event the prime contractor or remote contractor otherwise entitled to the funds defaults on or does not complete its contract.”

As a lawyer who has represented many contractors, large and small, in construction-related claims, I can assure you that collection of unpaid retainage is never an absolute, but it is substantially more likely to occur when it is held by a financial institution rather than an owner or general contractor, particularly when the owner or general contractor is experiencing financial distress. It is critical, therefore, that contractors take the proper steps immediately after entering a construction contract applicable to § 66-34-104 to inquire and obtain written assurance that the owner or prime contractor is complying with the escrow account requirements as provided therein regardless of any contract language to the contrary. If you have any questions regarding compliance with § 66-34-104 or any other construction contract-related matters, please give me a call.

— T. Price Thompson III, Construction Attorney

This entry was posted on Monday, April 10th, 2017 at 2:12 pm and is filed under Business/Commercial, Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.



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