This blog is from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction attorney serving clients in Florida. In this blog we will discuss reasonable assurances and stopping work in the Tennessee Prompt Payment Act
This blog ‘Other Rights: The TN Prompt Payment Act – Reasonable Assurances and Stopping Work’ is part ten and the last in our ten-part series on Tennessee lien laws where we will give the basics of what the lien law structure looks like in Tennessee, understand it a little bit, understand some of the pitfalls, and some of the things that you need to be aware of.
Part 5: Bonding a Lien in TN
Part 8: Can You Lien for Tenant Work in TN?
Part 10: Other Rights: The TN Prompt Payment Act – Reasonable Assurances and Stopping Work
Recap: Tennessee Lien Law Basics
Now we will have a quick summary of there we have been in the ten-part series. What does the Tennessee lien law look like? Generally speaking, a lot of things have been discussed.
a. Who has lien rights?
In Tennessee, prime contractors and remote contractors are the two divisions for the lien law. They have lien rights.
b. For what work are lien rights valid?
The work which can be liened is really anything that is improving the property itself.
c. On what property are lien rights valid?
The property can be a simple interest therein, it can be a leasehold interest, or it could even be a common interest under the horizontal property regime.
d. For how much are lien rights valid?
You can lien the contract price and extras, but you cannot lien for interest and construction attorney’s fees.
So big picture, that is the lien law in Tennessee.
e. Steps for prime contractors and remote contractors to follow
For a prime contractor to perfect their lien rights, they have to file suit within one year. To protect their priority, they also need to record a Notice of Lien in the chain of title within 90 days of completion or abandonment.
For remote contractors there is an additional requirement and a little bit of a different timing sequence. First is the Notice of Nonpayment. It is a rolling requirement and has to be sent 90 days after the end of each month in which the services or work are performed.
Assuming you have preserved your rights, you have the Notice of Lien which has to be reported in the chain of title within 90 days of completion or abandonment. Unlike prime contractors, remote contractors have to do this. At the end, the remote contractor also has to perfect the lien by filing a lawsuit and issuing an attachment within 90 days of recording the Notice of Lien.
So that is the overview.
Tennessee Prompt Payment Act
Now, to close the series out, we will talk about the corollary act which would be the Tennessee Prompt Payment Act. As far as protecting payment rights, first, generally speaking, the Prompt Payment Act has a couple of tools and there were some amendments in 2020.
a. Retainage requirements
Historically, Tennessee has retainage requirements and that can be an entire article on its own. In general, retainage has to be deposited in the time it is withheld in an interest-bearing escrow account. And the failure to do so is subject to $300 a day.
b. Trust requirements
Then you have the trust requirement, meaning that as soon as money is committed and starts flowing through the process of lender to owner, owner to general contractor, or remote contractor to another remote contractor, the funds will be held in a trust. This makes sure it gets all the way down the line. That is useful in some payment situations.
c. Timing requirements
The Prompt Payment Act also has timing requirements as far as when payment is due. That said, it is subject to what is in the contract between the parties. So generally speaking, the contract is going to govern over the Prompt Payment Act. At least that is the general thought.
The Prompt Payment Act does allow contingent payment clauses, both pay-when-paid and pay-if-paid. So if those are in the contract, they are likely going to be enforceable in some form or fashion depending on exactly ow they are written.
Your teeth are pretty much limited.
But retainage has some pretty strong teeth. That is an animal of its own at $300 a day.
ii. Interest (minimal)
For the failure to pay contract balance, Tennessee used to have a minimal interest.
iii. Attorney’s fees but only if ‘non-prevailing party acted in bad faith’
Then you had the potential to collect attorney’s fees if payment is not being made in good faith or said differently, if the withholding is in bad faith. That is a pretty high standard and really hard to get to.
2020 Legislation – Payment Rights
As part of the 2020 legislation where the construction industry in Tennessee came together, one of the things that was fixed was teeth.
a. Increased interest
Now the Prompt Payment Act has 1.5% interest per month as the real teeth to encourage prompt payment and penalize bad behavior.
The construction attorney’s fees portion of that stays the same. You still have to have bad faith but the thought is the increased interest will encourage behavior you need.
b. New user-friendly demand form
It also added user-friendly, statutorily approved lien forms (see TCA 33-34-602(a)(5)). You will see some of these with SunRay as well. These are very useful to make sure that people in the industry can get those forms and sent out on file to preserve their lien rights without necessarily having to go to an attorney.
So the two big new aspects to the Prompt Payment Act that were added in 2020 that we are going to dive into in this article are the right to stop work and the demand for reasonable assurances. This article has the main highlights and the takeaways from those.
c. Right to stop work procedure
The stop work procedure is essentially codifying what was already there at common law and it is more of codifying a procedure and then a right. People have to be aware of this, and by this, it means there is not an absolute right to stop work unless there is a lack of response from the party whom you were owed money.
d. Demand for reasonable assurances
On the demand for reasonable assurances, it is an additional tool as the industry talked on how to develop the construction statutes and the problems. The real payment problems seem to stem more from construction projects, whereas the sole source of entities or project entities and the project financing dried up.
Because of that, one of the things that was explored was how to give prime contractors all the way through remote contractors some assurance that the money will be there at the end of the day or there is funding. It is part of that.
There is a new section of the statute on reasonable assurances and that will be discussed below.
The PPA Demand: TCA 66-34-602
We will now take a look at the old portion of the Tennessee Prompt Payment Act which is how to actually trigger it. The answer is that you trigger it with a demand letter. That letter can be sent by a number of means. The key is you just have to have written confirmation of delivery.
What that does is it starts a period in which the other party has to respond within 10 days stating, “adequate legal reasons.” That is the key to the Tennessee prompt pay act. Tennessee does not have case law saying what adequate legal reasons are.
Construction lawyers in Tennessee believe that is probably going to be interpreted as a material breach standard. It is open, it is questionable, but that is what is there in the statutes. So there is a demand, there is a form, and SunRay has it. You can send that demand triggering the 10-day response period.
If you do not get a response, a lack of response is a violation. If you get a response, then you have to just decide whether thar response “has adequate legal reasons” for the withholding.
That is where we are as far as the Prompt Payment Act demand, and nothing changed there in 2020.
The PPA Demand Form: TCA 66-34-602
What changed is this new inclusion of what a Prompt Payment Act command looks like. Again, SunRay has some versions of these as well. This makes it so that in theory, lienors do not need to go to a lawyer at the very front and protect that payment rights. That is always subject to the size of the lien and the complexity. But that is the idea behind the new form.
Stop Work Procedure: TCA 66-34-602
Now, on top of that, you have these new sections and the section (b), is the new section on the stop work procedure.
There is a separate section (b)(1) for payments to the prime, and (b)(2) for payments to the remote contract, and again, they key here is that this gives you a procedural mechanism to stop work. If the party above you has not made payment or furnished a response, it is triggered with your Prompt Payment Act notice. And then it is only triggered if you do not receive a response setting forth again.
The language “adequate legal reasons” in this section is really the trigger. Because of that, there is still some uncertainty in the industry. Again, what adequate legal reasons are and some apprehension about what a court is going to do with those words are what there is concern about. There is also concern that some claiming party may misinterpret the statute and go ahead and see it as a firm right to stop work, period.
That can lead to what we call the ‘nuclear situation’ in which claims, and damages get very big very quickly. So, we caution you, there is now this tool. But the tool is a tool to be used with care because it is still going to interpret the term “adequate legal reasons.”
That is where you are with the new tool.
Reasonable Assurance: TCA 66-34-603
The other new tool is reasonable assurance. The reasonable assurance tool is two bites of the apple. One is before anything starts, a prime contractor (not a remote contractor, a prime contractor) has the right to go in and request reasonable assurances from the owner.
This is to really make sure that everyone in the process is protected, not to bombard an owner who is trying to get financing with requests from every potential remote contractor on the project. Now they key for people that are reading this is that once you are in a project and you see there are payment issues. You will probably wonder whether it is a funding issue or whether it is something else.
You now have the tools regardless of your problem to send a new request for reasonable assurances. Now, the key to this one is that the second one actually has some more teeth.
The (a)(1) is really something to reference for a prime contractor when they want to get into an owner’s financing before inking a construction contract. The second (2), is really a tool to be used when payment becomes an issue.
Reasonable Assurance Form: TCA 66-34-603
Now, there is a new form for this reasonable assurance. We need to highlight the fact that this notice for reasonable assurance can expressly be sent with any of the other notices that were talked about.
The Notice of Nonpayment that was spoken about above, for remote contractors in the lien notice pursuant to that § 66-34-602 (the Prompt Payment Notice) or any other notice so it can be sent with a Notice of Lien itself if they are a remote contractor or a prime contractor is reporting and serving it on the owner or the prime contractor is applicable.
So it can be sent with anything else, and SunRay has a form as well. That will get you where you need to be as far as making sure you have triggered the request for reasonable assurances.
Reasonable Assurance: TCA 66-34-603
The teeth in this are similar to the Prompt Payment Act notice. The owner has 10 days to provide a response.
One explains what the terms of the financial arrangements are explaining the adequate legal reasons for the owner’s failure to make payment. So it is one of those two things. Usually, if funding is not a problem and it is truly a contractual dispute, you are going to get paid. If funding is a problem or they are having to refinance, which is essentially what is seen in a lot of cases when the industry met as far as being problem projects.
You are going to get some assurances back from the owner of the new financial conditions or potentially old. Once the owner does that, they are then locked into the situation. They cannot materially vary those financial terms until giving notice to all the primes and the remotes who have asked.
That is a leverage point for anybody that is owed money on a project. So these new reasonable assurances at least try to knock out the concept of whether money is available to be paid, setting aside if there is a contractual fight or arguments to be had about whether the money is due.