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The Rules Regarding Retainage in Escrow Accounts in Tennessee

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It’s important for contractors working in the State of Tennessee to consider the applicable retainage laws whenever being contracted for public or private projects. The strict retainage requirements in Tennessee represent a potential point of conflict in the building timeline. Therefore, when an owner, general contractor, or subcontractor withholds a portion of the contract price in retainage, they must closely follow the specifications in § 66-34-104 of the Tennessee Code.

According to § 66-34-104 of the Tennessee Code: “Whenever, in any contract for the improvement of real property, a certain amount or percentage of the contract price is retained, that retained amount shall be deposited in a separate, interest bearing, escrow account with a third party.”

In this article, the Nashville construction litigation attorneys at Cotney Construction Law will discuss the rules regarding retainage in escrow accounts in Tennessee. For more information on retainage rules in the Volunteer State, read our previous article “Examining the Penalties for Withholding Retainage in Tennessee” or contact a Nashville construction litigation attorney.

Utilizing an Escrow Account

An escrow account acts as a third party entity that holds and distributes funds according to the terms of the contract established between a general contractor and owner. The escrow account closely follows these terms and lacks the rationale to prohibit or distribute funds beyond the scope of the contract. As a result, the escrow account acts as another mechanism for facilitating the safe trade-off of services for compensation. Once the contractor substantially or fully completes the project and receives a written release from the owner, the escrow account agent will deposit the retainage funds into the contractor’s account along with any accumulated interest, thereby making the funds the “sole and separate property” of the contractor.

When Owners (or Contractors) Don’t Pay

If the owner fails to release the funds from the escrow account, the contractor may seek legal remedy at no risk to the escrow agent to obtain the retainage. Remember, along with the owner, you and any of your subcontractors who have employed sub-subcontractors are responsible for distributing payments in a timely fashion to the relevant parties in accordance with the Tennessee Code. Additionally, any claims, demands, disputes, or controversies related to the disbursement of funds from the escrow account can be settled through arbitration if agreed upon in the contract. Seeking a resolution through arbitration must be conducted according to Tennessee Uniform Arbitration Act, compiled in Title 4, Chapter 5, Part 3, or the Federal Arbitration Act, 9 U.S.C. § 1, et seq.

Other Important Considerations from § 66-34-104

In addition to the information discussed above, contractors should also be cognizant of the following rules:

  • In contracts with public entities, including all government agencies and the University of Tennessee, interest accumulated on retainage must be paid at the same rate as funds in the local government investment pool (§ 9-4-704) for the entire duration of the contract.
  • § 66-34-104 applies to all prime contracts for the improvement of real property valued at $500,000 or more. It also applies to any subcontracts related to the project regardless of their value.
  • The rules detailed in this article from § 66-34-104 are mandatory contractual provisions and cannot be waived.

If you would like to speak with one of our Nashville construction litigation attorneys, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.