United States: New Construction Lien Legislation In Tennessee

Changes to Remedies in Lien Enforcement Actions

New legislation in Tennessee has limited the recovery of attorney's fees, expenses, and actual and liquidated damages in instances where a real property owner seeks to enforce a lien. Public Chapter 142, signed by Governor Lee and effective as of April 5, 2019, repealed Tennessee Code Annotated § 66-21-108. Section 108 provided that an owner who prevailed in an action challenging the validity of a lien was entitled to recover reasonable attorney's fees, costs incurred by the owner to challenge the validity of the lien, liquidated damages in an amount equal to ten percent of the fair market value of the property, but not to exceed $100,000, and any actual damages incurred by the owner.

The construction industry in Tennessee expressed serious concern based on the risk of liability for general contractors and their subcontractors in the case of any invalid mechanic's or materialmen's liens and lobbied for change. The Tennessee Bar Association also previously proposed an amendment to Section 108 to remove the threat of penalizing legitimate lienors for simply pursing their valid lien rights, but the legislation was Section was repealed completely.

Residential Contractors New Continuing Education Requirements

The General Assembly also created new legislation addressing contractor licensing classifications and requiring continuing education for residential contractors, which will be effective as of January 1, 2020. The new provisions to Tennessee Code Annotated § 62-6-112 require all general contractors engaged in residential construction who were licensed on or after January 1, 2009, to complete eight hours of continuing education every two years. The Tennessee Board for Licensing Contractors must approve the continuing education and offer both online and in person options. However, membership in certain trade associations can constitute four hours of continuing education annually.

Changes to Time for Notices of Nonpayment, Rights to Payment, and Retainage

Another critical construction bill to watch during the next legislative session is SB324. As introduced in January 2019, the bill seeks to amend multiple provisions of the Tennessee Code.

First, the bill seeks to amend Tennessee Code Annotated § 66-11-112(a) by increasing the time for "remote contractors" or subcontractors or others who furnish material, services, equipment or machinery on a project to record and enforce mechanic's and materialmen's liens from 90 days on the date the improvement is complete to no later than 12 months. The bill also seeks to increase the same length of time for "remote contractors" to serve notices of nonpayment on the owner and prime contractor. Rather than requiring a notice of nonpayment within 90 days of the last day of each month within which the work or labor was provided or supplies, materials, equipment, or machinery furnished, the proposed amendment seeks to allow the remote contractor a full twelve months from the last day of each month the work was performed to provide the requisite notice.

The bill also seeks to amend Tennessee Code § 66-34-103(b) which addresses retainage and would reduce the time owners have to release and pay all retainage for work completed from 90 days to 30 days after the owner receives the certificate of occupancy or the work is substantially complete. It would maintain the language requiring prime contractors to pay all retainage to any subcontractors within 10 days of receipt from the owner.

No More Pay-if-Paid Provisions?

Most importantly, SB324 seeks to prevent the commonly used "pay-if-paid" provisions in contracts between general contractors and their subcontractors. The proposed addition of a new section, Tennessee Code § 66-34-305, would effectively prohibit any condition precedent for payment clauses commonly used to require payment from the prime contractor to its subcontractors only if the prime contractor receives payment from the owner. It would also add Tennessee Code § 66-34-306 which would allow prime contractors and remote subcontractors to suspend performance of the work on a project without penalty until payment is received and entitle the contractor or subcontractor to its pro rata share of any interest provided for in Section 66-34-601. This language would only be applicable to contracts entered into after the effective date. This will be one to watch during the 2020 legislative session.

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