In November 2023, New York Governor Kathy Hochul signed SB 3539 into law, amending certain parts of Section 756 of the New York General Business Law, commonly known as the Prompt Payment Act (the “Act”). Among other provisions, the Act now significantly restricts the amounts owners can hold back from payments to contractors for services performed (so called “retainage”). Limiting retainage is likely to reduce the leverage that property owners previously had in working with contractors, and also may reduce the financial inventive for contractors to complete work in a timely and satisfactory manner.
BACKGROUND
The construction industry has long used retainage, which allows owners, as well as contractors working with subcontractors, to hold back portions of a contractor's payments until a project reaches certain levels of completion, often as determined by the property owner's architect and as agreed upon by the contractor. The use of retainage is intended to incentivize a contractor to finish work in a timely manner and in accordance with the requirements of the property owner. When first introduced by New York in 2003, one of the aims of the Act was to provide guidelines for owners, contractors and subcontractors around the practice of retainage in relation to all private construction projects in New York with a contract sum of $150,000 or more.
CHANGES TO THE ACT
The recent amendment brings a considerable change to Section 756-c of the Act. Whereas Section 756-c before had allowed a party to retain a “reasonable amount” of the contract sum, Section 756-c now caps the actual amount of retainage that may be withheld to no more than five percent (5%) of the contract sum. This marks a dramatic shift from the prior language of the Act and will nullify the standard industry practice of retaining 10%.
The 5% retention limit not only applies to owners but also to general contractors and subcontractors alike with respect to the retainage they apply to subcontractors and sub-subcontractors, and adds that “in no case shall retainage exceed the actual percentage retained by the owner.” Thus, this limits contractors' ability to retain from downstream parties in situations where the owner withholds less than 5%. For example, under the statute, an owner may retain 4% from a contractor and that same contractor may then turn around and retain from a sub-contractor, at most, 4% of the contract sum.
While the Act will have an impact on current industry practices, it is worth noting that the new language of Section 756-c measures the 5% retainage cap against the total “contract sum.” As such, there is some ambiguity in the current law as drafted regarding how the retainage may be allocated in a construction project. For example, it is unclear whether an owner could impose a higher retainage on portions of a contract while keeping the overall retainage within the new 5% cap in the aggregate.
In addition, Section 756-a of the Act has been amended. Prior to this new amendment, Section 756-a of the Act permitted a contractor to submit a final invoice for payment in full only “upon the performance of all the contractor's obligations under the contract.” Now under Section 756-a, contractors may submit their final invoice to an owner upon “substantial completion.” The Act leaves the definition of “substantial completion” to be defined by the parties to the construction contract.
Although contractors may now submit their final invoice at an earlier stage in the process, Section 765-c still allows for a contract to require “final completion” as a condition to the release of all retainage. Further, the Act still requires withholding parties (whether an owner, contractor or subcontractor) to release retainage to the relevant party within thirty (30) days. If a withholding party fails to comply with the statute, the withholding party may be responsible for the payment of interest at the rate of 1% per month on the date retention was “due and owing.” Thus, to avoid any potential disputes and project delays, it is now even more important for owners to have their contracts drafted precisely to list out the requirements a contractor must meet for final approval and payment.
CONCLUSION
Due to the changes outlined above and the ambiguities present in the new law, it is critical for clients to review their contracts to ensure compliance with the Act, and recommended that they seek the advice of counsel when drafting contracts containing provisions concerning these issues. The Real Estate team at KKWC has years of experience negotiating sophisticated construction contracts in New York and possesses the depth of market knowledge needed to help owners and developers navigate the evolving real estate landscape.
Originally published 12 February 2024
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