Without much publicity, back in November 2023 New York State Governor Kathy Hochul signed Senate Bill S3539, which amended two sub-sections of New York General Business Law (“GBL”) Section 756, which is sometimes referred to as the Prompt Payment Act. The legislative intent was to improve cash flow to contractors by reducing withheld retainage. The new law contained in GBL Section 756-c applies to most construction contracts and caps the amount of retainage that can be held from general contractors and subcontractors to five percent (5%) of the contract sum. The law applies to contracts entered into after November 17, 2023, for private (non-public) construction projects with a contract sum in excess of $150,000. The law does not apply to: (i) residential construction projects for one, two, or three family residential dwellings; (ii) residential subdivisions with under 100 one- or two-family homes; (iii) any residential construction project of 4,500 square feet or less; and (iv) certain affordable housing projects with less than 75 units.
Previously New York State required only that the withheld retainage amount be “reasonable.” Most commercial construction contracts typically required retainage of ten percent (10%) resulting in progress payments of 90% throughout the life of the contract. In addition to the new 5% statutory limit, it remains clear that no contractor or subcontractor can withhold any amount in excess of the actual amount retained by the owner. The legislation no longer permits the parties to require a percentage higher than a total of 5% in their negotiated contract documents.
The legislation does not seem to prohibit an owner from holding increased retainage for a portion of the job and lowering the required retainage later in the job - provided that the total retainage withheld does not exceed the limit of 5% of the total contract sum. For example, it appears that owners could hold 10% retainage until the contract work is 50% complete, and then reduce the retainage withheld thereafter to zero.
Violating owners, contractors, and subcontractors may be subject to the remedies set forth in the law, including potential suspension of work and interest penalties of 12% per annum from the date retainage was due if they fail to release the proper amount of retainage.
The second amended sub-section affected by the new law, GBL Section 756-a, provides that a contractor can submit a final invoice for retainage upon reaching “substantial completion” as defined in the contract (rather than upon performance of all obligations under the contract). However, GBL still requires that retainage must be released by the owner to the contractor no later than thirty (30) days after “final approval of the work under the contract.” There may be a need for further clarification to avoid confusion about the terms of the new legislation relating to the timing of such releases
For commercial construction lenders, it is important to note that the new law does not limit to 5% the amount of retainage withheld under a lender’s building loan contract with their borrower/contractor. However, contractors tend to structure their subcontracts to match the progress payments they will be receiving from their lenders. If a commercial lender continues to require 10% retainage under a building loan contract when the contractor is permitted to withhold only 5% from its subcontractors, then the contractor will almost certainly request their lender to reduce retainage to 5% to eliminate the “shortfall” of funds for the contractor to pay its subs.
If you have any questions regarding the retainage changes or any Commercial Lending law question, please contact Kate Karl at 585-258-2883 or kkarl@underbergkessler.com.