Gov. Hochul Signs Bill Amending Retainage Provisions of the “Prompt Payment Act”

December 21, 2023

Governor Kathy Hochul recently signed into law a bill amending Sections 756-a and 756-c of the New York State Prompt Payment Act( N.Y. Gen. Bus. Law §756 (McKinney 2009)) governing payment and retainage provisions in certain New York construction contracts. The new law, effective as of November 17, 2023, applies to privately owned commercial construction projects with contract sums in excess of $150,000.00. It is intended both to limit the retainage project owners may hold during the performance of a qualifying project and to promote the prompt release and payment of retainage on these projects. The changes could have significant implications for owners of construction projects and for construction loan lenders and borrowers.

Specifically, the amendment permits contractors to apply for payment of owner-held retainage upon the contractor’s achieving the substantial completion requirements under the contract. The law previously only afforded contractors the right to seek payment for retainage upon completion all of the work under the contract.

The new law also prohibits project owners covered by the statute from withholding retainage in excess of five percent of the contract price, and likewise prohibits contractors and subcontractors from retaining anything in excess of that being held by the project owner. Formerly, owners were permitted to withhold a “reasonable” retainage which typically was ten percent.

Though both changes represent a significant departure from the former provisions of the Prompt Payment Act, these changes are potentially mitigated by portions of the law which remain unchanged.

As to retainage release, while contractors now have an ability to invoice for retainage upon substantial completion, owners continue to have no obligation under the Prompt Payment Act to release that retainage until thirty days after final approval of the work.

In regard to the five percent retainage limitation, it is notable that the provision of Section 756-a which expressly permits the terms of a construction contract to supersede certain provisions of Section 756 remains unchanged. There is arguably an opening for parties to agree to retainage limits otherwise in excess of the new statutory limitation. Of course, that argument has not yet been tested given the recency of the change in law, and owners, lenders and borrowers would be well-advised to consult with legal counsel in navigating these recent changes of law.

For more information on the issues in this alert, or other real estate or construction matters, please contact:

Brendan Schmitt at +1 212 592 1689 or [email protected]

© 2023 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.