For any “prime” or general construction contract that is $500,000 or greater and all subcontracts thereunder (regardless of amount), Tennessee law requires that the owner (and by implication, any construction lender funding construction draws and any general contractor responsible for payment to subcontractors) deposit the amount of any retainage in a third-party, interest-bearing escrow account with a financial institution at the time the retainage is withheld. (TN Code § 66-34-104.)

The party responsible for depositing the fund must provide written notice to any prime contractor of its compliance with such statute, including identifying the name of the escrow holder, the account number, and the amount of funds retained in such account, and upon the satisfactory completion of the contract, the party owing the retainage must provide an executed release.

Compliance with these statutory requirements cannot be waived by contract or course of dealing. Failure to comply will result in a $300 per day penalty for each day that the retained funds are not deposited into the required escrow account and will constitute a Class A misdemeanor.