November 18, 2019

November 18, 2019

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Gov. Pritzker Signs Retainage Cap Into Law – Immediately Impacts Construction Contract and Loan Negotiations

On August 20, 2019, Governor Pritzker signed SB1636 into law, making a significant and immediately effective amendment to the Illinois Contractor Prompt Payment Act, 815 ILCS 603 (the “Act”).  This amendment impacts all contracts not in effect as of August 19, 2019, and all ongoing contract negotiations involving construction contracts with retainage provisions.  The newly enacted law adds Section 20 to the Act, and codifies a 10% cap to the amount of retainage that may be withheld on all private construction contracts in the state of Illinois.  Section 20 also requires that once a construction contract is 50% complete, the maximum retainage that may be withheld on the remainder of the project is 5% of the remaining payments to be made under the contract.  Of note, unlike other states, this amendment affects ALL private construction contracts in Illinois, regardless of size or cost.

While SB1636 did not amend the Act further, Section 20 creates a host of new obligations and questions for contractors, subcontractors, lenders, developers, and owners.  In particular, this statutory change will immediately impact construction loan negotiations between owners and lenders.  Section 20 limits the amount of retainage that may be withheld by a contracting owner, but does not appear to affect what terms a lender may require for a construction loan.  Owners need to take this new retainage requirement into account during their negotiations with their lenders in order to ensure the owner’s project cash flow requirements (particularly after 50% completion) will not be affected by this change in the law.  The wording of the Act also may leave open the question of whether at 50% completion retainage is reduced to 5% of the contract value or 5% of the remaining value of the “subsequent payments” to be made.  The question remains of whether this provision and/or the Act itself, can be waived in Illinois.  As of this alert, Illinois appellate courts have not addressed whether the provisions of the Act or the Act itself are waivable via contract.  

While a significant change to Illinois construction law, such retainage caps are becoming increasingly common throughout the United States.  Twenty states have capped private contract retainage at 10% or less via statute, with New Mexico prohibiting retainage entirely.  The enactment of SB1636 comes almost a year to the day of then-Governor Rauner’s veto of SB3052 on August 24, 2018, which proposed the same amendment to the Act.

© 2019 Much Shelist, P.C.

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David F. Nightingale Principal Much Chicago CONSTRUCTION CONTRACTS CONSTRUCTION DISPUTES CONSTRUCTION INDUSTRY MERGERS & ACQUISITIONS CONSTRUCTION LENDING & DEVELOPMENT LABOR & EMPLOYMENT ISSUES IN CONSTRUCTION
Principal

David is an experienced trial and transactional attorney who represents clients in a broad array of construction, real estate, and contractual matters. David advises developers, investors, owners, tenants, investment funds, contractors and subcontractors, privately held and family-owned companies, and corporations throughout the bid and contract process and provides his clients with strategic advice on ways to minimize cost and risk throughout the construction project lifecycle.

Clients rely on David to resolve construction, lien, contract, surety bond, employment, and collection...

312-521-2620
Dean W. Farley Special Counsel CONSTRUCTION LAW LITIGATION & DISPUTE RESOLUTION REAL ESTATE LAW
Special Counsel

Dean is an experienced transactional attorney and litigator who helps a broad array of construction, real estate, manufacturing and other companies identify, pursue and achieve their strategic business objectives. He advises developers, investors, owners, tenants, investment funds, contractors and subcontractors, privately held and family-owned companies, and mid-sized corporations on matters ranging from construction financing, contracts and agreements to lease negotiations and real property acquisitions and sales. A skilled trial and appellate attorney, he also represents parties in American Arbitration Association proceedings, as well as mediation and settlement negotiations.

“Law is my final career — but my area of focus is a direct result of my experience in the construction industry. Prior to becoming a lawyer, I co-owned a company specializing in HVAC systems for commercial, industrial and multi-unit residential buildings. Over the course of almost a decade in that business, I gained extensive industry insight and a passion for the world of construction law.”

In his transactional practice, Dean has drafted, reviewed and modified a wide range of entity- and fund-formation, acquisition, financing and related documents involving commercial and multifamily properties ranging in value from $500,000 to $30 million. He regularly drafts and edits commercial leases and contracts, including settlement agreements, indemnifications and Uniform Commercial Code (UCC) filings, as well as construction documents in accordance with AIA standards. Dean also manages eminent domain transactions on behalf of municipal entities.

Dean has extensive experience managing and handling complex litigation, including disputes involving real estate fraud, foreclosures, mechanics’ liens, restructurings and workouts of multi-property funds and related special purpose entities, lease terminations and evictions. He guides clients at every step, from conducting initial discovery, taking depositions, preparing witnesses and drafting pre-trial motions to presenting arguments at trial and filing appellate briefs.

312-521-2618
Scott R. Fradin, Construction Attorney, Much Shelist Law firm
Principal

Scott serves as co-chair of the firm’s Construction Law group. A highly experienced attorney and licensed architect who practiced in the field for several years, Scott works closely with individual and institutional owners, developers, builders, architects, engineers, contractors and specialty subcontractors to guide projects from inception through completion and dispute resolution. His legal practice is international; he has advised clients on construction projects in almost every U.S. state and in Canada, Chile, China, Israel, Mexico, Poland and Turkey, among other...

312-521-2619
Josh M. Leavitt, Construction Law Attorney, Much Shelist, Law Firm
Principal

Josh Leavitt concentrates his practice in construction law, including disputes, contracts, and counseling on industry risk. He has over 25 years of construction law experience, and is an elected Fellow of the American College of Construction Lawyers. 

312-521-2627
Daniel R. Bronson Principal Much REAL ESTATE DEVELOPMENT REAL ESTATE PURCHASES & SALES COMMERCIAL REAL ESTATE LEASING REAL ESTATE PRIVATE PLACEMENTS CONDOMINIUM DEVELOPMENT & CONVERSIONS CONDOMINIUM DECONVERSIONS CONSTRUCTION CONTRACTS REAL ESTATE FINANCE OPPORTUNITY ZONES AND QUALIFIED OPPORTUNITY FUNDS
Principal

Dan has more than 30 years of experience representing property owners and developers in a variety of real estate investment activities and construction projects. He counsels developers in all stages of real estate projects, from acquisition to completion, including raising capital, structuring multi-tiered joint ventures, negotiating construction loans, preparing construction documents and providing strategic advice throughout the life of a venture. Dan represents buyers and sellers in the sale of hotels, nursing homes, shopping centers, office buildings, apartment buildings, student...

312-521-2663