Since 1988, Section 713.346, Florida Statutes, has provided relief for contractors or subcontractors who have been unpaid for more than 30 days where there is no legitimate dispute that the funds are owed. But effective July 1, 2021, the penalties for failing to timely make undisputed payments increased significantly, making the failure the “misapplication of construction funds,” and subjecting the guilty party to civil and criminal penalties. Click to learn more about this new statute.
The Existing Statute
By way of a brief background, the existing statute provided that “[a]ny person who receives a payment for constructing or altering permanent improvements to real property shall pay, in accordance with the contract terms, the undisputed contract obligations for labor, services, or materials provided on account of such improvements.” In essence, if a property owner receives a construction draw, or a higher tier contractor receives a payment, they have to pay the downstream parties in accordance with their contract. In the event the payment due date is less than 30 days after the payment is received, the downstream party must wait at least 30 days before invoking the statute.
Once that 30 days passes, the affected party can file a lawsuit under the statute, and on 15 days’ notice obtain an evidentiary hearing where the court will determine what amount is truly undisputed and order payment of that amount. If the funds are not paid pursuant to the court order, the affected party can garnish or attach assets pre-judgment, and exercise a host of other remedies typically not available until after litigation ends. The statute also awards attorneys’ fees to the prevailing party.
As you can guess, this is a powerful tool for contractors and subcontractors to allow them to quickly obtain relief when a property owner or upstream contractor is improperly withholding money. This scenario arises typically where a property owner is withholding a large payment over minor punch out work or where funds have been incorrectly used to pay other contractors.
The New Statute
Effective July 1, 2021, the new statute prohibits this conduct and increases the penalties for it. Section 713.346(1) is amended to add the following language “[a] person, firm, or corporation who knowingly and intentionally fails to make the payment required under this subsection commits a misapplication of construction funds, punishable as provided in s. 713.345.”
Under Section 713.345, Florida Statutes, misapplication of construction funds can be a first, second, or third degree felony, depending on the dollar amount. Misapplication of less than $1,000.00 is a third degree felony and misapplication of more than $100,000.00 is a first degree felony. Anything in between is a second degree felony. Further, the new law also amends section 713.345 to include the following language: “[i]f a contractor, subcontractor, sub-subcontractor, or other person who is licensed under chapter 489 is convicted of misapplication of construction funds under this section, the licensee is subject to discipline under s. 489.129(1)(r).”
Section 489.129(1)(r), Florida Statutes is also a new statute and requires that any person licensed under Chapter 489, Florida Statutes, who is convicted of misapplication of construction funds under section 713.245, Florida Statutes, must have any licenses issued to them suspended for a minimum of one year from the conviction, along with any other penalties the DBPR chooses to impose.
For those of you scoring at home, this new statute makes the improper withholding of undisputed construction payment funds a felony and, if committed by a contractor, requires a one year suspension of the license. Further, under section 715.12, Florida Statutes, the interest due on these late payments can be as high as the statutory rate in Florida set by law, plus 12%. This would put the typical rate somewhere between 16% and 18%.
These are incredibly steep penalties, so it is important to ensure that if you are going to withhold payment of some or all of another’s money, that you do so for a valid reason.
Takeaways for Contractors
While contractors need to be careful when they decide to withhold funds from a subcontractor or material supplier due to these new penalties, it is important to note that this new statute also applies to property owners. So where a property owner is improperly withholding some or all of a payment, contractors should feel confident invoking this statute. Further, contractors should consider revising their contracts to limit the circumstances that could constitute a valid dispute. This will broaden the application of section 713.346, Florida Statutes, and provide a powerful tool to recover unpaid construction funds. As always, feel free to reach out with any questions or for assistance with your contract.