Iowa Supreme Court Issues Opinion RE: Subcontractor Preliminary Notices

On June 17, 2022, the Iowa Supreme Court rendered a decision in the Borst Brothers Const. v. Finance of America case involving a mechanic’s lien, which addressed one aspect of the pre-lien notice requirement for Iowa subcontractors on residential projects. As detailed below, the Iowa Supreme Court held that the 10-day deadline for posting of a Commencement of Work Notice on the MNLR does not apply to subcontractors when they are forced to file such notice on behalf of a general contractor or owner-builder who has failed to do so.

Background on Iowa Law

As addressed in prior blog posts dated April 30, 3012, and April 7. 2017,and Iowa lien law was substantially changed by a law that was signed in 2012, effective as of January 1, 2013. Among the law’s major changes, the state of Iowa implemented a mandatory, centralized online filing system called the Mechanic’s Lien and Notice Registry (MNLR), for all pre-lien notices and mechanic’s liens.

As a reminder, under that new Iowa law effective January 1, 2013:

1. general contractors and owner-builders on residential projects are required to post a "Commencement of Work Notice" MNLR (and provide an owner notice) within 10 days of the commencement of the construction, and
2. subcontractors and suppliers are required to file a post a "Preliminary Notice" on the MNLR, on every residential project to preserve their lien right. If one does not timely file the applicable notice in the MNLR regarding a residential project, such person or entity generally loses the right to enforce a mechanic’s lien in the future.

While there is a 10-day deadline for the filing of Commencement of Work Notices, there is no exact deadline for Preliminary Notices. Instead, the Iowa Code provides as follows:

A subcontractor shall post a preliminary notice to the mechanics’ notice and lien registry internet site. A preliminary notice posted before the balance due is paid to the general contractor or the owner-builder is effective as to all labor, service, equipment and material furnished to the property by the subcontractor. 572.13B(1).

The Iowa Code also provides as follows:

A mechanic’s lien perfected under this chapter is enforceable only to the extent of the balance due the general contractor or the owner-builder at the time of the posting of the preliminary notice specified in subsection 1 [i.e., 572.13B(1)]. 572.13B(3)(a).

Mechanically speaking, on the MNLR system, before a Preliminary Notice can be posted, there must be a Commencement of Work Notice on file for the project. This is expressly set forth in the Code as follows:

If a general contractor or owner-builder fails to post the required notice of commencement of work to the mechanics’ notice and lien registry internet site pursuant to subsection 1, within ten days of commencement of the work on the property, a subcontractor may post the notice in conjunction with the posting of the required preliminary notice pursuant to section 572.13B. A notice of commencement of work must be posted to the mechanics’ notice and lien registry internet site before preliminary notices pursuant to section 572.13B may be posted. 572.13A(2).

Thus, when a subcontractor attempts to a post a Preliminary Notice, but there is no Commencement of Work Notice posted, the subcontractor must then post the Commencement of Work Notice on the general contractor’s (or owner-builder’s) behalf.

Most legal practitioners, including myself, have interpreted the statute to mean that in the situation of a subcontractor who has to file a Commencement of Work Notice in order to file its own preliminary notice, such Commencement of Work Notice does not need to be filed within 10 days. In particular, the contrary interpretation would mean that subcontractors are denied the right to even post a Preliminary Notice whenever a general contractor (or owner-builder) chooses not to timely file a Commencement of Work Notice, as most subcontractors (other than perhaps the excavation and foundation subcontractors) are not even aware of or working on the job at the start the general contractor’s work, but are instead hired and on the job at a later time. In any event, there was a lack of 100 percent clarity in the statute in this regard. That has been resolved by the Iowa Supreme Court with this decision.

Specifics of the Case and Supreme Court Holdings

In this case, an owner-builder did not post Commencement of Work Notices on the registry for five residential lots that it was developing. Accordingly, two subcontractors did so, several months after the construction work had begun. When the project went into default, a priority dispute arose between these two subcontractors and the commercial lender for the project. The commercial lender claimed that its previously recorded mortgages had priority; the subcontractors argued that their mechanics’ liens came first.

The district court found in favor of the subcontractors, as did the court of appeals. Thereafter, the Iowa Supreme Court heard the case.

The Court’s opinion contained two major holdings. First, the Court held:

We also conclude that the ten-day deadline for posting the notice of commencement to the registry applies to general contractors and owner-builders but not to subcontractors.

While the statutory language in isolation is potentially ambiguous, context provides clarity. It would not make sense to allow subcontractors to step in only if the general contractor or owner-builder fails to post the notice of commencement within ten days, while requiring subcontractors to meet the same 10-day deadline. Meeting a missed deadline is impossible.

This confirmation by the Supreme Court is good news for subcontractors.

Second, the Court also confirmed the Iowa law remains unchanged as far as priority rules, stating that “under current law, as under prior law, a construction lender that recorded its mortgage before a particular subcontractor began its work gets priority over that subcontractor’s mechanics’ lien.” In the case, the lender at issue had recorded its mortgage after Borst’s work, so Borst’s lien was found to be senior.

In this regard, the Court held as follows:

Chapter 572 allows mechanics’ liens to obtain priority over other types of liens if certain conditions are met. Section 572.18 describes these conditions as follows:

1. Mechanics’ liens posted by a general contractor or subcontractor within ninety days after the date on which the last of the material was furnished or the last of the claimant’s labor was performed and for which notices were properly posted to the mechanics’ notice and lien registry internet site pursuant to sections 572.13A and 572.13B shall be superior to all other liens which may attach to or upon a building or improvement and to the land upon which it is situated, except liens of record prior to the time of the original commencement of the claimant’s work or the claimant’s improvements, except as provided in subsection 2.
2. Construction mortgage liens shall be preferred to all mechanics’ liens of claimants who commenced their particular work or improvement subsequent to the date of the recording of the construction mortgage lien.

The first condition that Kelly and Borst had to satisfy to attain priority over other types of liens was to post their mechanics’ liens “within ninety days after the date on which the last of the material was furnished or the last of the claimant’s labor was performed.” Iowa Code § 572.18(1). . . .

Next, Borst’s and Kelly’s notices of commencement and preliminary notices had to be “properly posted” to the MNLR website. Id. We have already determined that this occurred.

Finally, the subcontractors had to commence their work on the properties before FAC recorded its mortgages to get priority over FAC. . . . That being so, Borst’s and Kelly’s mechanics’ liens have priority over FAC’s inferior mortgages.

Again, this confirmation by the Supreme Court is good news for subcontractors.

If you have questions regarding subcontractor preliminary notices and pre-lien notice requirements for Iowa subcontractors, please contact Jodie McDougal at jmcdougal@fredlaw.com or 515.242.8971.