Using the mechanics lien process is a great way for subcontractors to secure their right to payment on a construction project. Emphasis on the term “process,” as there are a number of steps and requirements that must be met. In Iowa, this can potentially include a Notice of Commencement, a preliminary notice, and a properly filed lien claim. But even when all these steps are followed, there’s another factor to consider: priority.
A recent Iowa Court of Appeals case highlights some of the challenges that subcontractors can face when looking to enforce their lien claims.
Iowa Notice of Commencement requirements
An Iowa Notice of Commencement is required on all residential projects where the GC or the owner-builder plans to hire a subcontractor. Typically, this is filed by the general contractor or the owner-builder within 10 days of commencement of the work on the property. This is an important step in the process for subcontractors because a preliminary notice can’t be filed without a NOC filed, and more importantly, neither can a mechanics lien.
So what happens if a GC or owner-builder fails to file a NOC? Under Iowa Code §572.13A(2):
“(2) If a general contractor or owner-builder fails to post a 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…”
This is super-helpful for subcontractors looking to secure their lien rights. But things can get complicated when subs filed their own Notices of Commencement, as it did in a recent Iowa Court of Appeals case.
The case in question is Borst Brothers Construction, Inc. v. Finance of America Commercial, Inc.
Competing security interests on an Iowa residential property
- Lender: Finance America Commercial, Inc. (FAC)
- Owner-Builder: Thomas Dostal Developers, Inc. (Dostal)
- Represented by: S. P. DeVolder of The Devolder Law Firm, PLLC
- Subontractor (1): Borst Brothers Construction, Inc. (Borst)
- Subcontractor (2): Kelly Concrete Co. (Kelly)
Here’s what happened. Dostal was an owner/builder on a residential project and failed to file a Notice of Commencement. The project ended up going south, and there were a number of competing interests in the property. Dostal had defaulted on their loans, and at least two subcontractors had lien claims filed against the property. That’s when things got messy.
Since the timelines can get a little complicated in this case, I’ve broken down the relevant facts/dates into three separate sections. Then we’ll get to the good stuff.
1. FAC’s mortgages
To fund the project, Dostal obtained 5 separate commercial loans from FAC. Once the agreements were executed, FAC recorded the mortgages on November 13, 2017.
2. Borst’s mechanics liens
Borst was hired by Dostal to perform work on the project, and their first day on the project was early July 2017, and they wrapped up their work in December of the same year. On February 2, 2018, Borst filed a Notice of Commencement and a claim of lien for a little over $143,000 covering five separate lots. And on November 8, 2018, a preliminary notice was filed.
Kelly’s mechanics liens
Dostal had also hired Kelly to provide concrete work on the project. Kelly performed work on the project between September 2017 and January 2018. On February 1, 2018, Kelly had posted the trifecta onto the Iowa MNLR, a Notice of Commencement, a preliminary notice, and a mechanics lien claim (well… technically five for each separate lot) totaling roughly $39,000.
Mortgagee challenges lien claims and priority
At trial, the court declared that the mortgages and the lien claims filed by Kelly and Borst were all valid. Kelly’s liens were granted priority over Borst’s claims, and both subcontractor lien claims were given priority over FAC’s mortgages. Obviously, FAC was none too pleased with this result, and an appeal ensued.
Subcontractor notices of commencement are not subject to the 10-day deadline
FAC first argued that since neither Borst nor Kelly had filed a NOC within 10 days of beginning work on the project. Thus, by filing the notices well after the 10-day deadline, both Borst and Kelly were prohibited from perfecting a mechanics lien.
The court disagreed with this argument. The 10-day deadline under §572.13A applies to general contractors and owner-builders. If not, the statute allows a subcontractor to post one.
The court went on to state:
“A subcontractor would have every incentive to do so because the posting is a prerequisite to its posting of a preliminary notice and, critically, the posting of a preliminary notice is a prerequisite to enforcement of a mechanics lien.”
In fact, because the deadline for GCs/owner-builders is 10 days, a subcontractor wouldn’t know if the NOC had been properly filed until at least 11 days after the commencement of work.
Thus, the 10-day NOC deadline was not applicable to subcontractors.
Preliminary notice only needs to be filed before the GC is paid in full
As for the preliminary notices (or Notice of Lien Rights), there is no specific deadline to file these notices. Rather, it merely needs to be filed before the balance due is paid to the general contractor. Since Dostal was acting as an owner-builder, this presents a unique circumstance: How does one pay themselves?
Well, according to the district court, and affirmed by the appeals court, due to the fact that Dostal had yet to sell the lots at issue, the preliminary notices were posted before the balance was due. Therefore, the preliminary notices were timely filed.
Liens have priority if the work commenced prior to the mortgages being filed
Lastly, FAC challenged the decision to prioritize both Borst’s and Kelly’s lien claims over their mortgages. The mortgages were recorded in November of 2017, while each NOC wasn’t recorded until early 2018.
Under Iowa Code §572.18, mechanics liens are given priority over other encumbrances if the work that forms the basis of the claim was commenced prior to the competing interest. Or, to put it another way, mechanics liens in Iowa relate back to the date the work began, not the date the claim was filed.
Borst began work in July of 2017, while Kelly started in September of the same year, prior to the recording of FAC’s mortgages. Accordingly, the mechanics lien claims were given proper priority over the mortgages.
Furthermore, the appeals court also affirmed the lower court’s determination that Kelly’s claims took priority over Borst’s claims. As between competing mechanics lien claims, priority turns on when the mechanics lien was actually filed, and since Kelly’s claims were recorded one day before Borst had filed their claim, they were properly classified as having superior priority over Borst’s claim.
Interestingly enough, there’s a bit of a gap in the court’s reasoning and ultimate decision.
The Iowa NOC statute states that “[a] notice of commencement of work is effective only as to labor, service, equipment, or material furnished to the property subsequent to the posting of the notice of commencement of work” [emphasis added]. This seemingly undermines the validity of the subs’ claims. However, neither the appeal court opinion nor the district court opinion touches on this.
The purpose of the NOC requirement in Iowa is to ensure that the owner is aware of any potential subcontractors working on their property and require them to provide notice in order to be entitled to lien rights. It could be due to the fact that the subs were the ones who filed NOCs, or maybe because this was an owner-builder situation, and the owner was technically already aware of the claimants on the project. It’s unclear.
However, there’s still one more step up the appeals chain for the courts to clarify this. We’ll keep an eye on this case, for any further developments.
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