Mechanics lien rights on tenant improvements can be a touchy subject. These rights are treated differently from state to state. Based on a recent decision by the Supreme Court of Iowa, it’s a little bit clearer how Iowa will treat tenant improvements. Though, some questions remain.
Mechanics liens for tenant improvements, generally
While there’s no blanket rule for mechanics liens on tenant improvements, there are some general principles that apply in many states.
For one, a lien against the tenant‘s interest is often available. Meaning, a lien claimant could encumber the tenant’s lease rights or whatever other rights they have in the improvement – like where a building is owned separately from the land underneath it.
Another common idea is that when the owner forces, requires, or has intimate knowledge of the construction project, that owner’s interest may become lienable. But, in some states and some situations, unpaid contractors, subs, and suppliers who did work for a tenant might be up a creek (at least in terms of lien rights).
With these basic ideas in mind, let’s look at how Iowa handles mechanics lien rights against tenant improvements.
Further discussion on liens and tenant improvements:
Iowa mechanics liens for tenant improvements: The bottom line
The principles we’ll set out below come from a recent case – Winger Contracting Company v. Cargill, Inc. (thanks to Bloomberg for providing the text of the opinion). We’ll sort through that opinion below, but here’s the bottom line:
In Iowa, when work is done for a tenant, rather than for the owner, a lien claimant may file a lien against the tenant’s interest in the property in an attempt to recover payment. However, the claimant will generally not be entitled to claim a lien against the owner’s underlying property if the owner wasn’t a party to the original contract for work.
As we’ll discuss in the last section of this article – there may be an argument for lien claimants providing tenant work that actually improves the land, itself, of an owner. But that issue wasn’t specifically addressed in this opinion.
Background on the case
Before going too far, let’s set the stage. Cargill is the property owner here, and their lessee was a company called HFCA. HFCA hired contractors to put a building on Cargill’s property, and HFCA was going to maintain separate ownership of the building while paying rent to Cargill for using the land. At the end of the lease, which lasted 50 years, HFCA would maintain ownership of the building and HFCA was contractually required to remove it from Cargill’s land at the end of the term. HFCA was building a chemical processing plant, though – so who knows whether that’d actually happen (it wouldn’t have).
There was a deeper business relationship between Cargill and HFCA than just a tenant and landlord, though. Under the Agreement, Cargill was going to buy chemicals produced by HFCA at the site. What’s more, Cargill played a crucial role in securing funding for the project. Without Cargill’s help, HFCA could never have even attempted the job in the first place. The business interests of Cargill and HFCA were strongly intertwined.
Ultimately, HFCA hired contractors to prepare the land and construct the building. Naturally, those contractors hired subcontractors and suppliers to perform work. Unfortunately, the project went sideways and HFCA couldn’t pay their contractors, and those contractors couldn’t pay the subs and suppliers. As a result, a litany of mechanics lien claims were filed and eventually enforced.
What happened with the liens?
As mentioned above, a lot of businesses filed liens on the property and ultimately filed suit – interested parties Winger Contracting Company, Peterson Contractors Inc., Tracer Construction, American Piping Group Inc., Tri-Cty Electric Company of Iowa, and Tai Specialty Construction Inc. Because there are so many, we’ll refer to the group as “the lien claimants” or “claimants”.
The claimants argued that HFCA was acting as Cargill’s agent, and/or that Cargill and HFCA had become more than just lessor-lessee. According to the claimants, the relationship was more akin to HFCA acting as Cargill’s agent or that the two were partners in a joint venture. And, based on some older Iowa case law, if the owner and lessee’s relationship had constituted a joint venture, then a lien might be filed against Cargill.
Cargill, the owner, took the position that their interest in the property could not be liened because the work was set out by HFCA, their lessee. Cargill pointed to the fact that the Iowa lien statutes had been amended both in 2007 and in 2012 to limit who was considered an “owner” for the purposes of lien rights. According to Cargill, these amendments cut out the ability to file a mechanics lien based on having a contract with the owner’s agent rather than the owner themselves.
What did the Supreme Court think?
This case was appealed all the way up to the Supreme Court of Iowa. For brevity, we’ll just look at what the Supreme Court had to say.
To put it bluntly: The Supreme Court of Iowa deemed that the mechanics liens filed against Cargill’s property were improper. The court agreed with Cargill – based on the amendments to Iowa’s lien statute in 2007 and 2012, the definition of an “owner” in Iowa prevents lien rights arising against the owner’s property when the improvement is actually authorized by an agent of the owner or by the owner’s lessee. Cases prior to those amendments supported the ability for lien rights to arise in that situation, but the court overruled that old case law in light of the amendments to Iowa’s mechanics lien laws.
The Supreme Court of Iowa didn’t address one argument
There was one argument made by the lien claimants that the court didn’t address because the claimants failed to properly raise the issue. The claimants argued that part of § 572.2(1) of the Iowa lien statute allows for the possibility of liens against the land for a tenant improvement when it’s the land itself that’s improved (not just the tenant’s property or interest).
The section in question reads: “those engaged in grading, sodding, installing nursery stock, landscaping, sidewalk building, fencing on any land or lot, by virtue of any contract with the owner, owner-builder, general contractor, or subcontractor shall have a lien upon such building or improvement, and land belonging to the owner on which the same is situated or upon the land or lot so graded, landscaped, fenced, or otherwise improved, altered, or repaired, to secure payment for the material or labor furnished or labor performed.”
Essentially, the argument was that because some of the work performed changed the land itself – work like earthwork, grading the land, and otherwise improving the underlying property – a lien should attach to the land, itself. While the court didn’t seem particularly impressed by the argument – they didn’t address the issue because it was improperly pleaded. The claimants made that claim too late during the lawsuit, and because the lower courts hadn’t been presented with the argument, the Supreme Court of Iowa refused to consider it (which is common practice in the judicial system).
Are Iowa mechanics liens against tenant improvements completely impossible?
No! The court also found that the claimants would’ve had a completely valid lien against HFCA’s interest in the property. As you’ll recall from the “Background” section above, HFCA retained complete ownership of the facility built on top of Cargill’s land. So, lien claims against the tenant’s improvement were completely valid here since the tenant owned the building, itself.
However, at least in this case, there was a mortgage lien on the property separately owned by HFCA. Because this mortgage lien had higher priority than the lien claims, there was no ability to recover from them anyway.
Plus, as mentioned above, the Supreme Court of Iowa left the door a little open for future claimants working on tenant improvements.