The Iowa Supreme Court took on a mechanics lien case this month in Flynn Builders LLC v. Landes, and reversed the trial court and appeals court decision that was based largely on a factual determination of whether the general contractor did or did not substantially perform the construction contract. While the decision is based on the case’s specific facts, it may have far-reaching application on how courts treat this question since the Supreme Court issued a decision on the issue and seems to have heightened the standard of what constitutes substantial performance in the mechanics lien context.
Substantial Performance is Required To File An Iowa Mechanics Lien
To understand what happened in Flynn Builders, it’s first important to understand why “substantial performance” is even an issue with respect to the mechanics lien.
In most states, a mechanics lien can be filed without completing a contract. Whether the contract was or was not completed is typically a non-issue since mechanics liens can be filed for the value of services contributed. Accordingly, if you were supposed to perform $100,000 of work and only performed $50,000, you’re still entitled to recover the $50,000 of value you did contribute through a mechanics lien.
This is not the case in Iowa.
As explained by the court in Flynn Builders, Iowa caselaw has developed a requirement that “in order to enforce a mechanic’s lien, the work must be substantially performed by the contractor.”
When Is A Contract “Substantially Performed” to Allow A Mechanics Lien
This is the question considered squarely by the Iowa Supreme Court in this Flynn Builders case. While there is case law concerning “substantial performance” of a contract within Iowa’s contract case law, the court only looks to this jurisprudence for guidance and not precedent, which means that there is at least the possibility that a contract could be “substantially performed” in the mechanics lien context but not necessarily in the contractual context (or vice versa).
In Flynn Builders, there was conflicting factual testimony about just how complete the construction contract was at the time the general contractor – Flynn – left the site. Flynn left the site on account of a dispute with the property owner, and then filed a mechanics lien for the work he performed.
Flynn testified the project was virtually done, but admitted to a figure of being 80-85% complete. Landes testified it was “barely more than studs.” The trial court and appeals court ruled that the project was substantially complete enough to support a mechanics lien.
The Iowa Supreme Court ruled that the 80-85% completion percentage isn’t enough in this case. Here is their explanation of the applicable case law on substantial performance:
[A] technical, exact and perfect performance is not necessary in an action to foreclose a mechanic’s lien…So long as the builder substantially performs the contract, the builder is entitled to the contract price less reasonable damages on account of slight defects in performance…
‘Substantial performance,’ as defined by the cases, permits only such omissions or deviations from the contract as are inadvertent or unintentional, are not due to bad faith, do not impair the structure as a whole, are remediable without doing material damage to other parts of the building in tearing down and reconstructing, and may without injustice be compensated for by deductions from the contract price. So much is allowed in building contracts because of the hardship to the contractor if slight, unintentional deviations should bar his recovery.
In the Flynn Builders case, the Iowa Supreme Court disagreed with the lower courts determination, focusing very heavily on the 80-85% completion testimony. The Supreme Court was careful to not create a bright line percentage of completion rule, but seemed to create a “habitability” rule instead with the following comment:
While no mathematical rule relating to the percentage of the price, of cost of completion or of completeness can be laid down to determine substantial performance of a building contract, the work left unfinished in this case was much more than a technical or inadvertent omission; rather, the omissions materially affected the habitability of the house.
So, does this mean “substantial performance” now requires completion of the contract enough to allow habitability or occupancy of the property? Is there no room for argument if the non-completion is more than a “technical or inadvertent omission?”
Lower courts will probably be more restrictive with the definition of substantial performance in light of this opinion, and contractors should be weary of filing liens in Iowa when contracts have work remaining on them.