Recent Iowa Supreme Court Case Changes Rules Regarding Mechanic's Liens on Leased Properties
by Brian Rickert
Friday, June 28, 2019
Article written by BrownWinick 2019 Summer Associate, Mackensie Graham, and BrownWinick attorney, Brian Rickert
The Iowa Supreme Court recently issued an important ruling for the construction industry. In Winger Contracting Co. v. Cargill, Inc., the Iowa Supreme Court held that a contractor in Iowa cannot file a mechanic’s lien against an owner/landlord/lessor’s property when the contract for labor and materials was only with the tenant/lessee. In doing so, the Court clarified and/or changed the rules in Iowa relating to mechanic’s liens, so you must act accordingly to protect your business.
Before we dive into what the Court decided and its reasoning, a review of the mechanic’s lien rules and some recent legislative changes are appropriate, as these changes impacted the Court’s analysis.
Quick Background on Mechanic’s Liens and Some Recent Changes
First enacted in 1838, Iowa’s mechanic’s lien statute (currently Iowa Code Chapter 572) has served as an important tool for securing payment for materials and labor provided by contractors and suppliers on a construction project. As a quick refresher, a mechanic’s lien is a claim against the real estate that was improved by the work and/or materials provided; in theory, that it is unjust to allow a property owner to retain the benefits and improvements to its property without paying for them. A mechanic’s lien is a statutory remedy that is separate and distinct from any contract claim. The filing of the lien against the property normally precludes the property owner from selling or refinancing the property without dealing with it.
As with most statutes, Iowa’s mechanic’s lien laws have evolved over the years. Of particular importance to this case, in 2007 and 2012, the Iowa legislature amended the definitions included within the Mechanic’s Lien chapter, including narrowing the scope against whom and when a mechanic’s lien can be asserted. Particularly, the 2007 amendment removed “contracts with the owner’s agent” as a basis for who is entitled to file a mechanic’s lien. (This amendment also cut the terms “owner’s agent” from other parts of the mechanic’s lien statute.). In 2012, the statute was further modified so the definition of “owner” omitted persons “for whose use or benefit any … improvement is made.” As noted below, these definitional changes were important in the Court’s analysis.
To make a long story short, Cargill, Inc. leased land in Eddyville, Iowa to HF Chlor-Alkali, LLC (“HFCA”) for a 50-year term. Thus, Cargill was the landlord/lessor while HFCA was the tenant/lessor. As a part of its lease and use of the property, HFCA constructed a chlor-alkali manufacturing facility on the property. HFCA hired different contractors to construct the facility, who, in turn, utilized multiple sub-contractors and suppliers to complete the project. The project eventually broke down and many of the sub-contractors and suppliers were not paid. Because the general contractor was not solvent, Winger filed a mechanic’s lien against Cargill (based on its ownership of the land on which the facility was located). Cargill challenged and opposed the lien by arguing the lien attached only to the actual facility (owned by HFCA), but not the land itself (owned by Cargill and leased to HFCA).
What did Court Decide?
To determine the validity and enforceability of the lien, the Court in Winger had to compare the recent amendments to prior court decisions that were based on what the old versions of the mechanic’s lien statute provided. Namely, two older cases (Denniston & Patridge Co. v. Romp and Stroh Corp. v. K&S Development Corp. from 1953 and 1976, respectively) both held a mechanic’s lien could attach to a landlord/lessor’s property when work and services were provided through contracts with the tenant/lessee.
The Court emphasized how a mechanic’s lien is a “creature of statute,” and the justices focused on the statute (as amended in 2007 and 2012) to determine whether the sub-contractors’ liens were valid and could attach to Cargill’s property. Based exclusively on how the mechanic’s lien statute was amended and narrowed in recent years, the Supreme Court held that a mechanic’s lien against Cargill (the landlord/lessor) could not be enforced when the lien arose from the provision of labor and materials to HFCA (the tenant/lessee). The Court was clear, stating that to the extent prior cases held otherwise, they were overruled and were no longer the law in Iowa. Based on this new ruling, a mechanic’s lien in Iowa can no longer be filed against a property when the contractor or supplier only provided its labor or materials to a tenant/lessee.
In its analysis, the Court heavily considered the terms in the lease between Cargill and HFCA. Provisions included:
- HFCA said it would not use the land for anything other than the facility without Cargill’s approval.
- Cargill would continue to own the land, but HFCA would own the chlor-alkali facility.
- Nothing in the lease should be construed “as creating a partnership, joint venture, or association” between Cargill and HFCA or “cause either party to be responsible in any way for the debts or obligations of the other party.”
- HFCA would keep the “premises free from any and all liens arising out of any work performed, materials furnished or obligations incurred” due to HFCA or its affiliates.
Essentially the lease supported the statute’s language that a mechanic’s lien could not be enforced or filed against Cargill’s property for work done exclusively for its tenant/lessee, HFCA. Had Cargill approved of or consented to the work being performed, the result likely would have been different, but there was no evidence of that in Winger.
What Does this Mean for the Construction Industry?
In Iowa, and without some action or agreement to pay from the owner/landlord/lessor, a sub-contractor or supplier no longer has the ability to file a mechanic’s lien against a parcel of property when that sub-contractor or supplier is providing labor or materials to a tenant/lessee. While the sub-contractor or supplier may maintain its ability to sue the party who hired it for breach of contract, if that party is insolvent, the sub-contractor or supplier may be left without a remedy and stuck with an unpaid bill. This ruling makes it imperative for contractors and suppliers to understand what options they will have when dealing with tenants/lessees of a parcel of property. Steps must be taken before agreeing to do work on the project to try to guard against this situation.
In short, a qualified construction attorney can help you navigate the applicable laws, review your contract, and try to take steps to make sure you are paid for the work you provide. Failure to consult with any attorney before the work is performed can lead to the result that Winger dealt with, namely non-payment.
Please email Brian Rickert at email@example.com or call 515-242-2457 if you have questions.