Construction Law Update: Iowa Supreme Court Effectively Eliminates Notice-of-Commencement Requirement For Subcontractors on Residential Projects

On June 17, 2022, the Iowa Supreme Court issued a split 4-3 decision in Borst Bros. Constr., Inc. v. Finance of Am. Commercial, LLC, 975 N.W.2d 690 (Iowa 2022), that effectively eliminates the notice-of-commencement requirement for subcontractors on residential construction projects. Thomas Dostal Developers, Inc. entered into five commercial loans with Finance of America Commercial, LLC (FAC) for a residential development project, and FAC recorded its five mortgages between November 12 and December 20, 2017. Dostal Developers hired various subcontractors for the project, including Borst Brothers Construction and Kelly Concrete Company. Borst Brothers began its work on July 3, 2017 and ended work on December 19, 2017. Kelly Concrete began its work in September 2017, and ended its work on January 15, 2018. Dostal Developers never posted a notice of commencement as required by Iowa Code Section 572.13A. Kelly Concrete posted a notice of commencement on February 1, 2018, which was after Borst Brothers’ and Kelly Concrete’s last dates of work on the project, and they both posted preliminary notices and mechanic’s liens shortly thereafter, with both liens being posted within 90 days of their last dates of work.

FAC argued to the district court that Borst Brothers’ and Kelly Concrete’s liens were invalid because they failed to timely post a notice of commencement, and that the liens were inferior to FAC’s mortgages because the February 1, 2018 notice of commencement was posted after FAC had recorded its mortgages. The district court rejected FAC’s arguments and held that the liens were valid despite the notice of commencement being posted after the last dates of work, and it ruled that the liens had priority over all of FAC’s mortgages. The court of appeals affirmed these rulings. FAC asked the Supreme Court for further review of the case, which the Supreme Court granted.

On the notice-of-commencement issue, the Supreme Court issued two main rulings. It first ruled that the 10-day deadline in Iowa Code Section 572.13A(2) applies only to general contractors and owners-builders, not to subcontractors. The three dissenting Justices disagreed, and argued that a subcontractor must post a notice of commencement within 10 days of its first date of work on the project, but their position did not carry the day.

The Court also ruled that Borst Brothers’ and Kelly Concrete’s liens were valid even though the notice of commencement was posted after their last dates of work. The majority reached its decision by comparing the notice-of-commencement provision at Iowa Code Section 572.13A with the preliminary-notice provision at Iowa Code Section 572.13B. It noted the following distinctions between notices of commencement and preliminary notices: Section 572.13B’s language is mandatory and specifically applies only to subcontractors while the notice-of-commencement language is permissive as to subcontractors; the required contents of a preliminary notice include information about the subcontractor while the required contents of a notice of commencement do not; and Section 572.13B says that a preliminary notice is effective as to work previously performed while Section 572.13A says a notice of commencement is effective only to work done after the posting of the notice of commencement. Respectively, this ruling does not appear to be consistent with the statutory language, and it effectively eliminates the notice-of-commencement requirement for subcontractors.

The more reasonable interpretation of Section 572.13A appears to be that a subcontractor cannot lien for work performed prior to a notice of commencement being posted. It is true that, if a notice of commencement is not posted within 10 days of project work beginning, then a general contractor and owner-builder lose their lien rights. It is also true that, as the Court correctly notes, a subcontractor’s lien rights are not affected by the absence of a posted notice of commencement within 10 days of the project beginning. But this does not mean notices of commencement have no meaningful role as to subcontractors. As the Court accurately states, the statute “contemplates one notice of commencement of work per project,” meaning there does not need to be multiple notices of commencement posted for a project. But, for that one required notice of commencement, Section 572.12A(1) specifically says that it “is effective only as to any labor, service, equipment, or material furnished to the property subsequent to the posting of the notice of commencement of work.” This necessarily means that a posted notice of commencement is not effective as to work performed prior to its posting. This is significant because the Court acknowledges that a notice of commencement is the first lien-related document that must be posted. So, even if the Mechanic’s Notice and Lien Registry (MNLR) permitted the postings of a preliminary notice and a lien prior to a notice of commencement, such postings would have no effect. An effective notice of commencement is, therefore, a condition precedent to an effective lien. And, if a notice of commencement is not effective as to previously performed work, it follows that the related liens are not effective as to the previously performed work either. If this were not the case, it would render meaningless the statutory language that a notice of commencement “is effective only as to any labor, service, equipment, or material furnished to the property subsequent to the posting of the notice of commencement of work.” This conclusion is supported by the fact that Section 572.13B specifically states that a preliminary notice is effective as to any work performed by the subcontractor on the project, even work performed prior to the posting of the preliminary notice; in contrast, Chapter 572 does not contain similar “backward sweeping” language for notices of commencement, but, as discussed, it contains the opposite “forward sweeping” language. This interpretation gives both notices of commencement and preliminary notices meaningful roles for subcontractors. The Court’s ruling does not. In fact, it creates the illogical situation of a lien covering previously performed work when that lien’s notice of commencement does not. In the end, the Court has effectively eliminated notices of commencement from having any meaningful role as to subcontractors on residential projects.

The impact of the Court’s decision is shown by its ruling that Borst Brothers’ and Kelly Concrete’s liens had priority over FAC’s five mortgages, even though FAC recorded its mortgages prior to any notice of commencement, preliminary notice, or lien being posted for the project. Prior to this decision, a lender could inspect the MNLR to determine if a notice of commencement had been posted for a project. If there were no such positing, that lender could be secure in knowing that its recorded mortgage had priority over any future mechanic’s liens on the project. Now, that lender has no such security. The Court dismisses the significance of this impact by stating that a “prudent lender can use self-protection methods such as requiring its borrower to bond the project, joint check or escrow arrangements, or requirements that subcontractors waive or subordinate their lien rights.” This is certainly true, but a lender should not have to resort to these options to protect itself against subcontractor liens in the absence of a posted notice of commencement because, as the Court notes, the notice-of-commencement requirement’s entire “purpose, seemingly, is to provide general notice that there are (or will be) subcontractors with potential lien rights working on the property.” Because notices of commencement no longer have a meaningful role for subcontractors on residential projects, lenders will now be forced to protect themselves from subcontractor liens by always resorting to self-help options that the notice-of-commencement statute was designed to make unnecessary.