Sub-Subcontractor Loses Mechanics’ Lien Rights

Dickinson, Mackaman, Tyler & Hagen, P.C.
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Dickinson, Mackaman, Tyler & Hagen, P.C.

A recent decision from the Iowa Court of Appeals highlights a significant trap for contractors working on commercial construction. LM Construction, Inc. v. HGIK Hospitality, LLC, began when property owner HGIK Hospitality (“Property Owner”) hired general contractor DDG Construction (“General Contractor”) to build a commercial hotel in Ames. General Contractor hired subcontractor ESC, LLC (“Subcontractor”) to perform work on the project. Subcontractor hired LM Construction (“Sub-Subcontractor”) to install drywall.

Under Iowa Code § 572.33, Sub-Subcontractor had to provide written notice to General Contractor within 30 days of starting work on the project if Sub-Subcontractor wanted to protect its right to file a mechanics’ lien. The notice had to include Sub-Subcontractor’s name, address, phone number, and Subcontractor’s name. Sub-Subcontractor did mail a notice, but sent it to Property Owner, not General Contractor.

At some point, Subcontractor was terminated from the project, and General Contractor contacted Sub-Subcontractor about finishing the work on the project. Sub-Subcontractor agreed to do so, but General Contractor refused to pay approximately $100,000 to Sub-Subcontractor after the work was completed. Sub-Subcontractor then filed a mechanics’ lien, and filed a lawsuit to foreclose the lien.

The Iowa Court of Appeals ruled that Sub-Subcontractor was not entitled to a lien, because Sub-Subcontractor failed to send the notice required by Iowa Code § 572.33 to General Contractor. The Court was unpersuaded by Sub-Subcontractor’s argument that it sent a notice to Property Owner, because the statute is clear that the notice must be sent to the general contractor.

This case highlights the risks that contractors face when hired to work on commercial construction projects. The contract between Subcontractor and Sub-Subcontractor identified Subcontractor as the “general contractor.” That definition was misleading because for purposes of Iowa mechanics’ lien law, Subcontractor was not a “general contractor.”

Contractors should take time at the beginning of a project to identify the hierarchy between contractors, and identify the contractor with a contract directly with the property owner. This due diligence will reveal the identities of the parties who need to receive notice to protect a contractor’s mechanics’ lien rights.

In the absence of a mechanics’ lien, contractors can file claims for breach of contract. However, these cases are often less desirable because many construction contracts do not allow subcontractors to recover attorneys’ fees from the general contractor or property owner. If contractors want to protect their mechanics’ lien rights, and right to attorneys’ fees, then they should conduct due diligence at the beginning of a project to determine who needs to receive notice.

Contractors should also keep in mind that the mechanics’ lien law is full of traps for the unwary. Articles and blogs about the law are no substitute for consulting with a knowledgeable attorney, because the circumstances of your situation may have a slight difference that has important consequences for your mechanics’ lien rights. You should always consult with an attorney about mechanics’ lien questions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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