Is Iowa’s Mechanics Lien Law Broken?

I think the honest answer to the question of whether Iowa’s mechanics lien law is broken is “yes.” Reading chapter 572 of the Iowa Code is (at best) an adventure or (at worst) a nightmare. If experienced, practicing lawyers have a difficult time explaining or applying it, good luck to the general public.

Iowa Title Guaranty has been a lead sponsor for two or three legislative sessions of a bill to modify how mechanics liens are created and indexed. Presently, that legislation is embodied in HF 633.

Iowa Title Guaranty, which is a division of the Iowa Finance Authority, is a quasi-governmental agency that issues a form of insurance on the title to real estate. As an insurer, therefore, it has plenty of skin in the game. Under Iowa’s title system, Title Guaranty has recourse to the attorneys and settlement agents who examine title and “field issue” these policies for Title Guaranty, so plenty of attorneys and settlement agents have skin in the game, too.

For the uninitiated and in the simplest terms, a “mechanics lien” is the lien that a the laborers and materials suppliers get on real estate that is being modified by some kind of construction. The law currently provides that these “mechanics” get their liens established through filings in the offices of the clerk of court in the county where the real estate sits.

The legislative subcommittee of the Iowa State Bar Association’s Real Estate Section has looked this legislation over several times and generally has been supportive. The reasons that this subcommittee has been supportive are many. Some, but not necessarily all, of these reasons are summarized as follows:

• The existing law is difficult to understand and apply. The lag times and the required notices are difficult to deal with.
• The Real Estate Section has been an ally of Title Guaranty and their needs. Without speaking for Title Guaranty, it is clear that they think that the system needs to be improved. While their claim experience apparently has been relatively low (the “real estate bubble” notwithstanding), these liens and potential liens are problematic.
• Mechanics liens can present a real difficulty for closing agents as well. When a closing agent settles a real estate transaction, he or she has no clue who is actually out there doing the work. While they may do their best to collect lien waivers before closing, it is nearly impossible to know from whom a waiver must be collected. The bill proposed would create a system that would allow closing agents (at least in theory) easily to check for liens from their desks right before closing a loan.
• It has been our understanding that the clerks of court generally would rather not have to deal with and index legal descriptions for real estate.
• The county recorders probably could easily assume the current filings required under chapter 572, but they are currently have no mechanism that is similar to that in this particular bill.

The legislative proposals have evolved over the past couple of years. Title Guaranty was originally to be the administrator of the database. On evaluating the potential liability issues and the necessity for litigation reserves, Title Guaranty thought it better to put the responsibility in the Secretary of State’s office. The Iowa Secretary of State already administers a number of electronic databases.

The construction industry had been lukewarm to downright sour on the idea for the first couple of iterations. After meeting with the Bar and Title Guaranty representatives, Title Guaranty came up with the current bill. Title Guaranty has been responsive to construction industry concerns and done a fair job at proposing a system that would be relatively user-friendly. Since then, the construction and materials folks came around to being lukewarm to almost supportive.

This has been kind of a hot issue among real estate attorneys for a couple of weeks now. Some attorneys are also abstractors or have an interest in abstracting companies, which perform searches on real estate. These folks are concerned about whether and how they are going to have to certify searches on a centralized state database. Many attorneys are simply concerned about centralization, which, they worry, makes it difficult or impossible to deal with these records in the same way attorneys have dealt with their local clerks of court. Others worry about the actual “mechanics” of filing and searching. Some have noted that real estate records have always been local, and the existence of a lien through a state registry is unprecedented.

On the other hand, some attorneys noted that this system would be good for certain contractors. In particular, flooring and landscaping folks are the last ones on the job. Several attorneys mentioned that these late contractors are missed (or worse) when the general contractor gets paid.

To the worries, I guess my thought is that, frankly, things change. The system proposed in HF 633 may not be perfect. In this world, few things are perfect. Anyone who has ever closed a real estate transaction knows that you can run into the craziest problems before, during, and after a closing. Iowa lawyers are resourceful, and the problems almost always get solved. The benefits of this type of centralized reporting and indexing system, it seems to me, outweigh the costs.

As a Ways and Means Committee bill, HF 633 remains alive in this legislative session. Whether it will survive the session is difficult to say, but it has evoked an interesting discussion about local control, use of technology, and a pretty arcane part of Iowa law.