Special thanks to Gray Reed colleagues Paul Yale and Dominic Salinas for this post.
Weary of having to solicit those pesky subordinations of pre-existing mortgages to your recently-acquired oil and gas leases? Tired of chasing down the third assistant to the fourth vice president for loan servicing just to obtain one simple document? The 2015 Texas legislature was listening to you.
Beginning on January 1, the “first in time, first in right” rule no longer applies to the relationship between a real estate mortgage and a later-recorded oil and gas lease. By House Bill 2207 a prior mortgage is, for the most part, subordinated to a subsequent oil and gas lease. Where a lease is taken on land that is already subject to a mortgage and the mortgage is foreclosed, the oil and gas lease will not terminate, even if the lease has not been subordinated to the mortgage.
But wait – a practice tip!
It’s not that simple. One historical effect of mortgage foreclosure does not change: The lessee loses the right to use the surface of the foreclosed property for oil and gas operations. It is an improvement; prior to HB 2207 the entire lease was extinguished. The loss of surface rights will not likely be an issue on smaller tracts, but could pose a problem on larger tracts. If you intend to use the lease for a drillsite, go ahead and get the subordination.
Another thing that didn’t change: Royalty payments coming due after the sale pass to the purchaser of the foreclosed property.
A question remains
The Bill does not apply to a security interest that does not attach to a mineral interest. So what about proceeds of the sale of oil and gas, which are personal property, not a real property interest. If a security interest covers proceeds (and many of them do), could a foreclosure in effect wash out the oil and gas lease anyway? We don’t pretend to know the answer to that question.
Why did it pass?
The legislation will result in savings in time, energy, and legal and land costs. The bill was supported by producers and industry groups such as TIPRO and the Texas Alliance of Producers. Think about urban and suburban areas such as the Barnett Shale, where most lessors are homeowners with a mortgage. Under the new law the lease will continue. The only change will be that royalties payable to the lessor pre-foreclosure become payable to the purchaser post-foreclosure.
In 1954 Sam Phillips was looking for white guy who could sing like a black guy. He found him in Elvis Presley. To celebrate Elvis’s birthday (and with apologies to David Bowie) our musical interlude features a worthy successor, Saint Paul and the Broken Bones.