Black’s Law Dictionary defines a lien as, “A legal right or interest that a creditor has in another’s property, lasting until a debt or duty that it secures is satisfied.” Generally speaking, liens will be categorized as either voluntary, involuntary, tax, or miscellaneous. This is determined by what they encumber and the terms by which they are created. All liens act as an encumbrance upon real and personal property. The most common types of liens encumbering real property are voluntary liens acting as security instruments upon real property. The most common of these types are deed of trust and home equity liens. What effect do these instruments have upon oil and gas leases?
In the past, Texas was always considered a first in time first in right State, meaning that whichever instrument was recorded first would take priority over any subsequently recorded instrument. As a result, if an oil company leased a tract of land that was already encumbered by a valid security instrument, like a deed of trust, they ran the risk that the deed of trust would be foreclosed. If the deed of trust was foreclosed, it would effectively extinguish the oil and gas lease. This created a risk for oil companies and required special consideration in leases, such as subrogation clauses, for any prior encumbrances. However, effective January 1, 2016, the Texas legislature passed the following statute:
Texas Property Code Section 66.001 (b):
Notwithstanding any other law, an oil or gas lease covering real property subject to a security instrument that has been foreclosed remains in effect after the foreclosure sale if the oil or gas lease has not terminated or expired on its own terms and was executed and recorded in the real property records of the county before the foreclosure sale. An interest of the mortgagor or the mortgagor’s assigns in the oil or gas lease, including a right to receive royalties or other payments that become due and payable after the date of the foreclosure, passes to the purchaser of the foreclosed property to the extent that the security instrument under which the real property was foreclosed had priority over the interest in the oil or gas lease of the mortgagor or the mortgagor’s assigns.
This statute changes the way oil companies consider leasing land encumbered with prior recorded security instruments. Pursuant to the statute, oil companies can now take a lease on a property which was encumbered by a pre-existing security instrument without the fear of having the lease extinguished by a future foreclosure. The new statute states that any security instrument not foreclosed upon by January 1, 2016, will no longer operate to foreclose a valid oil and gas lease. This significantly reduces the risk involved in leasing tracts encumbered by security instruments.
However, the rule does have limitations. In situations where both the mineral and surface estate are encumbered by the same security instrument, a foreclosure after January 1, 2016 will terminate any surface agreements contained within the lease agreement. Therefore, it is important for any company leasing the land to know what their intended uses for the property is.
In addition, it is important to note that Texas Property Code Section 66.001 does not affect Involuntary Liens such as Ad Valorem Tax Liens, Weed Liens, or Mechanics and Materialman’s Liens, as the statute’s definition of a “security instrument” is a deed of trust, mortgage, or other contract lien on an interest in real property.
Liens of any category can affect an oil company’s interest on leased property. However, it is important to understand that the most common types of liens which encumber property no longer pose a significant risk. Oil companies can now lease encumbered property without the possibility of their lease being extinguished by future foreclosures.
Mazurek & Holliday PC is a full-service oil gas and energy law firm focused on meeting the energy law needs of our clients throughout the United States. If you have any questions about this topic or any that affect your energy rights, contact our offices.