Mineral Liens (Pt. 1)
In our practice we see an inverse relationship between the market value of oil and gas and the number of mineral liens being filed on oil and gas properties in Texas. The market goes down, the mineral liens go up. This follows from the fact that a downturn in production means more and more operators and contractors become financially strapped, unable to pay their bills and are often forced into bankruptcy. The statutory framework for mineral lien laws are covered in Chapter 56 of the Texas Property Code. The notice requirements and requirements for the lien affidavits are fairly straightforward and are covered extensively in case law and commentary on the subject. That said, operators and lease owners that are subject to mineral liens should carefully study the Code because many of the notices and lien affidavits we review contain defects.
Part 1 of this paper discusses property that may be subject to a mineral lien, parties that may file the lien, and property that is not subject to the lien. Part 2 of the paper, which may be found at the following link: https://www.steedbarkerlaw.com/blog/mineral-liens-pt-2, discusses an operator’s recourse when a subcontractor files a lien pertaining to an invoice that operator already paid to the subcontractor’s contractor.
1. Property Subject to the Mineral Lien:
Pursuant to Texas Property Code § 56.003(a), the following property is subject to a mineral lien:
the material, machinery, and supplies furnished or hauled by the lien claimant;
the land, leasehold, oil or gas well, water well, oil or gas pipeline and its right-of-way, and lease for oil and gas purposes for which the labor was performed or material, machinery, or supplies were furnished or hauled, and the buildings and appurtenances on this property;
other material, machinery, and supplies used for mineral activities and owned by the owner of the property listed in Subdivision (2); and
other wells and pipelines used in operations related to oil, gas, and minerals and located on property listed in Subdivision (2).
Texas courts generally interpret the above provisions to include all wells located on a leasehold, all productive and non-productive acreage covered by a lease, and contiguous tracts covered by different leases but operated as a pooled unit. See Mercantile National Bank at Dallas v. McCullough Tool Co., 259 S.W.2d 724, 479-480 (Tex. 1953); Oil Field Salvage Co. v. Simon, 168 S.W.2d 848, 852-853 (Tex. 1943).
There are, however, exceptions to this general rule. For example, in Dunigan Tool & Supply Co. v. Burris, the court found that a M&M lien against a base lease that was subsequently divided into three (3) separate tracts only applied to the subdivided tract to which the contractor actually furnished supplies. 427 S.W.2d 341, 343-344 (Tex. Civ. App. – Eastland 1968, writ ref’d n.r.e.).
2. Parties that May File the Lien:
Chapter 56 of the Property Code permits mineral contractors and mineral subcontractors to place a lien on the leasehold and its improvements. With respect to a services contract, there need not be a written contract between the contracting parties.
3. Property Not Subject to the Mineral Lien:
There are two primary limitations with respect to the interests or property subject to mineral liens. First, a lien which arises from the performance of labor or furnishing or hauling material, machinery, or supplies for a leasehold, does not attach to the fee title to the property. Tex. Prop. Code § 56.003(b). In other words, an operator’s contractor or subcontractor cannot place a lien for work performed on the leasehold on the mineral estate. Such a lien would only attach to the leasehold interests discussed supra Section 1 of this paper.
Second, the property owned by the property interest owner who has contracted with the mineral contractor is usually the only interest covered by the lien. See Development Co. v. G.E.T. Service Co., 616 S.W.2d 184, 185 (Tex. 1981); Wagner Supply Co. v. Bateman, 18 S.W.2d 1052, 1053-1054 (Tex. 1929); Mid-America Petroleum v. Adkins Supply, Inc., 83 B.R. 937, 941-942 (Bankr. N.D. Tex. 1988). Typically, the contracting mineral property owner will be the operator under the joint operating agreement (“JOA”). As such, the mineral lien will attach to the operator’s working interest, but the non-operating working interest (“non-op”) owners’ interests are not likely to be subject to the lien when the relationship between the operator and the non-ops is governed by an AAPL form JOA. See Wagner Supply Co., 18 S.W.2d at 1053-1054.
The mineral lien statute refers to an “express or implied contract with a mineral property owner or with a trustee, agent, or receiver of a mineral property owner.” Tex. Prop. Code § 56.00(2). Consequently, if the operator acted as an agent, trustee, or receiver of the other non-ops, the lien may attach to the entire leasehold. Today, this is typically not a problem for non-ops because the AAPL form JOA, under which most oil and gas operations are conducted, expressly states that the operator is not an agent or representative of the non-ops. As such, the non-ops are not in privity of contract with the lien claimant and are not subject to the lien so long as the non-ops owners were not party to the lien claimant’s contract with the operator or the operator’s contractor.
There appear to be two exceptions to the two limitations discussed above. First, contractors have been able to attach mineral liens to a non-op’s interest when the working interest relationship on the leasehold is characterized as a joint venture or mining partnership. See State v. Harrington, 407 S.W.2d 467, 477-478 (Tex. 1966); Wagner Supply Co., 18 S.W.2d at 1054; Nolen v. Rig-Time, Inc., 392 S.W.2d 754, 756-757 (Tex. Civ. App.—Corpus Christi 1965, writ ref’d n.r.e.).
Second, although only the interests owned by the contracting mineral owner (typically the operator with a working interest) is subject to the mineral lien, the lien may attach to the entire leasehold if the lessee of record contracts with the claimant and fails to record assignments to the other working interest owners before the claimant fully performed the contract. In this case, the contractor may be able to foreclose on the entire leasehold owned by the owner of record. Trevor Rees-Jones, Trustee, 799 S.W.2d 463 (Tex. App. – El Paso 1990, writ denied).
4. Conclusion
Generally, mineral contractors and subcontractors may file mineral liens on the wells located on the land and same leasehold where contractor or subcontractor performed the work, the lease or leases covering those wells, and equipment and improvements on the leasehold. The lien does not attach to the mineral estate and usually only attaches to the interest owned by the mineral owner contractor, which is typically an operator with a working interest. The lien may, however, attach to the entire leasehold if the operator served as an agent to the non-ops, the working interest relationship on the leasehold is characterized as a joint venture or mining partnership, or the lessee of record that contracted with the claimant failed to record assignments to the other working interest owners before the claimant fully performed the contract.
DISCLAIMER: This paper was not intended to be, and shall not be construed as, legal advice. Should you have specific questions about this issue or any other oil and gas issues, please email me at wmadden@steedbarkerlaw.com.