Although not as volatile as prior years, last year’s lower oil and gas prices hit the earnings of many operators and service providers—and there is no relief in sight with oil prices down 13% since the start of the year after a sluggish global economy and the coronavirus curbed demand. 2020 could be an interesting year. In times of lower prices, I seem to get more calls about mineral liens. Lenders and service providers call me inquiring about how to perfect the liens—operators call me to determine the scope of their liability or extinguish these burdens. Regardless of what side you find yourself on, it is useful to know a little bit about these unique liens and how they might impact your operations.
Chapter 56 of the Texas Property Code creates a lien for a contractor or subcontractor who, under an express or implied contract, performs labor or furnishes materials related to the drilling or operating of an oil or gas well or an oil or gas pipeline.
This is the exclusive statute governing liens of this type. Persons entitled to liens under this Chapter are not entitled to liens provided by other statutes. Although a court may liberally construe the enforcement provisions of the statute to effectuate its remedial nature, it will strictly apply the specific requirements for the lien’s creation; therefore, it is essential to review the precise language of the Chapter.
The statute and the courts have set a relatively broad definition of who qualifies for the lien and what services are covered, but there are some notable exceptions. For instance, the term “labor” is usually held to mean manual labor; thus, those providing professional services, such as accounting or land services, may be unable to assert a lien. Further, even certain types of physical services, such as the dismantling of a pipeline no longer in use, have been held not to qualify for the protection of the statute.
The statute also lists the property interests that are subject to the lien. Perhaps most importantly, the lien applies to the land, leasehold, well, pipeline, and lease for which labor was performed or materials were supplied. However, only the property interests of the owner contracting with the contractor are covered by the lien. Furthermore, an owner is not subject to liability greater than the amount detailed in the contract between owner and contractor. Therefore, if the owner has paid a contractor in full before receiving notice of the subcontractor’s claim, the property is not subject to a lien.
A contractor’s lien is perfected if, not later than six months after the day the indebtedness accrues, a claimant files an affidavit with the county clerk stating: (1) the name of the mineral property owner, if known; (2) the name and address of the claimant; (3) the dates of performance or furnishing; (4) a description of the property interest involved; and (5) an itemized list of amounts claimed.
For a subcontractor’s lien, the subcontractor must serve the property owner with a written notice of the lien no later than the tenth day before the day the affidavit is filed. In addition to the five items above, the subcontractor’s affidavit must include: (1) the name of the person for whom labor was performed or materials were furnished; and (2) a statement that the subcontractor timely served the required notice.
The steps to perfect these liens is relatively straightforward, nonetheless it is crucial that you meticulously follow the prescribed procedures. Additionally, there are a few issues that merit special consideration. First, you must strictly adhere to the time limits set by the statute. Failure to do so will be fatal to the lien.
Second, accurately and sufficiently describe the property interest subject to lien. Often my client gives me nothing other than a county and a well name, necessitating further investigation to determine a proper description of the lands, leases, and units burdened by the lien.
Third, do not file an affidavit of lien in instances where deadlines have passed, or circumstances prevent you from qualifying for a lien. An affidavit of a lien is a cloud on title; filing one without merit creates exposure to a suit for slander of title.
Assuming the lien has been properly perfected, its priority will relate back to the time that work was first performed, or materials were first supplied–not upon the date the work ended or the date the affidavit was filed. When multiple Chapter 56 liens exist against a single property, however, the liens are of equal priority and the holders will share any foreclosure proceeds on a pro rata basis.
If you are otherwise unable to reach a settlement, enforcement of the lien will require judicial foreclosure. The procedure to foreclose these liens is the same as that provided for traditional mechanics’ liens. The suit must be brought within two years after the date of filing the lien or within one year after completion of the work, whichever is later.
Hopefully, you won’t encounter any mineral lien issues this year, but if you do it is important to act promptly to protect your rights.