House Bill 2590 (Continuation of Oil and Gas Leases After Foreclosure) Would Reward Wrongful Conduct

Virtually all mortgage loans are drafted to encumber the mineral estate with a lien. Lender consent is generally expressly required to lease the minerals. Despite this requirement, many operators, particularly in urban areas have become lax about obtaining subordination agreements.

To solve the problem, Bill HB 2590 was promoted, which passed the Texas House and Senate in the Eighty-Third (83rd) regular legislative session. Fortunately, the Governor vetoed it. The bill would have forced the foreclosure-sale purchaser into a lease that neither he nor his precedessor-in-interest negotiated. Instead the buyer would be stuck with whatever lease the debtor negotiated in blatant violation of the lender-consent provisions of the mortgage.

This bill’s constitutionality is doubtful. The foreclosure-sale buyer acquires the interest encumbered by the lien, not whatever interest is held by the debtor. The lender never agreed to the lease terms, then when the buyer buys the lender’s interest, this bill would force the buyer into an agreement that he never made, that the owner of the interest purchased never agreed to, and that violated the mortgage contract, probably tortiously.

This bill should not be resubmitted to the Governor because it would interfere with private property rights by forcing landowners to accept terms that no one agreed to except the debtor, who violated the mortgage terms by leasing without obtaining lender consent and who only owned part of the interest sold, and the operator who failed to obtain a subordination agreement with full knowledge of its necessity.

When the mineral lessee executed the lease, the lessee knew that the lease violated the terms of the recorded instruments. The lessee also knew about the risk of foreclosure yet made the voluntary business decision to assume that risk. Now that the risk has materialized, the lessee should not be able to shirk its obligations by pushing that risk off onto the victims. This bill would reward lessees for ignoring mortgage terms, tortiously interfering with the mortgage, willfully disregard the obligation to obtain a subordination agreement, and then be rewarded for the foregoing conduct.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.