Replies to This Discussion

Permalink Reply by getoverit on August 26, 2008 at 16:54

I agree...and whole heartedly plan on doing so. Assuming that I get enough bonus or royalty money to do so. =)

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Permalink Reply by Dion Warr, CPL on August 27, 2008 at 2:33

Group:

Keep in mind that most leases contain language (usually in the vicinity of the warranty clause) that states something similar to the following:

(quoted from M. L. Bath Form 14-BR1-2A-PX PAID UP 2-77 R 6/81, Article 16)
"Lessee at its option shall have the right to redeem for Lessor, by payment and mortgage, taxes or other liens on the [leased] lands, in the event of default of payment by Lessor, and be subrogated to the rights of holder thereof. In the case of payment of any such mortgage, taxes, or other liens by Lessee, in addition to the right of subrogation herein granted, Lessee shall also have the right to retain any royalties which may become due Lessor hereunder and to repay itself therefrom, and the retention of said royalties by Lessee shall have the same effect as if paid to the Lessor in whose behalf payment of any mortgages, taxes, or other liens was made."

The reason I bring this up is twofold: First, to those of you that struck this clause from your lease form when the warranty clause was stricken, so you need to consult with your counsel as to how this might effect you. Second, with mortgage paper being peddled from one entity to the next, the odds that a successor mortgagee can even find your original mortgage in their records is shrinking quickly, and most major lenders, citing privacy issues, etc. are increasingly reluctant to even speak with a non-lender third party about your mortgage, much less grant a subordination.

In the days where most mortgages which originated in local banks stayed in local banks, it was relatively simple to speak to a local authorized bank representative and obtain a subordination. Not so anymore. On more recent mineral and lease due diligence projects that I have worked, the examining attorneys have recommended notating the prior existing mortgage, and filing a notice of seizure to minimize risk. That way, if the sheriff does his job, notification will be made to the oil company, and the company has the option to bring the note or taxes up to date prior to seizure and the loss of their lease. The above clause allows them to do so, and make up the payment out of your rentals, royalties, etc. without your permission. I would believe that most companies, if called to the "legal carpet" over this practice would defend their action by stating that they were acting in the best interest of the Lessor AND themselves in doing so, which argument I would believe to be quite compelling.

Obtaining a subordination used to be standing orders for title curative the moment that the lease was obtained, but the process has become so increasingly time-consuming that more and more companies are choosing to minimize their business risk by implementing these methods, and obtaining the lease w/o the subordination.

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Permalink Reply by M. Mcwilliams on August 29, 2008 at 1:00

Dion Warr, I'm curious about your statement that the title attorneys are recommending filing of a notice of seizure? What do you mean by that? What type of seizure notice could be filed if the mortgagor is not in default?

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Permalink Reply by Dion Warr, CPL on August 29, 2008 at 5:49

Some title attorneys working on behalf of O&G companies are recommending this type of instrument be filed if their clients insist on buying leases covering lands which are known to be subject to prior encumbrances.

You are correct in believing that as long as the prior mortgage is not in default, no such seizure would take place. The purpose of filing for notice of seizure is that should the property be placed into foreclosure for failure to comply with the terms of the mortgage, the O&G company would receive some timely notice prior to the actual foreclosure occuring, and thus would have time to consider its legal and contractual options (e.g., bringing the note current or paying off the note or lien ) to protect its lease.

Of course, the O&G company has no ability to act on your behalf in such a manner under the usual terms of the lease, unless default, or failure to pay taxes, or some other pending lien rears itself.]

One of the things I wanted to point out is that the O&G company's ability to act in this manner on your behalf is contained in or near warranty provisions in the lease; if you struck out the whole paragraph, that right is gone.

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Permalink Reply by M. Mcwilliams on August 29, 2008 at 6:33

Now I know what you are referring to. I'm not so sure it's called a Notice of Seizure, but the term escapes me at the moment. Good point about the warranty clause, too.

Interesting factors. These sort of things rarely arose, I would imagine, in dealing with largely rural tracts.

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Permalink Reply by Dion Warr, CPL on August 29, 2008 at 8:05

That would be the one. I should have stated it properly. The mortgage companies file them for the same reasons (b/c unfortunately, unpaid taxes and federal and state tax liens are threats to their contractual rights.

Sorry about the confusion in the title of the instrument, gang.

Really, M., you're right in that these things rarely arose in rural areas. Usually you borrowed from your local bank, who was more than happy to have your business, and most of the local bank offers looked upon landowners receiving bonuses and royalties as beneficial to the property, the owner, and their security. I used to obtain these from local bank officials pretty easily with a phone call and an appointment to complete the particulars, with no compensation to the bank whatsoever.

I guess with in the era of HS, with paid-up leases and bonuses as high as they are, without real timelines as to when additional monies (from options, renewals, and royalties) might come in the future, the banks have started to protect their security interests by taking some of the "bird in hand", rather than trusting their mortgagor to do the prudent thing in keeping their note current. And, I would further surmise, in these times, when the lender may have never laid eyes on their borrower, it is harder to 'feel' that sense of trust.

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Permalink Reply by burt whitten on August 28, 2008 at 11:06

I'm just trying to find anyone who has a home mortgage with wells fargo. Their office for land transactions and support is in Maryland and my time off doesn't match their time at work.

The papers they sent me to get started for release of mineral rights are as follows:

1. an application fee nonrefundable
2. completed and signed "application for modification to original mortgage document and/or collateral"
3. if there will be drilling on the property, a drill site map.
4. a copy of the signed oil and gas lease agreement between me and drilling comp.
5. a consent of lienholder document for their signature. ( which I don't have a clue)


I'm not interested in signing a modification to original mortgage.

they also want to know gross cash consideration to be received by mortgagor (me)

they also state *please note: a principal curtailment may be required in order to release collateral. they don't say how much it could be!

and this is what is scary to me!!!

they want me to sign "Mortgagor agrees that wells fargo bank, N A may, at its option, apply any of the proceeds form this transaction to taxes, assessments, ground rents, insurance, cost or reconditioning or restoration, or TO SUCH OTHER ITEMS AS IT MAY DEEM PROPER, OR TO HIS OR HER ACCOUNT.

AND THAT'S THE PART I DON'T LIKE, MAYBE THEY WANT TO BUY A NEW MOTOR HOME THAT IS WHAT THEY MAY DEEM PROPER.

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Permalink Reply by burt whitten on August 28, 2008 at 11:09

I JUST WANT TO TALK WITH SOMEONE WHO HAS HAD THE SAME LANGUAGE AND DOCUMENTS SENT TO THEM FROM WELLS FARGO AND EVERYTHING WAS OK AND THEY DID GET THEIR CHECK FROM THE GAS COMPANY.

I've never missed a payment and never been late and never had to use the property for collateral on any purchases.

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Permalink Reply by M on August 28, 2008 at 15:29

I have a mortgage with wells fargo and did not tell them anything about my lease or my royalty checks, it is a small home in a subdivision. I just cashed my checks.

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Permalink Reply by WHuguet on August 29, 2008 at 4:33

Here is the rub. If the mortgage was recorded before the lease, if the mortgage is foreclosed it will wipe out the mineral lease (scrub the title). To combat this, a subordination of the mortgage to the lease is often required. Although this isn't done in all cases, it is a prudent requirement.

Of course companies like WF will try to take advantage. I personally cannot stand WF. My current mortgage is with them and every year they try to add "supplemental" unnecessary insurance to my flood policy and charge me 10x the normal rate. The amount of flood coverage they require is 150% of the balance owed on the mortgage. But rest assured, its all covered by the fine print.

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Permalink Reply by Sillysas on December 1, 2008 at 13:35

I was wondering how this ended up turning out for you? Did you end up having to sign an application for modification to original mortgage document and/or collateral? And I don't understand why the mortgage would have to be modified? Were there any fees assessed? I am going thru the same thing, just starting. I don't want to redo my mortgage or anything. How did this end up for you or what have you found out? Thanks

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Permalink Reply by Dion Warr, CPL on December 4, 2008 at 5:45

Sandii:

I'm probably shortcutting a lot of what was said here previously, but the gist here is that

(1) Your existing mortgage 'primes' the lease, and so therefore your noteholder can thus choose to ignore or void the lease in the event of seizure and/or foreclosure (since the rights under which they could take possession of the property existed prior to the lease being in existence),

(2) Your mortgage company could elect to apply leverage on you, the mortgagor (although how much is debatable) by implementing other terms of your mortgage which restrict your ability to encumber the property to the detriment of the property and/or possibly accelerating your loan payments as a consequence.

(3) It used to be that this was not a problem, particular when dealing with more locally-based banks. Mortgagors routinely used to subordinate their rights under the terms of the mortgage to acknowledge the existence of and continue the lease regardless of any future seizure or foreclosure, as a courtesy, more or less. Today, that occurs less, due to the facts that (a) mortgages are frequently sold to regional or national entities whose operations are far removed from the local area, (b) privacy issues have made noteholders more reluctant to deal with these requests without involving the mortgagor/lessor, and (c) the economic climate is such that some lenders have moved to begin collecting fees for the added workload on their part and the possibility of shoring up their own interests by attempting to collect lease bonuses and other proceeds when possible to apply against their outstanding loans, especially when these monies are significant.

As a sidenote, if you really have a problem with your lender attempting to collect fees or a portion of your lease bonus, you may want to consider refinancing, but signing your lease prior to same. This would allow you to rid yourself of your original lenders' conditions (since in so doing, your old mortgage and lender would be paid off, and your lease would 'prime' the new mortgage).

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