Replies to This Discussion

Permalink Reply by kittycatmama on October 17, 2012 at 13:15

No, A never owned the minerals to sell them. They along with the land was mortgaged. Note on some of these deeds that are recorded mineral sales, the purchaser who bought the minerals will record a notice if property foreclosed. They want that opportunity to buy that property also to keep from losing their mineral investment. Just my opinion

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Permalink Reply by Steve P on October 17, 2012 at 19:48

My knowledge of Louisiana mortgages is very out of date, but generally 25 years ago the mortgage prevented the owner from committing "waste" of the property, and in legal terms, that waste was the devaluation of the property through the production of the valuable minerals underlying it.  that's why operators, at some point, generally want to get a subordination from the mortgage holder of its mortgage to the O&G lease.  If the landowner has already received the bonus check and spent it, good luck on that.

regardless of how dated my knowledge is, when you mortgage your property, you can't transfer good title, to the land, the buildings or the underlying minerals without a subordination or release of the mortgage. 

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Permalink Reply by Dion Warr, CPL on October 19, 2012 at 12:33

KCM:

Just read your post again.

Disagree in part - A does own the minerals, just subject to the prior existing mortgage.  So long as A complies with the term of his mortgage (the main one - pay the note), he is fine to do with the property as he will.  However, the terms and provisions of that contract usually provide for protection of Bank against diminution of value (depletion or destruction of the value of the pledged asset(s) ("waste", as Steve P states) as well as provisions and protections against A from selling, encumbering or otherwise alienating title so long as the mortgage is in force.  The provisions can ultimately allow Lender remedies up to and including the right to foreclose on the property, as well as seize and sell same.  This is the clause and concept "pact de non alienando".  A description follows: (cite from pbworks.com:

Pact de non alienando or Non-alienation pact - A clause in a mortgage giving the mortgagee the right to foreclose by EXECUTORY PROCESS directed solely against the mortgagor, and giving him the right to seize and sell the mortgaged property, regardless of any subsequent alienations. An example is “The mortgagors hereby agree in solido not to sell, alienate, deteriorate, or encumber said mortgaged property to the prejudice of this mortgage.” See HYPOTHECARY ACTION.

On the second part (recording the notice) - spot on!  Short of being able to obtain loan subordinations, the lessee is able to file a "Request for Notice of Seizure" (in LA; may be titled somewhat differently in other states) which would direct the Sheriff to provide notice to Lessee in the event that the leased property is to be foreclosed upon, seized and/or sold.  The notice provides Lessee a chance to protect his lease prior to his rights being lost due to such seizure or sale.

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Permalink Reply by Dion Warr, CPL on October 18, 2012 at 5:16

Adam:

First, IANAL, so therefore I am cannot provide legal advice, merely my understanding of the situation.

 

In your example, A mortgages the subject property to the Bank.  In LA, if A mortgages the described property as the owner of surface and minerals and does not specifically exclude the minerals, the mineral rights (along with the surface and any fixtures or improvements) are pledged to cover the note.

 

If the mortgage is in existence, filed of record and not paid in full or cancelled of record (by cancellation or by affidavit of lost note) at the time of the mineral sale to C, the mineral transfer is subject to the mortgage which primes the mineral conveyance.  As long as you continue to fulfill the terms and provisions of the prior existing mortgage, C has good rights.  Should you fail, the holder of the note may foreclose on the property along with the minerals, and is not bound by the terms of the mineral transfer (as that agreement was not in existence and filed of record at the time of the mortgage).

 

In general in LA, any transfer of property is considered to be made subject to all prior sales and encumbrances of record.  The mortgage represents a prior encumbrance in this case; foreclosure under the rights granted to the holder of the note allow Bank to seize the property and take possession of the mortgaged assets in satisfaction of the note should mortgagor fail to fulfill its obligations, subject to all sales and encumbrances of record prior to the mortgage.  What happens after - not the Bank's problem.

 

Depending upon whether A warranted the minerals sold to C, C could have cause of action against A (as by defaulting on the mortgage, title would fail as to the transfer to C).  This could be a potentially serious problem to A.  If the transfer was made without warranty of title, C bought A minerals at his own peril, unless it could be shown that A intended to welch on the note at the time that the mineral sale was contemplated.

 

 

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Permalink Reply by Land Rat on October 18, 2012 at 6:25

Also to note, warranty is implied in Louisiana.  To quitclaim you must disclaim the warranty.

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Permalink Reply by Land Rat on October 18, 2012 at 6:23

Also, encumbering (selling minerals) mortgaged property is usually against the promissory note and will make the person who took the mortgage out in default. 

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Permalink Reply by Dion Warr, CPL on October 18, 2012 at 12:50

Land Rat:

This is true, though it has not been generally enforced historically unless the encumbrances become so egregious that the bank feels the need to step in and/or in cases of excessive or destructive use of the surface (diminution of value).  Mortgages are generally written against the collateral value of the real estate, the fixtures and improvements.

That being said, the trend has been reversed in recent years in favor of aggressive pursuit of rents and outright refuals to subordinate notes or execute subordinations conditional and subject to assignment of proceeds for payment against the note.  I would attribute this more to the widespread marketing and securitization of mortgages versus the prior traditional local and regional lending and servicing of mortgages, as well as the recent financial crises which has resulted in noteholders protecting every opportunity to secure additional proceeds available to them under the terms of their loans so as to prevent borrowers from diverting proceeds made from mortgaged assets away from the pledged property and the lender.

Notwithstanding the more recent trends, the bank certainly and customarily reserves rights to accelerate the note, demand the proceeds from bonuses and rents, if not demand the payment of the note in full for such defaults on loan provisions.

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Permalink Reply by P.G. on October 18, 2012 at 13:39

So if a landowner lease his mineral rights without the bank's knowledge...would the lease be invalid?

Or would the landowner just be in default?

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Permalink Reply by Dion Warr, CPL on October 18, 2012 at 17:20

P.G.:

Lease would not be invalid, but you could draw the ire of the lender, who could avail himself of remedies available under the terms of the mortgage. If the property is foreclosed upon, seized and sold, any third party acquiring the property would not be subject to the lease. As a practical matter, if the lender has not made a move within a few months after the lease, and all other payments are kept up to date, generally nothing will happen.

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Permalink Reply by P.G. on October 19, 2012 at 4:03

This is confusing...the lender is just that..the lender...not the owner..

If the owner encumbers the property..how would the new owner from a foreclosure not be subject to the encumbrance?

What if the lease was for a pipeline rather than mineral rights? And the pipeline had been installed without the bank's knowledge..? Then the bank finds out and claims default and accelerates the loan..

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Permalink Reply by Dion Warr, CPL on October 19, 2012 at 4:38

P.G.:

Generally pipelines and utility easements do not draw this type of scrutiny, as they don't result in a substantial diminution of value. Also, since the utilities and common carriers have expropriation authority, there would be little recourse for the bank to reverse these types of transactions or grants. In the past (particularly on rural property) the leasing of property for oil and gas was not a big problem to the lender, for if the landowner was receiving royalties in addition to normal income, he was more likely to pay his note, and everyone won. When I first started in this business, it was relatively easy for me to obtain loan subordinations from banks for the asking; the lenders wanted to encourage E&P on their borrowers' properties.

Fast forward to 2008. Lenders were in the middle of a financial crisis. Loans were going into default all over the country. In our region of the country, owners were receiving thousands of dollars an acre just for leasing, but not necessarily paying on their mortgages and notes. The lenders, starved for cash, stopped turning a blind eye and started to enforce the rights available to them under the terms of their loans. They started making borrowers pay to *apply* to the lender to even consider approving a lease proposal. They made assignment of all or a preset portion of all future payments directly to them, and made the large E&P companies aware that they would thwart their ability (through their leverage on their borrowers) to acquire leases from their borrowers if they failed to agree. The companies, anxious to tie up as much acreage as possible as quickly as possible, agreed.

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Permalink Reply by Steve P on October 19, 2012 at 7:37

DW - YMNBAL, but you certainly are knowagable on these matters.  I agree with just about (I hedge because IAAL) everything you say on this topic.  For the O&G companies, it is always the trade-off between spending more money to chase down mortgages and try and get subordinations versus just taking the risks and hope nothing bad happens.  Back in the "good old days," producers seldom worried about losing their rights via a foreclosure.   With the financial crisis and increase in foreclosures, that risk has gone up substantially.  

As to the discussion on warranty problems for the mineral seller, I wouldn't worry too much about that.  If I am C, while I might have legal recourse against A, if A is in foreclosure on a mortgage, how much money do I want to throw at a lawyer to sue A in warranty?  what are my chances of recovering anything from A?

 

Good answer on pipelines.

 

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