Effective January 1, 2016, the general rule of “first in time, first in right” no longer applies in the case of real estate mortgages and their priority over subsequently filed oil and gas leases. House Bill 2207 creates a legislatively imposed subordination of a prior mortgage to a subsequent oil and gas lease. This legislation will result in savings in time, energy and costs to producers that were previously required to obtain subordination agreements from lienholders.

In the case where a lease is taken on land that is already subject to a mortgage and the mortgage is foreclosed, the statute provides that the oil and gas lease does not terminate, even if the lease has not been subordinated to the mortgage. Under the bill, when the leased property is later sold in a foreclosure sale, any rights granted to the lessee to use the surface terminate, and any royalty payments which become due after the sale pass to the purchaser of the foreclosed property.

The loss of surface rights will not likely be an issue on leases of smaller tracts, but might become problematic on large tracts or tracts on which oil and gas wells have been or are currently being drilled.