The recent drop in crude oil prices has been a boon to consumers and businesses alike. However, sustained lower crude prices will invariably have a negative impact on drilling activity in those states where oil and gas development has been concentrated. The current price is below production costs in some locations. Without a prompt recovery in prices, it can be expected that a sustained decrease in oil and gas activity will have an adverse financial impact on the myriad of businesses that provide supplies and services in the oil and gas sector. This, in turn, will likely lead to their delinquencies and defaults on financial obligations.
Lenders and equipment lessors occasionally experience a rude surprise in situations in which statutory liens asserted by unpaid laborers and material providers attach to oilfield assets. Under certain circumstances, depending on applicable state law, these statutory liens can potentially prime properly perfected security and even leasehold interests. Prudent oilfield lenders and equipment lessors should be aware of the risks associated with statutory liens and alert to the circumstances in which they arise.
At oil and gas well sites, statutory liens can take the form of mechanics’ liens, oil and gas liens, and possessory liens. Each type of lien is a creature of state statute and the circumstances in which they arise and are perfected vary significantly from state to state. However, the overriding philosophy for the enactment of statutory liens is the same. They are designed to protect vendors, materialmen and laborers who contribute to the value of real or personal property. The owner or lienholder should not profit at their expense. The problem, from the perspective of a lender or finance lessor, is that statutory liens can sometimes take priority over consensual liens or leasing agreements. In those situations, they must be satisfied before a secured creditor can realize on its collateral or a lessor can recover its equipment.
- A mechanic’s lien is usually available to a party that provides labor or materials incorporated into a structure or improvement on land. This will usually include a well site. Mechanic’s liens statutes are interpreted broadly to include architects, engineers, and draftsmen, along with subcontractors and suppliers who may not have a direct contractual relationship with the owner.
- Oil and gas or mineral liens are similar to mechanic’s liens, but generally tailored to apply to the peculiarities of oil and gas development. Depending on state law, mechanic’s liens and mineral liens may provide overlapping remedies.
- Possessory liens are limited to personal property and arise where labor, service or storage has been provided. The possessory lien exists by virtue of the lienholder’s possession of the property and terminates if possession is voluntarily surrendered.
A survey of lien statutes in some of the oil and gas producing states reflects a wide variety of statutory schemes. Deadlines for perfection and foreclosure vary from state to state. Different rules also apply as to the extent to which the lien relates back.
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It is not possible to completely eliminate the risk of becoming a victim of a statutory lien. However, prudent lending and leasing practices can significantly reduce the level of exposure. On site-specific loans, careful monitoring of draw requests and obtaining lien releases go a long way toward avoiding surprises in the event of default and foreclosure. For equipment lessors, careful monitoring of equipment and prompt action in the event of default are useful tools.