Anyone familiar with the construction industry is aware that contractors and suppliers can protect their right to obtain payment on the project by filing a mechanics’ lien on the property. Those same protections are also available for companies working on the construction of oil and gas wells and pipelines. However, oil and gas projects are treated differently than other construction projects under Ohio’s mechanics’ lien statute, and there are several traps for the unwary. This post sets out the basic guidelines for preserving lien rights on oil and gas well and pipeline projects – with a particular emphasis on how the procedures differ from those on other construction projects. This post also explains how an owner of an oil and gas project can protect itself from “hidden liens” and the risk of double payment.
What is Covered?
The Ohio Revised Code deals with mechanics’ liens in Chapter 1311. The specific provision relevant to oil and gas projects is found at section 1311.021, which provides that the general mechanics’ lien provisions also apply to oil and gas projects, except to the extent set forth in 1311.021. The first question, then, is what type of projects are covered by 1311.021? The answer is found in R.C. 1311.021(A), which states that the section applies to projects involving the construction, operation or repair of oil, gas, and injection wells which further the production of oil and gas or which dispose of related waste materials. Also covered are projects involving the altering, repairing or constructing of any oil derrick, oil tank or leasehold production pipeline.
Who is Covered?
Any person who performs labor or work or furnishes material for digging, drilling, boring, operating, completing or repairing any of the aforementioned projects has the right to file a mechanics’ lien.
What may be liened?
One of the more fundamental distinctions between oil and gas projects and the typical construction project is the nature of the property interest to which the lien attaches. In most construction projects, the lien attaches to the project owner’s real estate. In oil and gas projects, however, the project “owner” (i.e. the company constructing the well or pipeline) is oftentimes a lessee on the property and not the fee owner. For that reason, a mechanics’ lien filed on an oil and gas project attaches to the oil and gas lease or leasehold estate. If there is no such lease or estate, the lien instead attaches to any mineral interest, and oil and gas produced from the project and the proceeds thereof. The lien also attaches to all materials located on the project or used in connection with the project.
A word of caution: the lien is not effective against any purchaser of the oil and gas or pipeline carrier of the oil and gas until a copy of the lien affidavit has been delivered to the purchaser or pipeline carrier by certified mail. In this way, good faith purchasers of the oil and gas are protected from undisclosed liens.
Protecting Against Hidden Liens and Protecting the Right to File a Lien
The oil and gas statute dispenses with the typical requirement on construction projects that project owners must record notices of commencement and contractors and material suppliers must, in turn, provide notices of furnishing to the owner. Neither are required on oil and gas projects. The oil and gas statute instead tackles the problem of hidden lien claimants in a different fashion.
Rather than file a notice of commencement, the project owner is instead permitted (but not required) to request from its “original contractor” (i.e. the principal contractor hired by the owner to build the well or pipeline) an affidavit identifying all of the unpaid laborers, subcontractors and material suppliers on the project, as well as a description of the work or material supplied by each, and the total amount of each such contract and the balance due and owing. Upon receipt of such request, the original contractor must provide the affidavit or it will lose its right to file a lien on the project. If the owner does not make this request, the original contractor has no obligation to provide this affidavit.
An owner who requests and receives this affidavit may then protect itself from the risk of future liens by making payment jointly to the original contractor and the subcontractor or supplier or may require the original contractor to obtain lien waivers from each subcontractor or supplier before making payment to the original contactor for their work.
Just as the statute provides a mechanism for owners to protect themselves from the possibility of undisclosed lien claimants, so too does the statute provide a mechanism for those undisclosed laborers, subcontractors and suppliers to protect their lien rights. Any such subcontractor or supplier may serve the owner with a notice alerting the owner to its existence on the project. The notice must identify (1) the work being performed or materials being furnished, (2) the amount due or to become due, (3) the identity of the person with whom the subcontractor or supplier contracted, and (4) the identity of the specific well, oil derrick, oil tank or pipeline on which it is working, the permit number, and the county in which the work is being performed.
Any subcontractor or supplier who fails to provide this notice to the owner is at risk of losing its lien rights if the subcontractor is not listed on the affidavit provided by the original contractor to the owner and the owner has paid the full contract price to the original contractor.
The Lien Requirements
If a contractor has properly preserved its lien rights as set forth above, it may file its lien affidavit up to 120 days after last performing work on the project. The form of the lien affidavit is the same as that used on other construction projects, except that the lien claimant need not include in the affidavit the date it first performed work on the project. For priority purposes, any properly filed lien affidavit is effective from the date that the first visible work or labor is performed, or the first materials are furnished at the site.
The bottom line in all of this is that owners should request informational affidavits from their original contractors; original contractors should take care to provide accurate affidavits to owners; and subcontractors and suppliers should always provide an informational notice to the owner on every project. By taking these steps, each of the parties will have maximized their protections under the oil and gas lien statute.