SUBORDINATIONS

A Subordination is commonly encountered in a situation where a lessee has acquired an oil and gas lease from a lessor/landowner, when the lands are subject to a mortgage or deed of trust dated prior in time to the lease.  In that the lien created by the mortgage or deed of trust predates the oil and gas lease, if the mortgage or deed of trust goes into default and is foreclosed on, it will cut off the lessee’s rights under the lease, which are subordinate to the lien.  This could result in the lessee losing its lease.  The results of this could be very expensive if the lessee has drilled a producing well on the lands, having incurred substantial costs in drilling, completing, and equipping a well, and the lost revenue from the production of oil and/or gas.

To avoid this situation, most oil and gas leases grant the lessee the right to pay or retire any mortgage, tax liens, etc., on behalf of the lessor.  However, if this is not practical, and default is not eminent, it is common for the lessee to obtain a Subordination from the lienholder, providing that the lien is subordinate to lessee’s oil and gas lease.  This will not forestall foreclosure in the event of default under the mortgage or deed of trust, but will cause the lease to be superior to the lien so that it will not terminate upon foreclosure.  The forms available on www.USLegalForms.com contain a variety of subordination forms that address this situation.  In addition, subordinations are available on the forms Programs available through www.KanesForms.com, each “Program” contains a substantial number of forms used in oil, gas, and energy transactions.

Another possible use of a subordination has to do with the rights of the mineral and surface estate owners.  The mineral estate is deemed the dominant estate and has the right to make use of as much of the surface as is reasonably necessary to develop the mineral estate.  If a surface owner does not own all the minerals (i.e., the minerals have been severed), the surface owner may want to restrict the use of the surface of all or a portion of its lands, so it will not be interfered with by oil and gas operations.  One way to accomplish this would be to obtain a subordination from the mineral owner, or mineral owner’s/lessee, of its rights to make use of the surface of the lands.